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<SEC-DOCUMENT>0000318771-01-500003.txt : 20010313
<SEC-HEADER>0000318771-01-500003.hdr.sgml : 20010313
ACCESSION NUMBER: 0000318771-01-500003
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 5
CONFORMED PERIOD OF REPORT: 20001231
FILED AS OF DATE: 20010312
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: GENENTECH INC
CENTRAL INDEX KEY: 0000318771
STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834]
IRS NUMBER: 942347624
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 001-09813
FILM NUMBER: 1566294
BUSINESS ADDRESS:
STREET 1: 1 DNA WAY
CITY: SOUTH SAN FRANCISCO
STATE: CA
ZIP: 94080
BUSINESS PHONE: 650-225-1000
MAIL ADDRESS:
STREET 1: 1 DNA WAY
STREET 2: .
CITY: SOUTH SAN FRANCISCO
STATE: CA
ZIP: 94080
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
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<FILENAME>form10_k.txt
<DESCRIPTION>FORM 10-K DOCUMENT
<TEXT>
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, 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.
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:
=============================================================================
Title of Each Class Name of Each Exchange on Which Registered
- -----------------------------------------------------------------------------
Common Stock, $0.02 par value New York Stock Exchange
=============================================================================
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. [ ]
The approximate aggregate market value of voting stock held by nonaffiliates
of the registrant is $12,980,808,884 as of January 31, 2001. (A)
Number of shares of Common Stock outstanding as of January 31, 2001:
525,712,793
Documents incorporated by reference:
PARTS INCORPORATED
DOCUMENT BY REFERENCE
(1) Annual Report to stockholders for the year ended II
December 31, 2000 (specified portions)
(2) Definitive Proxy Statement with respect to the 2001 III
Annual Meeting of Stockholders to be filed by Genentech,
Inc. with the Securities and Exchange Commission
(hereinafter referred to as "Proxy Statement")
- ------------------------------------------------------------------------------
(A) Excludes 306,627,411 shares of Common Stock held by Directors and Officers
of Genentech and Roche Holdings, Inc.
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, "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 splits
of our Common Stock that were effected in October 2000 and November 1999.
BASIS OF PRESENTATION AND RESTATEMENT
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, with funds deposited by Roche for that purpose. This event,
referred to as the "Redemption" in this report, caused Roche to own 100%
of the outstanding common stock of Genentech on that date. The Redemption
of our Special Common Stock on June 30, 1999 was reflected as a purchase
of a business which, under U.S. generally accepted accounting principles,
required push-down accounting to reflect in our financial statements the
amounts paid for our stock in excess of our net book value. The
Redemption created our New Basis of accounting as discussed further
below. The Redemption was effective as of June 30, 1999, however, the
transaction was reflected as of the end of the day on June 30, 1999 in
the financial statements. We previously issued consolidated financial
statements that presented limited information related to the results of
operations for the period January 1, 1999 through June 30, 1999
immediately prior to the Redemption ("Old Basis"), and the period June
30, 1999 (including and subsequent to the Redemption) to December 31,
1999 ("New Basis"). We did not present separate statements of
operations, stockholders' equity or cash flows reflecting the new basis
of accounting. Upon further review and based on discussions with the
Securities and Exchange Commission, our statements of operations, cash
flows and stockholders' equity have been revised and presented on the New
Basis of accounting that resulted from the Redemption transaction. As
such, a vertical black line is inserted to separate the "Old Basis" and
"New Basis" presentation in the financial statements. For more
information about Old Basis and New Basis, you should read the
"Consolidated Financial Statements" and the "Basis of Presentation and
Restatement" note in the Notes to Consolidated Financial Statements (Part
II, Item 8 of this Form 10-K). Accordingly, the Old Basis reflects the
period January 1 through June 30, 1999, and all periods prior to the
Redemption, and the New Basis reflects the period from June 30 through
December 31, 1999, and all subsequent periods. As a result of the
accounting change, we reclassified $941.5 million from accumulated
deficit to additional paid-in capital.
We also restated our financial statements to correct the accounting
related to the write up of the valuation allowance pertaining to
unrealized gains on certain marketable equity securities, resulting from
the Redemption. As a result of this accounting change, the aggregate
amount of contract and other income in 1999 decreased by $20.3 million,
and net income decreased by $13.6 million ($0.03 per share) for the
quarter and six month period ended June 30, 1999. In addition,
amortization expense decreased by $0.6 million (less than $0.01 per
share) during the six month period ended December 31, 1999, and goodwill,
net of accumulated amortization, decreased by $19.7 million, other
accrued liabilities decreased by $6.8 million and accumulated deficit
increased by $12.9 million at December 31, 1999.
PART I
ITEM 1. Business
Genentech is a leading biotechnology company using human genetic information
to discover, develop, manufacture and market human pharmaceuticals that
address significant unmet medical needs. Fourteen of the approved products
of biotechnology stem from our science. We manufacture and market nine
protein-based pharmaceuticals listed below, and license several additional
products to other companies. 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., commonly known as
Roche, at a price of $20.63 per share in cash with funds deposited by Roche
for that purpose. We refer to this event as the "Redemption." As a result,
on that date, 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 $1,685.7
million of goodwill and $1,499.0 million of other intangible assets onto our
balance sheet on June 30, 1999. Also, as a result of push-down accounting,
we recorded special charges related to the Redemption of $1,207.7 million on
June 30, 1999. For more information about special charges and push-down
accounting, you should read "Special Charges" in the Financial Review section
(Part II, Item 7 of this Form 10-K) and the "Redemption of Our Special Common
Stock" note in the Notes to Consolidated Financial Statements (Part II, Item
8 of this Form 10-K). Roche subsequently made public offerings of our Common
Stock as described below.
Stock Splits
On October 24, 2000, 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 17, 2000. Our stock began
trading on a split-adjusted basis on October 25, 2000. 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 report 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 these
splits. 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.
Public Offerings
On July 23, 1999, October 26, 1999, and March 29, 2000, Roche completed
public offerings of our Common Stock. We did not receive any of the net
proceeds from these offerings. On January 19, 2000, Roche completed an
offering of zero-coupon notes that are exchangeable for an aggregate of
13,034,618 shares of our Common Stock held by Roche. Roche's percentage
ownership of our outstanding Common Stock is approximately 58.4% at December
31, 2000.
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 F. Hoffmann-La
Roche Ltd, and entered into or amended certain agreements with Roche, which
are discussed below in "Relationship With Roche."
Products
We manufacture and market nine protein-based pharmaceuticals listed below and
license several others to other companies.
- - 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 which we market
together with IDEC Pharmaceuticals Corporation, commonly known as IDEC,
for the treatment of patients with relapsed or refractory low-grade or
follicular, CD20-positive B-cell non-Hodgkin's lymphoma;
- - TNKase, registered trademark, (tenecteplase) single-bolus thrombolytic
agent for the treatment of acute myocardial infarction;
- - Activase, registered trademark, (alteplase, recombinant) tissue
plasminogen activator, or t-PA, for the treatment of acute myocardial
infarction, acute ischemic stroke within three hours of the onset of
symptoms and acute massive pulmonary embolism;
- - Nutropin Depot, registered trademark, [somatropin (rDNA origin) for
injectable suspension] long-acting growth hormone for the treatment of
growth failure associated with pediatric growth hormone deficiency;
- - Nutropin AQ, registered trademark, [somatropin (rDNA origin) injection]
liquid formulation growth hormone for the same indications as Nutropin;
- - 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;
- - Protropin, registered trademark, (somatrem for injection) growth hormone
for the treatment of inadequate endogenous growth hormone secretion, or
growth hormone deficiency, in children; and
- - Pulmozyme, registered trademark, (dornase alfa, recombinant) inhalation
solution for the treatment of cystic fibrosis.
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 we will receive
royalties 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.
Herceptin
In September 1998, we received U.S. Food and Drug Administration, or 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 was the product's first European approval and came shortly
after authorization of the product in Canada for treatment of metastatic or
advanced breast cancer, alone, and in combination with Taxol. During the
third quarter of 2000, Hoffmann-La Roche received approval from the European
Commission to market Herceptin for the treatment of HER2-positive metastatic
breast cancer in Europe. We receive royalties from Hoffmann-La Roche for
these Herceptin product sales.
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 in certain patients 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 that had spread to the lung. On October 6, 2000, we
issued a follow-up letter to physicians which included an amended package
insert for Herceptin including this information.
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
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 jointly promote
Rituxan with IDEC in the United States. 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. Hoffmann-La Roche is responsible for marketing MabThera,
registered trademark, (rituximab) in the rest of the world, excluding Japan,
and has agreed to pay us royalties and a mark-up on the supply of MabThera.
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 related
to the use of Rituxan in expanded dosing, including retreatment, times 8 and
bulky disease for the treatment of B-cell non-Hodgkin's lymphoma.
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 and TNKase
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. TNKase received FDA approval in early
June 2000 and was launched in late June 2000.
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 Chemical Corporation, formerly 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 TNKase. Boehringer
Ingelheim, which markets a recombinant t-PA under the trademark Actilyse,
registered trademark, filed a marketing application for Metalyse, registered
trademark, (tenecteplase), with European regulatory authorities in September
1999. Boehringer Ingelheim has received marketing approval for Metalyse in
Switzerland and Australia.
Nutropin Depot
In December 1999, we received regulatory approval to market Nutropin Depot.
We launched this product in late June 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, Inc. 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.
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
Nutropin is a human growth hormone similar to Protropin, see below,; 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 had been designated as a U.S.
Orphan Drug for treatment of growth failure in children with chronic renal
insufficiency. This status terminated 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.
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 Corporation, which
manufactures and markets recombinant growth hormone under the trademarks
Genotropin, registered trademark, (somatropin (rDNA) for injection) and
Genotropin MiniQuick, registered trademark.
Pulmozyme
Pulmozyme is marketed in the United States for the treatment of cystic
fibrosis, for which it had U.S. Orphan Drug designation. This status
terminated in December 2000. It was first approved for use in 1993. In
November 1996, Pulmozyme was cleared for marketing by the FDA for the
treatment 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. As of January 1999, we no longer sell
Actimmune directly in the United States. We have agreed to sell packaged
drug product 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 GlaxoSmithKline plc (formerly
SmithKline Beecham Biologicals S.A.)
Factor VIII Kogenate Bayer Corporation
Bovine growth hormone Posilac Monsanto Company
Interferon gamma-1b Actimmune InterMune
Soluble TNF receptor 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,
or R&D. 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:
Product Description
- ------------------------------ -------------------------------------------
Awaiting Regulatory Approval
- ----------------------------
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
completed a Phase III trial of this product
for intravenous catheter clearance and have
submitted U.S. regulatory filings seeking
marketing approval.
Xolair, trademark, An anti-IgE monoclonal antibody
(Anti-IgE Antibody) designed to interfere early in the process
leading to symptoms of allergic asthma
and seasonal allergic rhinitis. 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
and we have submitted U.S. and European
regulatory filings seeking marketing
approval.
Phase III
- ---------
Xanelim, trademark An antibody designed to block certain
immune cells as a potential treatment for
psoriasis. In collaboration with XOMA
Corporation, we are currently conducting
Phase III trials in patients with
psoriasis.
TNKase A second generation tissue-plasminogen
activator (t-PA) that is a selectively
mutated version of wild-type t-PA. TNKase
is being studied in combination with
various anti-thrombotic agents in the
potential treatment of acute myocardial
infarction. This product is being
developed in collaboration with
Boehringer Ingelheim.
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.
Tezosentan Tezosentan, a small molecule, is an
endothelin receptor antagonist being
developed as a potential treatment for
patients with acute heart failure.
Tezosentan, which is currently in
Phase III clinical trials, is being
developed in collaboration with Actelion,
Ltd.
Anti-VEGF antibody An antibody developed to inhibit
angiogenesis (the formation of new blood
vessels) as a potential treatment for
solid-tumor cancers. Phase III trials are
ongoing to treat several types of solid
tumors.
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
conducting Phase III trials for
adjuvant treatment of early-stage breast
cancer in patients who overexpress the
HER2 protein.
Tracleer (Bosentan) An orally administered endothelin
receptor antagonist that is being
developed for the potential treatment
of pulmonary hypertension (New Drug
Application, or NDA, filed) and congestive
heart failure (Phase III). The development
effort is being led by our partner
Actelion.
Preparing for Phase III trials
- ------------------------------
Nutropin Depot for adult Nutropin Depot is a long-acting formulation
growth hormone deficiency of growth hormone developed in collaboration
with Alkermes. The product is approved for
the treatment of growth failure associated
with pediatric growth hormone deficiency.
Phase III trials are being planned for the
treatment of adults with growth hormone
deficiency.
Phase II
- --------
Herceptin antibody An antibody that is an approved treatment
for metastatic breast cancer. Herceptin
is being evaluated for application in other
tumor types in which the HER2 protein is
overexpressed, including lung cancer. We
are conducting Phase II studies alone or in
collaboration with Hoffmann-La Roche, the
National Cancer Institute or other clinical
research groups.
LDP-02 A monoclonal antibody for the treatment of
inflammatory bowel diseases. This product
is licensed from and being developed in
collaboration with Millennium
Pharmaceuticals, Inc., formerly Leukosite,
Inc., or Millennium. Millennium is
conducting Phase II clinical trials in
Canada.
INS365 A second generation P2Y2 agonist, for the
potential treatment of patients with
chronic bronchitis. Our partner, Inspire
Pharmaceuticals, Inc., or Inspire, is
currently planning to initiate a Phase II
trial.
Dornase alfa inhalation A recombinant human protein used for the
solution with Aradigm's treatment of cystic fibrosis. Aradigm
delivery system Corporation completed a Phase IIa clinical
trial of dornase alfa delivery via
Aradigm's AERx, trademark, delivery system.
We canceled the program in late January
2001.
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. Phase I trials are being
conducted.
E-26 A second generation anti-IgE monoclonal
antibody for the potential treatment of
allergic asthma and allergic rhinitis. E26
is being developed in collaboration with
Novartis and Tanox. The product has
completed Phase I trials.
Anti-CD11a Antibody An antibody designed to block certain
immune cells as a potential treatment to
prevent solid organ transplant rejection.
Our collaborator, Xoma, is conducting Phase
I trials.
INS37217 A second generation P2Y2 agonist, for the
potential treatment of patients with cystic
fibrosis, being developed in collaboration
with Inspire.
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. In
collaboration with Immunex, we are
currently conducting preclinical studies in
order to enable an Investigational New Drug
exemption application, or IND, filing.
2C4 2C4 is a monoclonal antibody directed
against the human epidermal growth factor
receptor, type 2 (HER2) as a potential
treatment for cancer. 2C4 is designed to
block the association of HER2 with other
HER family members, thereby inhibiting
intra-cellular signaling through the HER
pathway. We are currently conducting
preclinical studies in order to enable an
IND filing.
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 Licensing 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, Nutropin
Depot, Nutropin AQ, Nutropin, Protropin, Pulmozyme, Actimmune and Rituxan,
and outside of the United States, excluding Japan, sales of Pulmozyme,
Herceptin and MabThera. 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. 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. In
late January 2001, we canceled the program and we forgave the loan. We
expect to record a charge of approximately $7.0 million to development costs
in the first quarter of 2001 related to this cancellation.
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, 2000, there were
no outstanding loans to CuraGen.
In December 1997, we entered into a collaboration agreement with Millennium
to develop and commercialize Millennium'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
Millennium 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 Millennium agrees to fund 25% of Phase
III development costs, we have agreed to provide a second loan to Millennium
for such funding. As of December 31, 2000, there were no outstanding loans
to Millennium.
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 also 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 the year, 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 "Segment, Significant Customer And Geographic
Information" note in the Notes to Consolidated Financial Statements (Part II,
Item 8 of this Form 10-K), we had four major customers, including Hoffmann-La
Roche, who individually provided over 10% of our total revenues in at least
one of the last three years. Also discussed in the note are material foreign
revenues by country in 2000, 1999 and 1998.
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 R&D 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 Depot, Nutropin
AQ, Nutropin, Protropin, Pulmozyme, Rituxan (licensed from IDEC), TNKase
(licensed from Boehringer Ingelheim), Xolair (licensed from Novartis) and
Xanelim in the aggregate are considered to be of material importance. All
are covered by registrations or pending applications for registration in the
U.S. Patent and Trademark Office and in other countries.
Our royalty income for patent licenses, know-how and other related rights
amounted to $207.2 million in 2000, $189.3 million in 1999, and $229.6
million in 1998. Royalty expenses were $100.3 million in 2000, $88.8 million
in 1999, and $66.3 million in 1998.
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. Corixa Corporation, formerly Coulter
Pharmaceuticals, Inc., has filed and received an expedited review of a
revised BLA in 2000 for Bexxar, trademark, (tositumomab and iodine I 131
tositumomab), which may compete with our product Rituxan and IDEC has filed a
BLA for Zevalin, trademark, (ibritumomab tiuxetan), a product which could
also potentially compete with Rituxan. Both Bexxar and Zevalin are
radiolabeled molecules while Rituxan is not. We are also aware of other
potentially competitive biologic therapies for non-Hodgkin's lymphoma in
development.
Activase and TNKase
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 June 2000, TNKase was
approved by the FDA for the treatment of acute myocardial infarction.
Nutropin Depot, Nutropin AQ, Nutropin and Protropin
Eli Lilly and Company 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, or BTG, Novo
Nordisk A/S, or Novo, and Pharmacia-received FDA approval in 1995 to market
their growth hormone products in the United States. BTG was preliminarily
enjoined from selling its product, but it is now free to enter the market. A
fifth competitor, Serono, Inc., received FDA approval in October 1996 to
market its growth hormone product. In the first quarter of 1997, Serono,
Novo and Pharmacia began selling their growth hormone products in the United
States. On June 21, 2000, Novo announced that the FDA approved Norditropin,
registered trademark, SimpleXx, trademark, a liquid form of its recombinant
somatropin product, 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 launched the product in late June 2000. We are not
aware of any competing sustained-release formulations of human growth hormone
in clinical development.
Pulmozyme
Pulmozyme is used for the treatment 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 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 27.2 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 $20.63 per share, less the exercise price;
- - Options for the purchase of approximately 16.0 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 19.6 million shares of Special
Common Stock were canceled in accordance with the terms of our 1996 Stock
Option/Stock Incentive Plan, or the 1996 Plan. With certain exceptions,
we granted new options for the purchase of 1.333 times the number of
shares under the previous options with an exercise price of $24.25 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, or the 1999 Plan, was
approximately 20.0 million. Alternative arrangements were provided for
certain holders of some of the unvested options under the 1996 Plan.
Of the approximately 16.0 million shares of converted options, options
with respect to approximately 4.0 million shares were outstanding at December
31, 2000, all of which are currently exercisable except for options with
respect to approximately 320,507 shares. These outstanding options are held
by 1,420 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 26.0 million shares (including the 20.0 million
shares referred to above) of Common Stock to approximately 2,400 employees at
an exercise price of $24.25 per share, with the grant of such options made
effective as of July 16, 1999. Of the options to purchase these 26.0 million
shares, options to purchase approximately 19.8 million shares were
outstanding at December 31, 2000, of which options to purchase approximately
7.7 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, 2000, $11.1 million and
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 our 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 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 $10.0 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 $100.0 million on its aggregate sales of that product and thereafter
a royalty of 15% on its aggregate sales of that product in excess of
$100.0 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, $5.0 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 $100.0 million.
Tax Sharing Agreement
Since the redemption of our Special Common Stock, and until Roche completed
its second 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 provides
that we will, among other things, establish a stock repurchase program
designed to maintain Roche's percentage ownership interest in our common
stock. In addition, Roche has a continuing option to buy stock from us at
prevailing market prices to maintain its percentage ownership interest. In
connection with that provision, 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 is to 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 509,194,352 (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 splits of our common stock in October 2000 and
November 1999. As long as Roche's percentage ownership is greater than 50%,
prior to issuing any shares, Genentech has agreed to repurchase a sufficient
number of shares of its common stock to provide that, immediately after its
issuance of shares, Roche's percentage ownership will be greater than 50%.
We have also agreed, upon request, to repurchase shares of our common stock
to increase Roche's ownership to the Minimum Percentage.
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, but not limited to, our
product sales, royalties, contract revenues, expenses and net income.
Fluctuations in Our Operating Results Could Affect the Price of Our Common
Stock
Our operating results may vary from period to period for several reasons
including:
- - The overall competitive environment for our products.
For example, sales of our Activase product decreased in 2000, 1999 and
1998 primarily due to competition from Centocor Inc.'s Retavase and more
recently to a decreasing size of the thrombolytic marketplace as other
forms of acute myocardial infarction treatment gain acceptance.
- - The amount and timing of sales to customers in the United States.
For example, sales of our Growth Hormone products increased in 2000 and
1999 due to fluctuations in distributor ordering patterns.
- - The amount and timing of our sales to Hoffmann-La Roche of products for
sale outside of the United States and the amount and timing of its sales
to its customers, which directly impact both our product sales and royalty
revenues.
For example, in the third quarter of 2000, Hoffmann-La Roche's approval of
Herceptin in Europe increased our sales of Herceptin product.
- - 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 by the FDA for sale.
- - The rate of adoption and use of our products for approved indications and
additional indications.
For example, sales of Pulmozyme increased in 1998 due, in part, to new
patients who were attracted to our product as a result of an FDA approval
for a label extension to include cystic fibrosis patients under the age of
five.
- - The potential introduction of new products and additional indications for
existing products in 2001 and beyond.
- - The ability to successfully manufacture sufficient quantities of any
particular marketed product.
- - The number and size of any product price increases we may issue.
The Successful Development of Pharmaceutical Products Is Highly Uncertain
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 several reasons including:
- - Preclinical and clinical trial results that may show the product to be
less effective than desired or to have harmful problematic side effects;
For example:
- In June 2000, we announced that the preliminary results from
our 415-patient Phase II clinical trial of our recombinant humanized
anti-CD18 monoclonal antibody fragment, which is known as rhuMAb
CD18, for the treatment of myocardial infarction, more commonly known
as a heart attack, did not meet its primary objectives.
- In 1999, our Phase III clinical trial of recombinant human nerve
growth factor, which is known as rhNGF, for use in diabetic
peripheral neuropathy did not meet its objectives and we decided not
to file for product approval with the FDA.
- In 1999, our Phase II clinical study of recombinant human vascular
endothelial growth factor, which is known as VEGF, protein failed to
meet the primary endpoints of the study.
- - Failure to receive the necessary regulatory approvals or delay in
receiving such approvals;
- - Manufacturing costs or other factors that make the product uneconomical;
or
- - The proprietary rights of others and their competing products and
technologies that may prevent the product from being commercialized.
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, or R&D, 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.
For example, there is no guarantee that internal research efforts will
succeed in generating sufficient data for us to make a positive
development decision or that an external candidate will be available on
terms acceptable to us. In the past, promising candidates have not
yielded sufficiently positive preclinical results to meet our stringent
development criteria.
- - 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.
For example, in February 2000, we entered into an agreement with Actelion
Ltd. for the purchase of rights for the development and co-promotion in
the United States of tezosentan and paid Actelion an upfront fee of $15.0
million which was recorded as a R&D expense.
- - As part of our strategy, we invest in R&D. R&D as a percent of revenues
can fluctuate with the changes in future levels of revenue. Lower
revenues can lead to more disciplined spending of R&D efforts.
- - Future levels of revenue.
Roche, Our Controlling Stockholder, May Have Interests That Are Adverse to
Other Stockholders
Roche, as our majority stockholder, 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
stockholders that Roche will not institute a new business plan in the future.
Roche's interests may conflict with your interests.
Our Affiliation Agreement With Roche Could Limit Our Ability to Make
Acquisitions and Could Have a Material Negative Impact on Our Liquidity
The affiliation agreement between us and Roche contains provisions that:
- - Require 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;
- - Enable Roche to maintain its percentage ownership interest in our common
stock; and
- - Establish a stock repurchase program designed to maintain Roche's
percentage ownership interest in our common stock.
These provisions may have the effect of limiting our ability to make
acquisitions and while the dollar amounts associated with the stock
repurchase program cannot currently be estimated, these stock repurchases
could have a material adverse impact on our liquidity, credit rating and
ability to access capital in the financial markets.
Our Stockholders May Be Unable to Prevent Transactions That Are Favorable to
Roche but Adverse to Us
Our certificate of incorporation includes provisions relating to:
- - Competition by Roche with us;
- - Offering of corporate opportunities;
- - Transactions with interested parties;
- - Intercompany agreements; and
- - Provisions limiting the liability of specified employees.
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 with Roche, the offer of
corporate opportunities to Roche and intercompany agreements with Roche.
This deemed consent may restrict your ability to challenge transactions
carried out in compliance with these provisions.
Potential Conflicts of Interest Could Limit Our Ability to Act on
Opportunities That Are Adverse to Roche
Persons who are directors and/or officers of Genentech and who are also
directors and/or officers of Roche may decline to take action in a manner
that might be favorable to us but adverse to Roche. Two of our directors,
Dr. Franz B. Humer and Dr. Jonathan K.C. Knowles, currently serve as
directors, officers and employees of Roche Holding Ltd and its affiliates.
We May Be Unable to Retain Skilled Personnel and Maintain 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 these types of personnel and relationships is
intense.
Roche has the right to maintain its percentage ownership interest in our
common stock. Our affiliation agreement with Roche provides that, among
other things, we will establish a stock repurchase program designed to
maintain Roche's percentage ownership in our common stock if we issue or sell
any shares. This right of Roche may limit our flexibility as to the number
of shares we are able to grant under our stock option plans. We therefore
cannot assure you that we will be able to attract or retain skilled personnel
or maintain key 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, either alone or in combination with the use of another Centocor
product, ReoPro, registered trademark, (abciximab) and to the use of other
mechanical therapies to treat acute myocardial infarction; the resulting
adverse effect on sales has been and could continue to be material. Retavase
received approval from the FDA in October 1996 for the treatment of acute
myocardial infarction. We expect that the use of mechanical reperfusion in
lieu of thrombolytic therapy for the treatment of acute myocardial infarction
will continue to grow.
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 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, sales of our Growth Hormone products may decline, perhaps
significantly.
Third, in the non-Hodgkin's lymphoma market, Corixa Corporation,
formerly Coulter Pharmaceutical, Inc., has filed and received an expedited
review of a revised Biologics License Application, or BLA, in 2000 for
Bexxar, trademark, (tositumomab and iodine I 131 tositumomab), which may
potentially compete with our product Rituxan and IDEC has filed a BLA for
Zevalin, trademark, (ibritumomab tiuxetan), a product which could also
potentially compete with Rituxan. Both Bexxar and Zevalin are radiolabeled
molecules while Rituxan is not. 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.
For example, in June 2000 one of our competitors, Novo, received FDA
approval for a liquid formulation of its growth hormone product that
will directly compete with our liquid formulation, Nutropin AQ. Also in
June 2000, another of our competitors, Serono S.A., received FDA approval
to deliver its competitive growth hormone product in a needle-free device.
- - Our pricing decisions and the pricing decisions of our competitors.
For example, we raised the prices of Rituxan in May 2000 and Pulmozyme in
June 2000 by approximately 5%.
- - The degree of patent protection afforded our products by patents granted
to us and by the outcome of litigation involving our patents.
For example, in January 2000, a federal court judge lifted a preliminary
injunction that had been in effect since 1995 against Bio-Technology
General Corporation, or BTG. Although an appeal of the judge's decision
is pending, BTG is now permitted to sell its competitive growth hormone
product in the United States.
- - The outcome of litigation involving patents of other companies concerning
our products or processes related to production and formulation of those
products or uses of those products.
For example, as further described in "Protecting Our Proprietary Rights Is
Difficult and Costly," in May 1999, June 2000 and September 2000, several
companies filed patent infringement lawsuits against us alleging that we
are infringing certain of their patents.
- - The increasing use and development of alternate therapies.
For example, the overall size of the market for thrombolytic therapies,
such as our Activase product, continues to decline as a result of the
increasing use of mechanical reperfusion.
- - The rate of market penetration by competing products.
For example, in the past, we have lost market share to new competitors in
the thrombolytic and growth hormone markets.
In Connection With the Redemption of Our Special Common Stock, We Recorded
Substantial Goodwill and Other Intangibles, the Amortization of Which May
Adversely Affect Our Earnings
As a result of the redemption of our special common stock, Roche owned all of
our outstanding common 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 on our financial statements. Push-down accounting required us to
record goodwill and other intangible assets of approximately $1,685.7 million
and $1,499.0 million, respectively, on June 30, 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. If our assets need to be evaluated for possible impairment, we
may have to reduce the carrying value of our intangible assets. This could
have a material adverse effect on our financial condition and results of
operations during the periods in which we recognize a reduction. We may have
to write down intangible assets in future periods. For more information
about push-down accounting, see the "Redemption of Our Special Common Stock"
note in the Notes to Consolidated Financial Statements (Part II, Item 8 of
this Form 10-K).
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.
For example, we began receiving royalty revenues from Immunex's sale of
Enbrel in 1999.
- - The conclusion of existing arrangements with other companies and Hoffmann-
La Roche.
For example, royalty revenues decreased in 1999 from 1998 due to the
expiration of royalty payments primarily on sales of human insulin, from
Eli Lilly and Company in August 1998.
- - The timing of non-U.S. approvals, if any, for products licensed to
Hoffmann-La Roche and other licensees.
For example, we expect the approval of Herceptin outside the United States
which occurred in third quarter of 2000 to have a continuing positive
impact on royalties.
- - Fluctuations in foreign currency exchange rates.
- - The initiation of new contractual arrangements with other companies.
For example, license fees from Immunex and Schwarz Pharma increased
contract revenues in 1999.
- - Whether and when contract benchmarks are achieved.
For example, milestone payments from Pharmacia increased contract
revenue in 1997.
- - The failure of or refusal of a licensee to pay royalties.
- - The expiration or invalidation of patents or 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, we cannot predict the breadth of claims allowed in these
companies' patents. Patent disputes are frequent and can preclude the
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. In addition, an adverse decision could force
us to either obtain third-party licenses at a material cost or cease using
the technology or product in dispute. For example, in late 1999 we settled a
patent infringement lawsuit brought against us by the Regents of the
University of California in which the University alleged that the manufacture
and sale of our Protropin and Nutropin growth hormone products infringed a
patent owned by the University. In connection with that settlement we paid
the University of California $150.0 million and donated $50.0 million for the
construction of a new life sciences building on the University of California,
San Francisco campus.
The presence of patents or other proprietary rights belonging to other
parties may lead to our termination of the R&D 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.
Three lawsuits have been filed against us in which the companies
involved allege that we have infringed their patents by the manufacture and
sale of certain of our products:
- - In May 1999, GlaxoSmithKline plc, or Glaxo, filed a complaint in which it
appears to claim that our manufacture, use and sale of Rituxan and
Herceptin antibody products infringe four Glaxo patents that relate to
certain uses and preparations of antibodies.
- - In June 2000, Chiron Corporation filed a complaint in which it claims that
our manufacture and sale of Herceptin infringe a patent it owns.
- - In September 2000, Glaxo filed another complaint in which it appears to
claim that our manufacture, use and sale of Rituxan and Herceptin antibody
products infringe a Glaxo patent that relates to certain cell culture
methods.
We May Incur Material Litigation Costs
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 might have to incur substantial expense in defending these lawsuits.
We have in the past taken substantial special charges relating to litigation,
including $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. Pharmaceutical product liability exposures could be
extremely large and pose a material risk. Our business may be materially and
adversely affected by a successful product liability claim in excess of any
insurance coverage that we may have.
We May Be Unable to Obtain Regulatory Approvals for Our Products
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
R&D, 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,
they remain subject to ongoing FDA regulation, including, for example,
changes to their label, written advisements to physicians 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.
For example, in May 2000, we issued letters to physicians advising them of
some serious adverse events associated with the administration of
Herceptin. In October 2000, we issued a new package insert for Herceptin
including this information.
- - Failure to comply with existing or future regulatory requirements.
For example, in 1999, we paid a $50.0 million settlement to the federal
government in connection with a federal investigation of our former
clinical, sales and marketing activities associated with our human growth
hormone products.
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
We currently produce all of our products at our manufacturing facilities
located in South San Francisco, California and Vacaville, California or
through various contract manufacturing arrangements. Problems with any of
our or our contractors' manufacturing processes could result in product
defects, which could require us to delay shipment of products, recall
products previously shipped or be unable to supply products at all.
For example, in March 2000, we issued an important drug notification
regarding a defect in the packaging of our Pulmozyme product. During a
quality assurance inspection, we had discovered that there was a defect in
the packaging of Pulmozyme which occasionally caused a small puncture in
ampules of that product. We suspended shipping the product while we
determined the source and extent of the defect. We ultimately recalled some
of the product.
On December 27, 2000, we received a Warning Letter from the FDA
regarding our quality control at our South San Francisco manufacturing plant.
The products cited were for cystic fibrosis, breast cancer and acute
myocardial infarction. On February 7, 2001, we received a letter from the
FDA accepting our responses and corrective actions with respect to the
Warning Letter.
In addition, any prolonged interruption in the operations of our or our
contractors' 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 our manufacturing processes and those of our
contractors are highly complex and are subject to a lengthy FDA approval
process, alternative qualified production capacity may not be available on a
timely basis or at all. Difficulties or delays in our and our contractors'
manufacturing of existing or new products could increase our costs, cause us
to lose revenue or market share and damage our reputation.
Our Stock Price, Like That of Many Biotechnology Companies, Is Highly
Volatile
The market prices for securities of biotechnology companies in general have
been highly volatile and may continue to be highly volatile in the future.
In addition, due to the absence of the put and call that were associated with
our special common stock, the market price of our common stock has been and
may continue to be more volatile than our special common stock was in the
past.
In addition, the following factors may have a significant impact on the
market price of our common stock:
- - Announcements of technological innovations or new commercial products by
us or our competitors.
For example, our stock increased by approximately 4% on the day we
announced FDA approval for our Nutropin Depot product.
- - Developments concerning proprietary rights, including patents.
For example, our stock price decreased by approximately 4% on the day one
of our competitors, Chiron, announced a patent infringement suit against
us.
- - Publicity regarding actual or potential medical results relating to
products under development by us or our competitors.
For example, our stock price increased by approximately 9% on the day we
announced positive preliminary Phase III results from the Anti-IgE asthma
clinic.
- - Regulatory developments in the United States and foreign countries.
- - Public concern as to the safety of biotechnology products.
For example, on May 8, 2000, we issued a warning concerning our Herceptin
drug after 15 deaths resulted from the administration of Herceptin. Our
stock price decreased by approximately 2% at that time.
- - Economic and other external factors or other disaster or crisis.
For example, our stock reached a high of $122.50 per share in March 2000
and decreased, as the biotech sector and stock market in general
decreased, to a low of $42.25 per share in late May 2000.
- - Period-to-period fluctuations in financial results.
For example, our stock price has historically been affected by whether we
met or exceeded analyst expectations.
Our Affiliation Agreement With Roche Could Adversely Affect Our Cash Position
Our affiliation agreement with Roche provides that we will 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, these 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.
These provisions may have the effect of limiting our ability to make
acquisitions and while the dollar amounts associated with the stock
repurchase program cannot currently be estimated, those stock repurchases
could have a material adverse impact on our liquidity, credit rating and
ability to access capital in the financial markets.
Future Sales by Roche Could Cause the Price of Our Common Stock to Decline
As of December 31, 2000, Roche owned 306,594,352 shares of our common stock
or approximately 58.4% of our outstanding shares. All of our shares owned by
Roche are eligible for sale in the public market subject to compliance with
the applicable securities laws. We have agreed that, upon Roche's request,
we will file one or more registration statements under the Securities Act in
order to permit Roche to offer and sell shares of our common stock. We have
agreed to use our best efforts to facilitate the registration and offering of
those shares designated for sale by Roche. Sales of a substantial number of
shares of our common stock by Roche in the public market could adversely
affect the market price of our common stock.
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, 2000.
Our Interest Income is Subject to Fluctuations in Interest Rates
Our material interest bearing assets, or interest bearing portfolio,
consisted of cash equivalents, restricted cash, short-term investments,
convertible preferred stock investments, convertible loans and long-term
investments. The balance of our interest bearing portfolio was $1,879.6
million or 28% of total assets at December 31, 2000. Interest income related
to this portfolio was $90.4 million or 5% of total revenues. 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 bearing portfolio. To mitigate the impact of
fluctuations in U.S. interest rates, for a portion of our portfolio, we have
entered 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, 2000, 1999
and 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 evaluate our foreign currency exposure on a net basis. We receive royalty
revenues from licensees selling products in countries throughout the world.
Increasingly however, these royalties are being offset by expenses arising
from our foreign facility as well as non-U.S. dollar expenses incurred in our
collaborations. Currently, our foreign royalty revenues exceed our expenses.
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 our net foreign exchange exposure, we could 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
term of these options is generally one to two 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.
Based on our overall currency rate exposure at December 31, 2000, 1999
and 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. Our biotechnology equity investment portfolio
totaled $652.7 million or 10% of total assets at December 31, 2000. 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 and equity swaps. 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). An equity swap is a derivative instrument where we pay the
counterparty the total return of the security above the current spot price
and receives interest income on the notional amount for the swap term. The
equity swap protects us from a decline in the market value of the security
below the spot price and limits our potential benefit from an increase in the
market value of the security above the spot price. 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, 2000, 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 $94.0 million. We estimated that the potential loss in fair
value of the equity securities portfolio was $43.2 million at December 31,
1999 and $10.6 million at December 31, 1998.
Recent Accounting Pronouncements Could Impact Our Financial Position and
Results of Operations
We will adopt Statement of Financial Accounting Standards 133, or FAS 133,
"Accounting for Derivative Instruments and Hedging Activities," on January 1,
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. Based on our derivative positions at December 31, 2000, we
estimate that upon adoption, we will record a charge from the cumulative
effect of a change in accounting principle of approximately $9.0 million
being recognized in the consolidated statement of operations and an increase
of approximately $8.0 million in other comprehensive income.
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 a 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 R&D of
products either on our own behalf or under contracts. During 2000, 1999 and
1998, our R&D expenses were $489.9 million, $367.3 million and $396.2
million, respectively.
Our R&D efforts have been the primary source of our products. We intend
to maintain our strong commitment to R&D 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, 2000, we had 4,459 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 25 buildings for our research and development, manufacturing,
marketing and administrative activities. Of the buildings, 14 are owned and
11 are leased. We have made and continue to make improvements to these
properties to accommodate our growth. In addition, we own approximately 17
acres adjacent to our current facilities that may be used for future
expansion. In 1995, we began development of a new manufacturing facility of
approximately 300,000 square feet in Vacaville, California under an operating
lease arrangement. The facility is operational and was granted FDA licensure
in April 2000. In April 2000, we purchased a cell culture manufacturing
facility in Porrino, Spain. The facility will supplement our existing bulk
cell culture production capacity. 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 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, product liability litigation, 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 $150.0 million and agreed to
make a contribution in the amount of $50.0 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, GlaxoSmithKline plc, or Glaxo, 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. Two of the
patents relate to the use of specific kinds of antibodies for the treatment
of human disease, including cancer. The other two patents asserted against
us relate to preparations of specific kinds of antibodies which are made more
stable and the methods by which such preparations are made. Glaxo's
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/or sale of our Herceptin and
Rituxan antibody products. On July 19, 1999, we filed our answer to the
complaint, and in our answer we also stated counterclaims against Glaxo. On
or about October 27, 2000, Glaxo filed a motion for summary judgment that our
Herceptin and Rituxan antibody products infringe two of the patents asserted
against us in this suit, U.S. Patent Nos. 5,545,403 and 5,545,405. On
November 21, 2000, we filed an opposition to that motion. The trial of this
suit was previously scheduled to begin January 29, 2001, but has been
rescheduled to begin April 16, 2001.
On September 14, 2000, Glaxo filed another patent infringement
lawsuit against us in the U.S. District Court in Delaware, alleging that we
are infringing U.S. Patent No. 5,633,162 owned by Glaxo. The patent relates
to specific methods for culturing Chinese Hamster Ovary cells. Glaxo's
complaint fails to specify which of our products or methods of manufacture
are allegedly infringing that patent. However, the complaint makes a general
reference to Genentech's making, using and selling "monoclonal antibodies,"
and so we believe that the suit relates to our Herceptin and Rituxan antibody
products. On October 4, 2000, we filed our answer to the complaint, and in
our answer we also stated counterclaims against Glaxo. The judge has
scheduled the trial for this suit to begin January 25, 2002. This lawsuit is
separate from and in addition to the Glaxo suit mentioned above.
We and the City of Hope National 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, denying all the claims made by the City of Hope.
On or about December 22, 2000, City of Hope filed a dismissal of its
declaratory relief claims. On January 4, 2001, we filed a motion to dismiss
the case. The judge denied the motion on February 1, 2001, but issued a
temporary stay of proceedings to permit us to file a petition with the
appellate court. We filed our petition on February 13, 2001, which was
denied by the appellate court on February 22, 2001. The trial of this suit
has been rescheduled to begin on August 22, 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
judgments 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 judgment 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.
Genentech and BTG each filed appeals with the Federal Circuit relating
to the proceedings in the District Court, and those appeals are now pending.
Genentech filed its appeal brief with the Federal Circuit on May 15, 2000.
BTG filed its appeal brief on July 11, 2000. In it, BTG included a request
that its antitrust claims against Genentech (which previously had been
dismissed by the District Court) be reinstated. The Federal Circuit held a
hearing on the appeals on December 4, 2000, but has not yet given a decision
on the appeals. At this time, and in the future if Genentech's appeal is not
successful, BTG could enter the United States market with its human growth
hormone product.
On June 7, 2000, Chiron Corporation filed a patent infringement suit against
us in the U.S. District Court in the Eastern District of California
(Sacramento), alleging that the manufacture, use, sale and offer for sale of
our Herceptin antibody product infringes Chiron's U.S. Patent No. 6,054,561.
This patent relates to certain antibodies that bind to breast cancer cells
and/or other cells. On August 4, 2000, we filed our answer to Chiron's
complaint, and in our answer we also stated counterclaims against Chiron.
The judge has scheduled the trial of this suit to begin June 25, 2002.
We and Pharmacia AB are parties to a 1978 agreement relating to Genentech's
development of recombinant human growth hormone products, under which
Pharmacia is obligated to pay Genentech royalties on sales of Pharmacia's
growth hormone products throughout the world. On January 5, 1999, Pharmacia
filed a request for arbitration with the International Chamber of Commerce to
resolve several disputed issues between Genentech and Pharmacia under the
agreement. One of the claims made by Pharmacia is for a refund of some of
the royalties previously paid to Genentech for sales of Pharmacia's growth
hormone products in certain countries. Although the International Chamber of
Commerce has not yet given a decision on that claim, we do not believe its
decision is likely to have a material adverse effect on our financial
position, result of operations or cash flows.
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 operating results of that period.
In addition to the above, in April 1999, we paid $50.0 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, 2000) and positions with the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- -------------------------------------- --- -----------------------------------------
<S> <C> <C>
Arthur D. Levinson, Ph.D. 50 Chairman and Chief Executive Officer
Susan D. Desmond-Hellmann, M.D., M.P.H. 43 Executive Vice President-Development and
Product Operations and Chief Medical
Officer
Louis J. Lavigne, Jr. 52 Executive Vice President and
Chief Financial Officer
Myrtle S. Potter 42 Executive Vice President-Commercial
Operations and Chief Operating Officer
Robert L. Garnick, Ph.D. 51 Senior Vice President-Regulatory, Quality
and Compliance
Dennis J. Henner, Ph.D 49 Senior Vice President-Research
Stephen G. Juelsgaard 52 Senior Vice President-General Counsel and
Secretary
Kimberly J. Popovits 42 Senior Vice President-Marketing and Sales
W. Robert Arathoon, Ph.D. 48 Vice President-Global Manufacturing
Operations
J. Joseph Barta 53 Vice President-Quality
Stephen G. Dilly, M.D., Ph.D. 41 Vice President-Medical Affairs
David A. Ebersman 31 Vice President-Product Development
Claudia M. Estrin 48 Vice President-Decision Support and
Commercial Innovation
Roy C. Hardiman 41 Vice President-Corporate Law and
Assistant Secretary
Paula M. Jardieu, Ph.D. 50 Vice President-Pharmacological Sciences
Sean A. Johnston, Ph.D. 42 Vice President-Intellectual Property
and Assistant Secretary
R. Guy Kraines 50 Vice President-Finance
Joseph S. McCracken, D.V.M. 47 Vice President-Business and Commercial
Development
Walter K. Moore 49 Vice President-Government Affairs
David Nagler 48 Vice President-Human Resources
Diane L. Parks 48 Vice President-Managed Healthcare and
Commercial Support
Andrew R. Scherer 52 Vice President-Engineering, Facilities,
Strategic Planning and Support
Daniel S. Sulzbach, Ph.D. 51 Vice President-Corporate Information
Technology
John M. Whiting 45 Vice President, 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 of Directors on
September 1999 and was elected President and Chief Executive Officer and a
director of the Company in July 1995. Since joining the Company in 1980, Dr.
Levinson has been a Senior Scientist, Staff Scientist and the Director of the
Company's Cell Genetics Department. Dr. Levinson was appointed Vice President
of Research Technology in April 1989, Vice President of Research in May 1990
and Senior Vice President in January 1993. Dr. Levinson was formerly on the
editorial boards of "Molecular Biology and Medicine" and "Molecular and
Cellular Biology," and is active in the American Society of Microbiology, the
New York Academy of Sciences, the American Association for the Advancement of
Science, and the American Society for Biochemistry and Molecular Biology.
From 1977 to 1980, Dr. Levinson was a Postdoctoral Fellow in the Department
of Microbiology at the University of California, San Francisco. In 1977, Dr.
Levinson received his Ph.D. in Biochemistry from Princeton University.
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 position of
Associate Director at Bristol-Myers Squibb from February 1993 to February
1995.
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.
Myrtle S. Potter was appointed Executive Vice President, Commercial Operations
and Chief Operating Officer in May 2000. Prior to joining Genentech, she held
the positions of President of U.S. Cardiovascular/Metabolics from November
1998 to May 2000, Senior Vice President of Sales, U.S.
Cardiovascular/Metabolics from March 1998 to October 1998, Group Vice
President of Worldwide Medicines Group from February 1997 to February 1998 and
Vice President of Strategy and Economics, U.S. Pharmaceutical Group from April
1996 to January 1997 at Bristol-Myers Squibb. Previously, she held the
position of Vice President of the Northeast Region Business Group at Merck and
Company from October 1993 to March 1996.
Robert L. Garnick, Ph.D. was appointed Vice President, Regulatory, Quality
and Compliance on March 1, 2001. Previously, he served as Vice President,
Regulatory Affairs from February 1998 to March, 2001. 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.
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 from May 1990 to
December 1990. He joined Genentech in 1981, as a Scientist in Research from
Scripps Clinic and Research Foundation.
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.
Kimberly J. Popovits was appointed Senior Vice President, Marketing and Sales
in February 2001. Previously, she served as Vice President, Sales from
October 1994 to February 2001, 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.
W. Robert Arathoon, Ph.D. was appointed Vice President, Global Manufacturing
Operations in September 2000. He previously served as Vice President,
Process Sciences and Manufacturing from October 1999 through August 2000,
Vice President, Process Sciences from April 1996 through August 2000 and
Senior Director, Process Sciences 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 1998 to October
1998, Senior Director, Quality Assurance from January 1994 to February 1998,
Senior Director, Pharmaceutical Manufacturing from September 1993 to December
1993, Director, Pharmaceutical Manufacturing from September 1989 to August
1993, and Associate Director, Validation and Technical Services from June
1989 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 GlaxoSmithKline plc, formerly 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 A. 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.
Claudia M. Estrin was appointed Vice President, Decision Support and
Commercial Innovation in November 2000. Prior to joining Genentech, she held
the position of Executive Vice President, Customer Operations and Corporate
Administration from December 1999 to October 2000 and Senior Vice President
of Customer Operations from April 1998 to December 1999 at Boron, LePore &
Associates, Inc. Previously, she held the position of Director of Strategic
Marketing and Media from October 1996 to March 1998 at Bristol-Myers Squibb
and Business Planning Manager from March 1996 to October 1996 and Manager of
Database Marketing from August 1993 to March 1996 at Merck USHH.
Roy C. Hardiman was appointed Vice President of Corporate Law in May 2000 and
Assistant Secretary in December 2000. He previously served as Director and
Far East Representative, Business Development from July 1998 to April 2000,
and Associate General Counsel from April 1998 to July 1998, Chief Corporate
Counsel from April 1996 to March 1998, Senior Corporate Counsel from August
1993 to March 1996 and Corporate Counsel from November 1990 to July 1993.
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 and Assistant Secretary in December 2000. 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.
R. Guy Kraines was appointed Vice President of Finance in April 2000. Prior
to joining Genentech, he held the position of Vice President and Treasurer of
CNF Transportation Inc. from August 1996 through March 2000 and Assistant
Treasurer from August 1994 to August 1996.
Joseph S. McCracken was appointed Vice President of Business and Commercial
Development in February 2001. Previously, he served as Vice President of
Business Development from July 2000 to February 2001. He held the positions
of Vice President of Technology Licensing and Alliances at Aventis
Pharmaceuticals from January 2000 to July 2000. Previously he held the
position of Vice President of Worldwide Business and Technology Development
from November 1998 to December 1999 and Vice President of Technology
Licensing from November 1997 to November 1998 at Rhone-Poulenc Rorer
Pharmaceuticals. He was the Founder of TPM Associates from April 1995 to
November 1997. From October 1993 to April 1995, he held the position of Vice
President of Business Development at Terrapin Technologies.
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.
David Nagler was appointed Vice President of Human Resources in September
2000. He previously served as Senior Director of State Government Affairs
from April 1995 to August 2000. Prior to joining Genentech, he held the
position of Managing Associate at Nossaman, Guthner, Knox and Elliott from
April 1988 to April 1995.
Diane L. Parks was appointed Vice President of Managed Healthcare and
Commercial Support in February 2001. Previously, she served as Vice
President, Marketing from June 1999 to February 2001. 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.
Andrew R. Scherer was appointed Vice President, Strategic Planning and Support
in August 2000 and has served as Vice President, Engineering and Facilities
since May 2000. He previously served as Senior Director of Engineering and
Facilities Services from April 1998 to April 2000 and Senior Director of
Facilities Services from January 1996 to April 1998 among other positions,
since joining Genentech in 1988.
Daniel S. Sulzbach, Ph.D. was appointed Vice President, Corporate Information
Technology 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 Vice President in January 2001 and 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 1999 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
Splits," and footnotes labeled "Relationship With Roche," "Roche's Right to
Maintain its Percentage Ownership Interest in Our Stock" and "Capital Stock"
in the Notes to Consolidated Financial Statements of our 2000 Annual Report
to Stockholders are incorporated herein by reference.
ITEM 6. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL DATA (UNAUDITED)
(millions, except per share amounts)
<TABLE>
<CAPTION>
2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
New Basis || Old Basis
(June 30 ||(January 1
to || to
December 31) || June 30)
Restated (6) || Restated (6)
- ---------------------------------------------------------------------||------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenues $ 1,736.4 $ 703.8 ||$ 697.2 $1,150.9 $1,016.7 $ 968.7
Product sales 1,278.3 535.7 || 503.4 717.8 584.9 582.8
Royalties 207.2 96.7 || 92.6 229.6 241.1 214.7
Contract & other 160.4 26.4 || 56.8 114.8 121.6 107.0
Interest 90.4 45.0 || 44.4 88.7 69.1 64.2
- ---------------------------------------------------------------------||------------------------------------------
Total costs and expenses $ 1,732.4 $ 2,211.0 ||$ 550.6 $ 898.3 $ 846.9 $ 820.8
Cost of sales 364.9(1) 187.1(1)|| 98.5 138.6 102.5 104.5
Research & development 489.9 182.4 || 184.9 396.2 470.9 471.1
Marketing, general & administrative 497.0 253.4 || 214.5 358.9 269.9 240.1
Special charges - 1,387.7(2)|| 50.0(2) - - -
Recurring charges related to redemption 375.3(3) 197.7(3)|| - - - -
Interest 5.3 2.7 || 2.7 4.6 3.6 5.1
- ---------------------------------------------------------------------||------------------------------------------
Income (loss) data ||
Income (loss) before taxes and ||
cumulative effect of accounting change $ 4.0 $(1,507.2) ||$ 146.6 $ 252.6 $ 169.8 $ 147.9
Income tax (benefit) provision 20.4 (262.1) || 59.0 70.7 40.8 29.6
Income (loss) before cumulative effect of ||
accounting change (16.4) (1,245.1) || 87.6 181.9 129.0 118.3
Cumulative effect of accounting ||
change, net of tax (57.8)(5) - || - - - -
Net income (loss) (74.2) (1,245.1) || 87.6 181.9 129.0 118.3
- ---------------------------------------------------------------------||------------------------------------------
Earnings (loss) per share: ||
Basic $ (0.14) $ (2.43) ||$ 0.17 $ 0.36 $ 0.26 $ 0.25
Diluted (0.14) (2.43) || 0.16 0.35 0.26 0.24
- ---------------------------------------------------------------------||------------------------------------------
Selected balance sheet data ||
Cash, short-term investments ||
& long-term marketable securities $ 2,459.4 $ 1,957.4 || - $1,604.6 $1,286.5 $1,159.1
Accounts receivable 261.7 214.8 || - 149.7 189.2 197.6
Inventories 265.8 275.2 || - 148.6 116.0 91.9
Property, plant & equipment, net 752.9 730.1 || - 700.2 683.3 586.2
Goodwill 1,455.8 1,609.1 || - - - -
Other intangible assets 1,280.4 1,453.3 || - 65.0 54.7 40.1
Other long-term assets 168.5 201.1 || - 131.3 122.5 109.1
Total assets 6,711.8 6,534.8 || - 2,855.4 2,507.6 2,226.4
Total current liabilities 448.7 477.4 || - 291.3 289.6 250.0
Long-term debt 149.7 149.7 || - 150.0 150.0 150.0
Total liabilities 1,037.6 1,264.9 || - 511.6 476.4 425.3
Total stockholders' equity 5,674.2 5,269.9(4)|| - 2,343.8 2,031.2 1,801.1
<FN>
We have paid no dividends.
The Selected Consolidated Financial Data above reflects adoption of SAB 101
in 2000, FAS 130 and 131 in 1998, FAS 128 and 129 in 1997 and FAS 121 in
1996.
All per share amounts reflect two-for-one stock splits that were effected in
2000 and 1999.
(1) Includes costs related to the sale of inventory that was written up at
the Redemption due to push-down accounting.
(2) Charges related to 1999 Redemption ($1,207.7 million) and legal
settlements ($230.0 million).
(3) Primarily reflects amortization of other intangible assets and goodwill
related to the Redemption.
(4) 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.
(5) Reflects the impact of the adoption of SAB 101 on revenue recognition
effective January 1, 2000. Pro forma amounts of net income (loss) and
related diluted per share amounts, assuming retroactive application of
the change in accounting principle for the years ended 1997 through 2000
(previous amounts were not material) are as follows (in millions, except
per share amounts):
2000 1999 1998 1997
------ --------- ------ ------
Pro forma:
Net income (loss) $(16.4) $(1,168.7) $154.5 $109.8
Earnings (loss) per
share - diluted $(0.03) $ (2.28) $ 0.30 $ 0.22
(6) We revised the presentation of our 1999 results to reflect the New and
Old basis of accounting resulting from the Redemption and also corrected
the accounting related to the write up of the valuation allowance
pertaining to unrealized gains on certain marketable securities.
</FN>
</TABLE>
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation
The section labeled "Financial Review" of our 2000 Annual Report to
Stockholders is incorporated herein by reference.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The section labeled "Financial Review-Forward-Looking Information and
Cautionary Factors That May Affect Future Results-We Are Exposed to Market
Risk" in this Form 10-K.
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 2000
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
2001 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," "Change-In-Control Agreements," "Loans and Other
Compensation," "Compensation Committee Report," "Compensation Committee
Interlocks and Insider Participation," "Performance Graph" and "Total
Stockholder Returns" of our Proxy Statement in connection with the 2001
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," "Security Ownership of
Certain Beneficial Owners," "Security Ownership of Management" and "Amount
and Nature of Beneficial Ownership" of our Proxy Statement in connection with
the 2001 Annual Meeting of Stockholders are incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions
The sections labeled "Relationship With Roche," "Loans and Other
Compensation" and "Certain Relationships and Related Transactions" of our
Proxy Statement in connection with the 2001 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 2000 Annual Report to Stockholders and are incorporated herein by
reference pursuant to Item 8 of this Form 10-K.
Consolidated Statements of Operations for the year ended December 31,
2000, the periods from June 30, 1999 to December 31, 1999 and January
1, 1999 to June 30, 1999, and for the year ended December 31, 1998
Consolidated Statements of Cash Flows for the year ended December 31,
2000, the periods from June 30, 1999 to December 31, 1999 and January
1, 1999 to June 30, 1999, and for the year ended December 31, 1998
Consolidated Balance Sheets at December 31, 2000 and 1999
Consolidated Statements of Stockholders' Equity for the year ended
December 31, 2000, the periods from June 30, 1999 to December 31, 1999
and January 1, 1999 to June 30, 1999, and for the year ended December
31, 1998
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 the year ended
December 31, 2000, the periods from June 30, 1999 to December 31, 1999
and January 1, 1999 to June 30, 1999, and for the year 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 Certificate of Amendment of Amended and Restated Certificate of
Incorporation.(14)
3.3 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, 1987.(6)
10.2 Form of Affiliation Agreement, dated as of July 22, 1999,
between Genentech and Roche Holdings, Inc.(2)
10.3 Amendment No. 1, dated October 22, 1999, to Affiliation
Agreement between Genentech and Roche Holdings, Inc.(13)
10.4 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)
10.5 Tax Sharing Agreement, dated as of July 22, 1999, between
Genentech, Inc. and Roche Holdings, Inc.(2)
10.6 Amended and Restated Lease Agreement, dated December 8, 1995,
between Genentech and BNP Leasing Corporation.(5)
10.7 Amended and Restated Purchase Agreement, dated December 8,
1995, between Genentech and BNP Leasing Corporation.(5)
10.8 Restated Relocation Loan Program.(7)
10.9 Genentech, Inc. Tax Reduction Investment Plan.(9)
10.10 Amendment No. 1 to the Genentech, Inc. Tax Reduction Investment
Plan.(10)
10.11 Amendment No. 2 to the Genentech, Inc. Tax Reduction Investment
Plan.(10)
10.12 Amendment No. 3 to the Genentech, Inc. Tax Reduction Investment
Plan.(10)
10.13 Trust Agreement.(10)
10.14 Amendment No. 1 to Trust Agreement.(10)
10.15 Amendment No. 2 to Trust Agreement.(10)
10.16 Amendment No. 3 to Trust Agreement.(10)
10.17 Amendment No. 4 to Trust Agreement.(10)
10.18 Amendment No. 5 to Trust Agreement.(10)
10.19 Amendment No. 6 to Trust Agreement.(10)
10.20 Amendment No. 7 to Trust Agreement.(10)
10.21 Supplemental Plan to the 401(k) Plan.(7)
10.22 1990 Stock Option/Stock Incentive Plan, as amended and restated
as of October 16, 1996.(11)
10.23 1994 Stock Option Plan, as amended and restated as of October
16, 1996.(11)
10.24 1996 Stock Option/Stock Incentive Plan, as amended and restated
as of October 16, 1996.(11)
10.25 1999 Stock Plan, as amended and restated as of December 8,
2000.(14)
10.26 1991 Employee Stock Plan, as amended April 13, 1999.(12)
10.27 Long-Term Key Employee Incentive Program, effective as of
July 1, 1999.(13)
13.1 Portions of the 2000 Annual Report to Stockholders.(14)
23.1 Consent of Ernst & Young LLP, Independent Auditors.(14)
28.1 Description of the Company's capital stock.(8)
* 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) 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 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.
(9) 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.
(10) 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.
(11) 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.
(12) 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.
(13) Filed as an exhibit to Annual Report on Form 10-K for the year ended
December 1999 and incorporate herein by reference.
(14) Filed with this document.
(b) Reports on Form 8-K
On October 25, 2000, Genentech filed a current report on Form 8-K dated
October 24, 2000. There were no other reports filed for the quarter
ended December 31, 2000.
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: March 9, 2001
By: /s/JOHN M. WHITING
---------------------------------
John M. Whiting
Vice President, Controller,
and Chief 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, Vice President,
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 March 9, 2001
- --------------------------- Officer and Director
Arthur D. Levinson
Principal Financial Officer:
/s/LOUIS J. LAVIGNE, JR. Executive Vice President March 9, 2001
- --------------------------- and Chief Financial Officer
Louis J. Lavigne, Jr.
Director:
/s/HERBERT W. BOYER Director March 9, 2001
- ---------------------------
Herbert W. Boyer
/s/JONATHAN K.C. KNOWLES Director March 9, 2001
- ---------------------------
Jonathan K.C. Knowles
/s/FRANZ B. HUMER Director March 9, 2001
- ---------------------------
Franz B. Humer
/s/MARK RICHMOND Director March 9, 2001
- ---------------------------
Mark Richmond
/s/CHARLES A. SANDERS Director March 9, 2001
- ---------------------------
Charles A. Sanders
SCHEDULE II
<TABLE>
<CAPTION>
GENENTECH, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2000, 1999 and 1998
(in thousands)
Additions
Balance at Charged to Balance at
Beginning Costs and End of
of Period Expenses Deductions(1) Period
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts and returns:
Year Ended December 31, 2000: $ 18,951 $ 16,167 $ (17,808) $ 17,310
========= ========= ========== =========
Period from June 30 to December 31, 1999: $ 17,744 $ 4,318 $ (3,111) $ 18,951
========= ========= ========== =========
Period from January 1 to June 30, 1999: $ 17,418 $ 3,985 $ (3,659) $ 17,744
========= ========= ========== =========
Year Ended December 31, 1998: $ 14,535 $ 11,389 $ (8,506) $ 17,418
========= ========= ========== =========
Inventory reserves:
Year Ended December 31, 2000: $ 16,384 $ 14,500 $ (19,067) $ 11,817
========= ========= ========== =========
Period from June 30 to December 31, 1999: $ 16,447 $ 2,382 $ (2,445) $ 16,384
========= ========= ========== =========
Period from January 1 to June 30, 1999: $ 14,904 $ 10,901 $ (9,358) $ 16,447
========= ========= ========== =========
Year Ended December 31, 1998: $ 12,055 $ 5,405 $ (2,556) $ 14,904
========= ========= ========== =========
Reserve for nonmarketable equity securities
and convertible equity loans:
Year Ended December 31, 2000: $ 29,045 $ 3,740 $ - $ 32,785
========= ========= ========== =========
Period from June 30 to December 31, 1999: $ 19,648 $ 9,397 $ - $ 29,045
========= ========= ========== =========
Period from January 1 to June 30, 1999: $ 12,143 $ 7,505 $ - $ 19,648
========= ========= ========== =========
Year Ended December 31, 1998: $ 5,490 $ 7,958 $ (1,305) $ 12,143
========= ========= ========== =========
</TABLE>
(1) Represents amounts written off or returned against the allowance or
reserves.
INDEX OF EXHIBITS FILED WITH FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2000
Exhibit No. Description
- ----------- -----------
3.2 Certificate of Amendment of Amended and Restated Certificate of
Incorporation
10.25 1999 Stock Plan, as amended and restated as of December 8, 2000
13.1 Portions of the 2000 Annual Report to Stockholders
23.1 Consent of Ernst & Young LLP, Independent Auditors
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3
<SEQUENCE>2
<FILENAME>exhibit3_2.txt
<DESCRIPTION>CERT OF AMNDMNT OF AMENDED & RESTATED CERT OF INC
<TEXT>
<PAGE>
Exhibit 3.2
CERTIFICATE OF AMENDMENT
OF AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
Genentech, Inc. a corporation organized and existing under and by virtue of
the General Corporation Law of the State of Delaware.
DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of Genentech, Inc.
resolutions were duly adopted setting forth a proposed amendment of the
Amended and Restated Certificate of Incorporation of said corporation,
declaring said amendment to be advisable and calling a meeting of the
stockholders of said corporation for consideration thereof. The resolution
setting forth the proposed amendment is as follows:
RESOLVED, that the Amended and Restated Certificate of Incorporation of this
corporation be amended by changing "Section 4.01(a)" of the Article thereof
numbered "4" so that, as amended, said Section of said Article shall be and
read as follows:
"Section 4.01. CAPITAL STOCK. (a) The Corporation is
authorized to issue two classes of stock to be designated,
respectively, preferred stock and common stock. The total
number of shares which the Corporation is authorized to issue
is seven hundred million (700,000,000) shares. One hundred
million (100,000,000) shares shall be designated preferred
stock, par value $0.02 per share ("Preferred Stock"). Six
hundred million (600,000,000) shares shall be designated common
stock, par value $0.02 per share ("Common Stock"). The Common
Stock of the Corporation shall be all of one class."
SECOND: That thereafter, pursuant to resolution of its Board of Directors,
the regular meeting of the stockholders of said corporation was duly called
and held upon notice in accordance with Section 222 of the General
Corporation Law of the State of Delaware at which meeting the necessary
number of shares as required by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
FOURTH: That the capital of said corporation shall not be reduced under or
by reason of said amendment.
IN WITNESS WHEREOF, said Genentech, Inc. has caused this Certificate of
Amendment to be signed by Stephen G. Juelsgaard, an Authorized Officer, this
15th day of May, 2000.
GENENTECH, INC.
By: /s/ Stephen G. Juelsgaard
---------------------------------
Name: Stephen G. Juelsgaard
Title: Senior Vice President, General
Counsel and Secretary
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>3
<FILENAME>exhibit10_25.txt
<DESCRIPTION>1999 STOCK PLAN, 12/08/2000
<TEXT>
<PAGE>
Exhibit 10.25
GENENTECH, INC.
1999 STOCK PLAN,
AMENDED AND RESTATED AS OF DECEMBER 8, 2000
1. PURPOSES OF THE PLAN. The purposes of this 1999 Stock Plan are:
- to attract and retain the best available personnel for positions
of substantial responsibility,
- to provide additional incentive to Employees and Consultants, and
- to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant. Stock Purchase Rights may also be granted under the Plan.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" means the Board or any of its Committees as
shall be administering the Plan, in accordance with Section 4 of the Plan.
(b) "APPLICABLE LAWS" means the requirements relating to the
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws
of any foreign country or jurisdiction where Options or Stock Purchase Rights
are, or will be, granted under the Plan.
(c) "BOARD" means the Board of Directors of the Company.
(d) "CODE" means the Internal Revenue Code of 1986, as amended.
(e) "COMMITTEE" means a committee of Board members appointed by
the Board in accordance with Section 4 of the Plan.
(f) "COMMON STOCK" means the common stock of the Company.
(g) "COMPANY" means Genentech, Inc., a Delaware corporation.
(h) "DIRECTOR" means a member of the Board.
(i) "CONSULTANT" means any person, including an advisor, engaged
by the Company or Subsidiary to render services to such entity but shall not
include an Employee.
(j) "DISABILITY" means total and permanent disability as defined
in Section 22(e)(3) of the Code.
(k) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or Subsidiary of the Company. An individual shall
not cease to be an Employee in the case of (i) any leave of absence approved
by the Company or (ii) transfers between locations of the Company or between
the Company, any Subsidiary, or any successor. For purposes of Incentive
Stock Options, no such leave may exceed ninety days, unless reemployment upon
expiration of such leave is guaranteed by statute or contract. If
reemployment upon expiration of a leave of absence approved by the Company is
not so guaranteed, then three (3) months following the 91st day of such leave
any Incentive Stock Option held by the Optionee shall cease to be treated as
an Incentive Stock Option and shall be treated for tax purposes as a
Nonstatutory Stock Option. Neither service as a Director nor payment of a
director's fee by the Company shall be sufficient to constitute "employment"
by the Company.
(l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(m) "FAIR MARKET VALUE" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system
on the day of determination, as reported in The Wall Street Journal or such
other source as the Administrator deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value
of a Share of Common Stock shall be the mean between the high bid and low
asked prices for the Common Stock on the day of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(n) "INCENTIVE STOCK OPTION" means an Option intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code
and the regulations promulgated thereunder.
(o) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option.
(p) "NOTICE OF GRANT" means a written or electronic notice
evidencing certain terms and conditions of an individual Option or Stock
Purchase Right grant. The Notice of Grant is part of the Option Agreement.
(q) "OFFICER" means a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(r) "OPTION" means a stock option granted pursuant to the Plan.
(s) "OPTION AGREEMENT" means an agreement between the Company and
an Optionee evidencing the terms and conditions of an individual Option
grant. The Option Agreement is subject to the terms and conditions of the
Plan.
(t) "OPTIONED STOCK" means the Common Stock subject to an Option
or Stock Purchase Right.
(u) "OPTIONEE" means the holder of an outstanding Option or Stock
Purchase Right granted under the Plan.
(v) "PARENT" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(w) "PLAN" means this 1999 Stock Plan.
(x) "RESTRICTED STOCK" means shares of Common Stock acquired
pursuant to a grant of Stock Purchase Rights under Section 11 of the Plan.
(y) "RESTRICTED STOCK PURCHASE AGREEMENT" means a written
agreement between the Company and the Optionee evidencing the terms and
restrictions applying to stock purchased under a Stock Purchase Right. The
Restricted Stock Purchase Agreement is subject to the terms and conditions of
the Plan and the Notice of Grant.
(z) "RETIREMENT" means a Service Provider who leaves the
employment of the Company after reaching age sixty-five (65).
(aa) "RULE 16b-3" means Rule 16b-3 of the Exchange Act or any
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
(bb) "SECTION 16(b) " means Section 16(b) of the Exchange Act.
(cc) "SERVICE PROVIDER" means an Employee, Director or Consultant.
(dd) "SHARE" means a share of the Common Stock, as adjusted in
accordance with Section 13 of the Plan.
(ee) "STOCK PURCHASE RIGHT" means the right to purchase Common
Stock pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
(ff) "SUBSIDIARY" means a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 13
of the Plan, the maximum aggregate number of Shares that may be optioned and
sold under the Plan is 48,000,000 Shares. The Shares may be authorized, but
unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes
unexercisable without having been exercised in full, the unpurchased Shares
which were subject thereto shall become available for future grant or sale
under the Plan (unless the Plan has terminated); PROVIDED, however, that
Shares that have actually been issued under the Plan, whether upon exercise
of an Option or Right, shall not be returned to the Plan and shall not become
available for future distribution under the Plan, except that if Shares of
Restricted Stock are repurchased by the Company at their original purchase
price, such Shares shall become available for future grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) PROCEDURE.
(i) MULTIPLE ADMINISTRATIVE BODIES. The Plan may be
administered by different Committees with respect to different groups of
Service Providers.
(ii) SECTION 162(m). To the extent that the Administrator
determines it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.
(iii) RULE 16b-3. To the extent desirable to qualify
transactions hereunder as exempt under Rule 16b-3, the transactions
contemplated hereunder shall be structured to satisfy the requirements for
exemption under Rule 16b-3.
(iv) OTHER ADMINISTRATION. Other than as provided above,
the Plan shall be administered by (A) the Board or (B) a Committee, which
committee shall be constituted to satisfy Applicable Laws.
(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the
Plan, and in the case of a Committee, subject to the specific duties
delegated by the Board to such Committee, the Administrator shall have the
authority, in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and
Stock Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to be
covered by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any Option or Stock Purchase Right granted
hereunder. Such terms and conditions include, but are not limited to, the
exercise price, the time or times when Options or Stock Purchase Rights may
be exercised (which may be based on performance criteria), any vesting
acceleration or waiver of forfeiture restrictions, and any restriction or
limitation regarding any Option or Stock Purchase Right or the shares of
Common Stock relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(vi) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan;
(vii) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred treatment under
foreign laws;
(viii) to modify or amend each Option or Stock Purchase Right
(subject to Section 15(c) of the Plan), including the discretionary authority
to extend the post-termination exercisability period of Options longer than
is otherwise provided for in the Plan;
(ix) to allow Optionees to satisfy withholding tax
obligations by electing to have the Company withhold from the Shares to be
issued upon exercise of an Option or Stock Purchase Right that number of
Shares having a Fair Market Value equal to (or less than) the minimum amount
required to be withheld. The Fair Market Value of the Shares to be withheld
shall be determined on the date that the amount of tax to be withheld is to
be determined. All elections by an Optionee to have Shares withheld for this
purpose shall be made in such form and under such conditions as the
Administrator may deem necessary or advisable;
(x) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option or Stock
Purchase Right previously granted by the Administrator;
(xi) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) EFFECT OF ADMINISTRATOR'S DECISION. The Administrator's
decisions, determinations and interpretations shall be final and binding on
all Optionees and any other holders of Options or Stock Purchase Rights.
5. ELIGIBILITY. Nonstatutory Stock Options and Stock Purchase Rights
may be granted to Service Providers. Incentive Stock Options may be granted
only to Employees.
6. LIMITATIONS.
(a) Each Option shall be designated in the Option Agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair
Market Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year
(under all plans of the Company and any Parent or Subsidiary) exceeds
$100,000, such Options shall be treated as Nonstatutory Stock Options. For
purposes of this Section 6(a), Incentive Stock Options shall be taken into
account in the order in which they were granted. The Fair Market Value of
the Shares shall be determined as of the time the Option with respect to such
Shares is granted.
(b) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they interfere
in any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options:
(i) No Service Provider shall be granted, in any fiscal
year of the Company, Options to purchase more than 2,000,000 Shares.
(ii) In connection with his or her initial service, a
Service Provider may be granted Options to purchase up to an additional
1,000,000 Shares which shall not count against the limit set forth in
subsection (i) above.
(iii) The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's capitalization
as described in Section 13.
7. TERM OF PLAN. The Plan shall become effective upon its adoption by
the Board. It shall continue in effect for a term of ten (10) years unless
terminated earlier under Section 15 of the Plan.
8. TERM OF OPTION. The term of each Option shall be stated in the
Option Agreement. In the case of an Incentive Stock Option, the term shall
be ten (10) years from the date of grant or such shorter term as may be
provided in the Option Agreement. Moreover, in the case of an Incentive
Stock Option granted to an Optionee who, at the time the Incentive Stock
Option is granted, owns stock representing more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company or any
Parent or Subsidiary, the term of the Incentive Stock Option shall be five
(5) years from the date of grant or such shorter term as may be provided in
the Option Agreement.
9. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) EXERCISE PRICE. The per share exercise price for the Shares
to be issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share
on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per
Share exercise price shall be determined by the Administrator. In the case
of a Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share
on the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted
with a per Share exercise price of less than 100% of the Fair Market Value
per Share on the date of grant pursuant to a merger or other corporate
transaction.
(b) WAITING PERIOD AND EXERCISE DATES. At the time an Option is
granted, the Administrator shall fix the period within which the Option may
be exercised and shall determine any conditions that must be satisfied before
the Option may be exercised.
(c) FORM OF CONSIDERATION. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including the
method of payment. In the case of an Incentive Stock Option, the
Administrator shall determine the acceptable form of consideration at the
time of grant. Such consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired
upon exercise of an option, have been owned by the Optionee for more than six
months on the date of surrender, and (B) have a Fair Market Value on the date
of surrender equal to the aggregate exercise price of the Shares as to which
said Option shall be exercised;
(v) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to
the Optionee, including any liability attributable to the Optionee's
participation in any Company-sponsored deferred compensation program or
arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.
10. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option
granted hereunder shall be exercisable according to the terms of the Plan and
at such times and under such conditions as determined by the Administrator
and set forth in the Option Agreement. Unless the Administrator provides in
writing otherwise, vesting of Options granted hereunder shall be suspended
during any unpaid leave of absence. An Option may not be exercised for a
fraction of a Share.
An Option shall be deemed exercised when the Company
receives: (i) written or electronic notice of exercise (in accordance with
the Option Agreement) from the person entitled to exercise the Option, and
(ii) full payment for the Shares with respect to which the Option is
exercised. Full payment may consist of any consideration and method of
payment authorized by the Administrator and permitted by the Option Agreement
and the Plan. Shares issued upon exercise of an Option shall be issued in
the name of the Optionee or, if requested by the Optionee, in the name of the
Optionee, his or her spouse or in any other name or names designated by
Optionee. Until the Shares are issued (as evidenced by the appropriate entry
on the books of the Company or of a duly authorized transfer agent of the
Company), no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to the Optioned Stock, notwithstanding
the exercise of the Option. The Company shall issue (or cause to be issued)
such Shares promptly after the Option is exercised. No adjustment will be
made for a dividend or other right for which the record date is prior to the
date the Shares are issued, except as provided in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the
number of Shares thereafter available, both for purposes of the Plan and for
sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) TERMINATION OF RELATIONSHIP AS A SERVICE PROVIDER. If an
Optionee ceases to be a Service Provider, other than upon the Optionee's
death, Disability, or Retirement, the Optionee may exercise his or her Option
within such period of time as is specified in the Option Agreement to the
extent that the Option is vested on the date of termination (but in no event
later than the expiration of the term of such Option as set forth in the
Option Agreement). In the absence of a specified time in the Option
Agreement, the Option shall remain exercisable for three (3) months following
the Optionee's termination. If, on the date of termination, the Optionee is
not vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified by the
Administrator, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan.
(c) DISABILITY OF OPTIONEE. If an Optionee ceases to be a Service
Provider as a result of the Optionee's Disability, the Optionee may exercise
his or her Option within such period of time as is specified in the Option
Agreement to the extent the Option is vested on the date Optionee ceases to
be a Service Provider (but in no event later than the expiration of the term
of such Option as set forth in the Option Agreement). In the absence of a
specified time in the Option Agreement, the Option shall remain exercisable
for twelve (12) months following the date the Optionee ceases to be a Service
Provider. If, on the date Optionee ceases to be a Service Provider, the
Optionee is not vested as to his or her entire Option, the Shares covered by
the unvested portion of the Option shall revert to the Plan. If, after
Optionee ceases to be a Service Provider, the Optionee does not exercise his
or her Option within the time specified herein, the Option shall terminate,
and the Shares covered by such Option shall revert to the Plan.
(d) DEATH OF OPTIONEE. Unless otherwise provided by the
Administrator or in any Option Agreement, immediately upon Optionee's death,
the Option shall automatically accelerate and become fully-vested for all of
the Shares covered by such Option, and the expiration date of the Option
shall automatically be extended to the expiration date of the Option term
specified in the Option Agreement. If an Optionee dies while a Service
Provider, the Option may be exercised by the Optionee's designated
beneficiary, provided such beneficiary has been designated prior to
Optionee's death in a form acceptable by the Administrator. If no such
beneficiary has been designated by the Optionee, then such Option may be
exercised by the personal representative of the Optionee's estate or by the
person or persons to whom the Option is transferred pursuant to the
Optionee's will or in accordance with the laws of descent and distribution.
If the Option is not exercised following Optionee's death within the time
specified herein, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan.
(e) RETIREMENT OF OPTIONEE. Unless otherwise provided by the
Administrator or in any Option Agreement, immediately upon Optionee's
Retirement, the Option shall automatically accelerate and become fully-vested
for that number of Shares covered by such Option which would otherwise vest
during the twelve (12) month period immediately following the date of
Retirement had the Optionee remained a Service Provider during that period,
and the expiration date of the Option shall automatically be extended to the
expiration date of the Option term specified in the Option Agreement. In the
event Optionee ceases to be a Service Provider by reason of Retirement, the
Option may continue to be exercised by Optionee during the terms of the
Option. If the Option is not exercised following Optionee's Retirement
within the time specified, the Option shall terminate, and the Shares covered
by such Option shall revert to the Plan.
(f) BUYOUT PROVISIONS. The Administrator may at any time offer to
buy out for a payment in cash or Shares an Option previously granted based on
such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
11. STOCK PURCHASE RIGHTS.
(a) RIGHTS TO PURCHASE. Stock Purchase Rights may be issued
either alone, in addition to, or in tandem with other awards granted under
the Plan and/or cash awards made outside of the Plan. After the
Administrator determines that it will offer Stock Purchase Rights under the
Plan, it shall advise the offeree in writing or electronically, by means of a
Notice of Grant, of the terms, conditions and restrictions related to the
offer, including the number of Shares that the offeree shall be entitled to
purchase, the price to be paid, and the time within which the offeree must
accept such offer. The offer shall be accepted by execution of a Restricted
Stock Purchase Agreement in the form determined by the Administrator.
(b) REPURCHASE OPTION. Unless the Administrator determines
otherwise, the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination
of the purchaser's service with the Company for any reason (including death
or Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the
purchaser to the Company. The repurchase option shall lapse at a rate or
under such conditions as shall be determined by the Administrator and set
forth in the Restricted Stock Purchase Agreement.
(c) OTHER PROVISIONS. The Restricted Stock Purchase Agreement
shall contain such other terms, provisions and conditions not inconsistent
with the Plan as may be determined by the Administrator in its sole
discretion.
(d) RIGHTS AS A SHAREHOLDER. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered
upon the records of the duly authorized transfer agent of the Company. No
adjustment will be made for a dividend or other right for which the record
date is prior to the date the Stock Purchase Right is exercised, except as
provided in Section 13 of the Plan.
12. TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. Unless
determined otherwise by the Administrator, an Option or Stock Purchase Right
may not be sold, pledged, assigned, hypothecated, transferred, or disposed of
in any manner other than by will or by the laws of descent or distribution
and may be exercised, during the lifetime of the Optionee, only by the
Optionee. If the Administrator makes an Option or Stock Purchase Right
transferable, such Option or Stock Purchase Right shall contain such
additional terms and conditions as the Administrator deems appropriate.
13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER OR
ASSET SALE.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by
the shareholders of the Company, the number of shares of Common Stock covered
by each outstanding Option and Stock Purchase Right, and the number of shares
of Common Stock which have been authorized for issuance under the Plan but as
to which no Options or Stock Purchase Rights have yet been granted or which
have been returned to the Plan upon cancellation or expiration of an Option
or Stock Purchase Right, as well as the price per share of Common Stock
covered by each such outstanding Option or Stock Purchase Right, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split,
stock dividend, combination or reclassification of the Common Stock, or any
other increase or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be
deemed to have been "effected without receipt of consideration." Such
adjustment shall be made by the Board, whose determination in that respect
shall be final, binding and conclusive. Except as expressly provided herein,
no issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or
price of shares of Common Stock subject to an Option or Stock Purchase Right.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify
each Optionee as soon as practicable prior to the effective date of such
proposed transaction. The Administrator in its discretion may provide for an
Optionee to have the right to exercise his or her Option until ten (10) days
prior to such transaction as to all of the Optioned Stock covered thereby,
including Shares as to which the Option would not otherwise be exercisable.
In addition, the Administrator may provide that any Company repurchase option
applicable to any Shares purchased upon exercise of an Option or Stock
Purchase Right shall lapse as to all such Shares, provided the proposed
dissolution or liquidation takes place at the time and in the manner
contemplated. To the extent it has not been previously exercised, an Option
or Stock Purchase Right will terminate immediately prior to the consummation
of such proposed action.
(c) MERGER OR ASSET SALE. In the event of a merger of the Company
with or into another corporation, or the sale of substantially all of the
assets of the Company, each outstanding Option and Stock Purchase Right shall
be assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the
event that the successor corporation refuses to assume or substitute for the
Option or Stock Purchase Right, the Optionee shall fully vest in and have the
right to exercise the Option or Stock Purchase Right as to all of the
Optioned Stock, including Shares as to which it would not otherwise be vested
or exercisable. If an Option or Stock Purchase Right becomes fully vested
and exercisable in lieu of assumption or substitution in the event of a
merger or sale of assets, the Administrator shall notify the Optionee in
writing or electronically that the Option or Stock Purchase Right shall be
fully vested and exercisable for a period of fifteen (15) days from the date
of such notice, and the Option or Stock Purchase Right shall terminate upon
the expiration of such period. For the purposes of this paragraph, the
Option or Stock Purchase Right shall be considered assumed if, following the
merger or sale of assets, the option or right confers the right to purchase
or receive, for each Share of Optioned Stock subject to the Option or Stock
Purchase Right immediately prior to the merger or sale of assets, the
consideration (whether stock, cash, or other securities or property) received
in the merger or sale of assets by holders of Common Stock for each Share
held on the effective date of the transaction (and if holders were offered a
choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares); provided, however, that if such
consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option or Stock Purchase Right, for each
Share of Optioned Stock subject to the Option or Stock Purchase Right, to be
solely common stock of the successor corporation or its Parent equal in fair
market value to the per share consideration received by holders of Common
Stock in the merger or sale of assets.
14. DATE OF GRANT. The date of grant of an Option or Stock Purchase
Right shall be, for all purposes, the date on which the Administrator makes
the determination granting such Option or Stock Purchase Right, or such other
later date as is determined by the Administrator. Notice of the
determination shall be provided to each Optionee within a reasonable time
after the date of such grant.
15. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may at any time amend,
alter, suspend or terminate the Plan.
(b) SHAREHOLDER APPROVAL. The Company shall obtain shareholder
approval of any Plan amendment to the extent necessary and desirable to
comply with Applicable Laws.
(c) EFFECT OF AMENDMENT OR TERMINATION. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any
Optionee, unless mutually agreed otherwise between the Optionee and the
Administrator, which agreement must be in writing and signed by the Optionee
and the Company. Termination of the Plan shall not affect the
Administrator's ability to exercise the powers granted to it hereunder with
respect to Options granted under the Plan prior to the date of such
termination.
16. CONDITIONS UPON ISSUANCE OF SHARES.
(a) LEGAL COMPLIANCE. Shares shall not be issued pursuant to the
exercise of an Option or Stock Purchase Right unless the exercise of such
Option or Stock Purchase Right and the issuance and delivery of such Shares
shall comply with Applicable Laws and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
(b) INVESTMENT REPRESENTATIONS. As a condition to the exercise of
an Option or Stock Purchase Right, the Company may require the person
exercising such Option or Stock Purchase Right to represent and warrant at
the time of any such exercise that the Shares are being purchased only for
investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a representation
is required.
17. INABILITY TO OBTAIN AUTHORITY. The inability of the Company to
obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
18. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall
be sufficient to satisfy the requirements of the Plan.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>4
<FILENAME>exhibit13_1.txt
<DESCRIPTION>PORTIONS OF THE 2000 ANNUAL REPORT TO STOCKHOLDERS
<TEXT>
<PAGE>
Exhibit 13.1
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. All numbers
related 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 splits of our Common Stock that were effected in October 2000
and November 1999.
OVERVIEW OF OUR BUSINESS
Genentech is a leading biotechnology company using human genetic information
to discover, develop, manufacture and market human pharmaceuticals that
address significant unmet medical needs. Fourteen of the approved products
of biotechnology stem from our science. We manufacture and market nine
protein-based pharmaceuticals listed below, and license several additional
products to other companies.
- - 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 which we market together with IDEC
Pharmaceuticals Corporation, commonly known as IDEC, for the treatment of
patients with relapsed or refractory low-grade or follicular, CD20-
positive B-cell non-Hodgkin's lymphoma;
- - TNKase (tenecteplase) single-bolus thrombolytic agent for the treatment of
acute myocardial infarction;
- - Activase (alteplase, recombinant) tissue plasminogen activator, or t-PA,
for the treatment of acute myocardial infarction, acute ischemic stroke
within three hours of the onset of symptoms and acute massive pulmonary
embolism;
- - Nutropin Depot [somatropin (rDNA origin) for injectable suspension]
long-acting growth hormone for the treatment of growth failure associated
with pediatric growth hormone deficiency;
- - Nutropin AQ [somatropin (rDNA origin) injection] liquid formulation growth
hormone for the same indications as Nutropin;
- - 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;
- - Protropin (somatrem for injection) growth hormone for the treatment of
inadequate endogenous growth hormone secretion, or growth hormone
deficiency, in children; and
- - Pulmozyme (dornase alfa, recombinant) inhalation solution for the
treatment of cystic fibrosis.
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 we will receive
royalties 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 $20.63 per share in cash with funds deposited by Roche
for that purpose. We refer to this event as the "Redemption." As a result,
on that date, 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 $1,685.7
million of goodwill and $1,499.0 million of other intangible assets onto our
balance sheet on June 30, 1999. Also, as a result of push-down accounting,
we recorded special charges related to the Redemption of $1,207.7 million on
June 30, 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.
STOCK SPLITS
On October 24, 2000, 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 17, 2000. Our stock began
trading on a split-adjusted basis on October 25, 2000. 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, Special Common Stock and Redeemable Common Stock give effect to
these splits.
PUBLIC OFFERINGS
On July 23, 1999, October 26, 1999, and March 29, 2000, Roche completed
public offerings of our Common Stock. We did not receive any of the net
proceeds from these offerings. On January 19, 2000, Roche completed an
offering of zero-coupon notes that are exchangeable for an aggregate of
13,034,618 shares of our Common Stock held by Roche. Roche's percentage
ownership of our outstanding Common Stock is approximately 58.4% at December
31, 2000.
RESULTS OF OPERATIONS
(dollars in millions, except per share amounts)
As discussed in the "Basis of Presentation and Restatement" note in the Notes
to Consolidated Financial Statements, our 1999 financial statements have been
restated to reflect: (a) our results of operations prior to the Redemption
(Old Basis) separately from our results of operations subsequent to the
Redemption (New Basis) and (b) revised accounting related to the write up of
the valuation allowance pertaining to unrealized gains on certain marketable
equity securities resulting from the Redemption. Information for 1999 in
this Financial Review for 1999 reflects the combined Old Basis and New Basis
presentation from the Consolidated Financial Statements.
Annual % Change
2000 1999 1998 00/99 99/98
- ----------------------------------------------------------------------
Revenues $1,736.4 $1,401.0 $1,150.9 24% 22%
Total Revenues: Total revenues for 2000 reached $1,736.4 million, a 24%
increase from 1999. Revenues for 1999 increased 22% from 1998 primarily due
to higher product sales. These increases are further discussed below.
Annual % Change
Product Sales 2000 1999 1998 00/99 99/98
- ----------------------------------------------------------------------------
Herceptin $ 275.9 $ 188.4 $ 30.5 46% 518%
Rituxan 444.1 279.4 162.6 59 72
Activase/TNKase 206.2 236.0 213.0 (13) 11
Growth Hormone 226.6 221.2 214.0 2 3
Pulmozyme 121.8 111.4 93.8 9 19
Actimmune 3.7 2.7 3.9 37 (31)
----------------------------------------------------
Total product sales $1,278.3 $1,039.1 $717.8 23% 45%
% of revenues 74% 74% 62%
Total Product Sales: Total product sales were $1,278.3 million in 2000, an
increase of 23% from 1999 reflecting the effect of strong Rituxan and
Herceptin 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 in
connection with our licensing agreement with Hoffmann-La Roche were $67.4
million in 2000, $41.3 million in 1999 and $28.7 million in 1998. See
"Relationship With Roche" below for further information about our licensing
agreement with Hoffmann-La Roche.
Herceptin: Sales of Herceptin were $275.9 million, a 46% increase from 1999.
In 1999 sales of Herceptin were $188.4 million. We recorded $30.5 million of
initial sales of Herceptin in the fourth quarter of 1998. Herceptin was
first marketed in September 1998 and is the first humanized monoclonal
antibody for the treatment of HER2 overexpressing metastatic breast cancer.
Since the launch of Herceptin, an increase in penetration into the breast
cancer market has contributed to a positive sales trend. We have granted
Hoffmann-La Roche exclusive marketing rights to Herceptin outside of the
United States.
During the third quarter of 2000, Hoffmann-La Roche received approval
from the European Commission to market Herceptin for the treatment of HER2-
positive metastatic breast cancer in Europe. We receive royalties from
Hoffmann-La Roche for these European Herceptin product sales.
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 in certain patients 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 that had spread to the lung. On October 6, 2000, we
issued a follow-up letter to physicians which included an amended package
insert for Herceptin including this information.
Rituxan: Sales of Rituxan were $444.1 million in 2000, an increase of 59%
from 1999. Sales of Rituxan were $279.4 million in 1999, an increase of 72%
from 1998. These increases were 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, the first full year of sales. Rituxan
was approved for marketing by the Food and Drug Administration, or FDA, in
late November 1997 and we launched Rituxan in December 1997. We co-developed
Rituxan with IDEC, from which we license Rituxan. IDEC and Genentech jointly
promote 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 in 1997 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 the supply of MabThera.
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/TNKase: Sales of our two cardiovascular products, Activase and
TNKase, were $206.2 million in 2000, a decrease of 13% from 1999. TNKase
received FDA approval in early June 2000 and was launched in late June 2000.
The decrease from the prior year was due primarily to increased competition
from Centocor, Inc.'s Retavase, registered trademark, (reteplase), and a
decline in the overall size of the thrombolytic market as a result of
increasing use of mechanical reperfusion as well as early intervention with
other therapies in the treatment of acute myocardial infarction. In 1999,
sales of Activase were $236.0 million, 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 competition from Centocor's Retavase.
Growth Hormone: Sales of our four growth hormone products, Nutropin Depot,
Nutropin AQ, Nutropin and Protropin, increased slightly in 2000 compared to
1999. This increase was largely due to fluctuations in customer ordering
patterns and the introduction of Nutropin Depot. In December 1999, we
received FDA approval for Nutropin Depot, a long-acting dosage form of
recombinant growth hormone for pediatric growth hormone deficiency. Nutropin
Depot was launched in late June 2000. In 1999, Protropin, Nutropin and
Nutropin AQ sales were $221.2 million, a slight increase from 1998. This
increase primarily reflects fluctuations in customer ordering patterns.
Pulmozyme: Pulmozyme sales were $121.8 million in 2000, a 9% increase from
1999. This increase was attributable to increased market penetration in the
early and mild patient populations for the treatment of cystic fibrosis.
Sales of Pulmozyme were $111.4 million in 1999, an increase of 19% over 1998.
This increase was due to our continued market penetration for the treatment
of cystic fibrosis in the early and mild patient populations.
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 sublicensed all of its rights
to InterMune Pharmaceuticals, Inc., or InterMune. As of January 1999, we no
longer sell Actimmune directly in the United States. We have agreed to sell
packaged drug product to InterMune at cost plus a mark-up.
Royalties, Contract and Other, Annual % Change
and Interest Income 2000 1999 1998 00/99 99/98
- ------------------------------------------------------------------------------
Royalties $207.2 $189.3 $229.6 9% (18)%
Contract and other 160.4 83.2 114.8 93 (28)
Interest income 90.4 89.4 88.7 1 1
Royalties: Royalty income was $207.2 million, an increase of 9% from 1999.
This increase was due to higher third-party sales from various licensees.
Royalty income was $189.3 million in 1999, a decrease of 18% from 1998. This
decrease was primarily related to the expiration of royalties from Eli Lilly
and Company 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 two years. See "Forward-Looking
Information and Cautionary Factors That May Affect Future Results" below for
a discussion of market risks related to these financial instruments.
Contract and Other Revenues: Contract and other revenues were $160.4 million
in 2000, an increase of 93% over 1999. This increase was primarily due to
higher gains from the sale of biotechnology equity securities and the
recognition of $8.6 million of deferred revenues (see "Staff Accounting
Bulletin No. 101" below for further discussion), offset in part by lower
contract revenues from our strategic alliances with third-party
collaborators. Contract and other revenues were $83.2 million in 1999, 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 partially offset by higher revenues in 1999 from our strategic
alliances, including initial license fees from Immunex for Enbrel and from
Schwarz Pharma AG for Nutropin AQ and Nutropin Depot and by higher gains from
the sale of biotechnology equity securities.
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 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 $3.5 million in
2000, $17.2 million in 1999 and $21.6 million in 1998.
Interest Income: Interest income in 2000 and 1999 were comparable to
previous years. In our fixed income portfolio (cash, short-term and long-
term investment portfolio, excluding marketable equity securities), at
December 31, 2000, lower portfolio returns were offset by higher average
balances. Year end balances were also higher in 2000 compared to 1999.
Annual % Change
Costs and Expenses 2000 1999 1998 00/99 99/98
- ------------------------------------------------------------------------------
Cost of sales $ 364.9 $ 285.6 $138.6 28% 106%
Research and
development 489.9 367.3 396.2 33 (7)
Marketing, general and
administrative 497.0 467.9 358.9 6 30
Special charges:
Related to redemption - 1,207.7 - - -
Legal settlements - 230.0 - - -
Recurring charges related
to redemption 375.3 197.7 - 90 -
Interest expense 5.3 5.4 4.6 (2) 17
-------------------------------------------------
Total costs and expenses $1,732.4 $2,761.6 $898.3 (37)% 207%
% of revenues 100% 197% 78%
COS as a % of product sales 29 27 19
R&D as % of revenues 28 26 34
MG&A as % of revenues 29 33 31
Cost of Sales: Cost of sales, or COS, was $364.9 million in 2000, an
increase of 28% from 1999. COS as a percent of product sales was 29%, an
increase from 1999. This increase primarily reflects a change in the product
mix, an increase in provisions established for nonuseable inventory and
higher sales to Hoffmann-La Roche. COS was $285.6 million in 1999, an
increase of 106% from 1998. COS as a percent of net sales increased to 27% in
1999. This increase reflects the six months of costs related to the sale of
inventory that was written up at the Redemption due to push-down accounting,
offset in part by efficiencies in production and a more favorable product
mix. As a result of push-down accounting, $92.8 million and $93.4 million of
expense was recognized in 2000 and 1999, respectively, through the sale of
inventory that was written up as a result of the Redemption. All inventory
written up as a result of the Redemption has been sold as of December 31,
2000.
Research and Development: Research and development, or R&D, expenses in 2000
were $489.9 million, up 33% from 1999. This increase was due to higher
clinical costs related to later-stage clinical trials and higher in-licensing
and collaboration expenses. In-licensing expenses in 2000 included a $15.0
million payment for the purchase of in-process research and development, or
IPR&D, during the first quarter of 2000 under an 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. Actelion is
leading the development effort of tezosentan and the project is currently in
Phase III clinical trials. In addition, we made a $35.0 million payment to
Actelion for the purchase of IPR&D for the rights to develop and co-promote
Actelion's endothelin receptor antagonist Tracleer, trademark, (bosentan) in
the United States for the potential treatment of acute and chronic heart
failure. Actelion is leading the development efforts and commercialization
of Tracleer. We determined that the above acquired IPR&D was not yet
technologically feasible and that the acquired IPR&D had no future
alternative uses. R&D expenses were $367.3 million in 1999, down 7% from
1998 as a result of reduced spending as products progressed through late-
stage clinical trials. R&D as a percentage of revenues was 28% in 2000, 26%
in 1999 and 34% in 1998.
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 2000 increased 6% from 1999. This
increase resulted from higher marketing and sales expenses while general and
administrative expenses decreased. The marketing and sales increase was
driven by the continued support of our growing bio-oncology business,
including the Rituxan profit-sharing expense with IDEC, the launch of TNKase,
and the prelaunch support of Xolair for the potential treatment of allergic
asthma and seasonal allergic rhinitis. The decrease in general and
administrative expenses was mostly due to the write down of certain
biotechnology investments as a result of other than temporary impairment and
higher legal expenses in 1999. In 1999, MG&A expenses increased 30% from
1998. The increase was primarily in support of the growth of our bio-
oncology products including the Rituxan profit-sharing with IDEC, and
competitive conditions with other marketed products. Additional increases
came from higher royalty, legal and corporate expenses.
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 IPR&D, (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. See "In-Process Research and Development" below and
the "Redemption of Our Special Common Stock" note in the Notes to
Consolidated Financial Statements for further information regarding these
special charges.
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
charge for the settlement of the patent infringement lawsuits brought by the
University of California relating to our human growth hormone products. See
the "Leases, Commitments and Contingencies" note 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 $375.3 million in 2000 and $197.7
million in 1999. These charges were comprised of $364.2 million in 2000 and
$190.4 million in 1999 related to the amortization of other intangible assets
and goodwill, and $11.1 million in 2000 and $7.3 million in 1999 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.
Income (Loss) Before Taxes and Cumulative
Effect of Accounting Change, Income Taxes
and Cumulative Effect of Accounting Change 2000 1999 1998
- ----------------------------------------------------------------------------
Income (loss) before taxes and
cumulative effect of accounting
change $ 4.0 (1,360.6) $252.6
Income tax provision (benefit) 20.4 (203.1) 70.7
Income (loss) before cumulative
effect of accounting change (16.4) (1,157.5) 181.9
Cumulative effect of accounting
change, net of tax (57.8) - -
Staff Accounting Bulletin No. 101: In the fourth quarter of 2000, we adopted
the Securities and Exchange Commission's Staff Accounting Bulletin No. 101 on
revenue recognition effective January 1, 2000 and recorded a $57.8 million
charge, net of tax, as a cumulative effect of a change in accounting
principle related to contract revenues recognized in prior periods. The
related deferred revenue is being recognized over the term of the agreements.
In 2000, we recognized $8.6 million of this deferred revenue in contract and
other income. (See the "Change in Accounting Principle" section of the
"Description of Business and Significant Accounting Policies" note in the
Notes to Consolidated Financial Statements for further information on our
adoption of Staff Accounting Bulletin No. 101.)
Income Tax: The tax provision of $20.4 million for 2000 increased over the
1999 tax benefit of $203.1 million primarily due to increased pretax income
and non-deductible goodwill amortization related to the Redemption. The
increase was partially offset by the increased benefit of R&D tax credits.
The 1999 tax benefit differed from the 1998 tax provision primarily because
of the charges related to the Redemption and legal settlements. The tax
provision and tax benefit in 2000 and 1999, respectively, reflect the adverse
impact of non-deductible in-process R&D charges and amortization of goodwill.
The tax rate of 31% in 2000 on pretax income excluding charges related to the
Redemption and cumulative effect of accounting change is lower than the
comparable tax rate of 33% in 1999 primarily due to increased R&D tax
credits. The 1999 tax rate increased from 28% in 1998 primarily due to
reduced research credits and realization of foreign losses.
Net Income (Loss) 2000 1999 1998
- -----------------------------------------------------------------------------
Net income (loss) $(74.2) $(1,157.5) $181.9
Earnings (loss) per share:
Basic: Earnings (loss) before cumulative
effect of accounting change $(0.03) $ (2.26) $ 0.36
Cumulative effect of accounting
change, net of tax (0.11) - -
----------------------------
Net earnings (loss) per share $(0.14) $ (2.26) $ 0.36
============================
Diluted: Earnings (loss) before cumulative
effect of accounting change $(0.03) $ (2.26) $ 0.35
Cumulative effect of accounting
change, net of tax (0.11) - -
----------------------------
Net earnings (loss) per share $(0.14) $ (2.26) $ 0.35
============================
Net Income (Loss): The net loss of $74.2 million, or a loss of $0.14 per
share in 2000 primarily reflects a full year of recurring charges for the
amortization of goodwill and other intangible assets related to the
Redemption and push-down accounting, the cumulative effect of a change in
accounting principle, costs related to the sale of inventory that was written
up at the Redemption and higher R&D expenses; offset in part by higher
product sales. The net loss in 1999 of $1,157.5 million, or a loss of $2.26
per share, is attributable to the Redemption and related push-down
accounting, and legal settlements, net of their related tax effects. To a
lesser extent, the loss in 1999 was also due to higher MG&A expenses, COS and
income taxes, and lower royalty and contract and other revenues, partly
offset by higher product sales and lower R&D spending.
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.
In 1990 and 1991 through 1997, Roche purchased 60% and 5%, respectively, of
our outstanding common stock. The push-down effect of Roche's aggregate
purchase price is allocated based on Roche's ownership percentages as if the
purchases had occurred at the original purchase dates for the 1990 and 1991
through 1997 purchases. Therefore, 65% of the purchase price allocated to
IPR&D as of September 7, 1990, or 65% of $770.0 million ($500.5 million) was
recorded as an adjustment to additional paid-in capital related to the 1990-
1997 acquisitions. The remaining 35% of our outstanding common stock not
owned by Roche was purchased in 1999. Accordingly, 35% of $2,150.0 million
of total fair value at the Redemption date, or $752.5 million, was expensed
on 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 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 IPR&D 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 IPR&D
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 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 the
Redemption date. Projects subsequently added to the research and development
pipeline are not included. Except as otherwise noted below, since the
Redemption date there have been no significant changes to the phase of
development for the projects listed. 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 R&D expenditures that will be required to complete the in-process
projects will total at least $640.0 million as of December 31, 2000, as
compared to $700.0 million as of the Redemption date. This estimate reflects
costs incurred since the Redemption date, discontinued projects, and
decreases in cost to complete estimates for other projects, partially offset
by an increase in certain cost estimates related to early stage projects and
changes in expected completion dates.
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."
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, or 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 IPR&D 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, 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 (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>
We also identified five additional product programs that were at
different stages of IPR&D. 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 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. Material cash inflows
from significant projects are generally expected to commence within one to
two years after the substantial completion date has been reached.
The significant changes to the projects in the IPR&D charge since the
Redemption date through December 31, 2000, include:
- - Nutropin Depot long-acting growth hormone - project received FDA approval
in December 1999.
- - TNKase second generation t-PA - project received FDA approval in June
2000.
- - Anti-IgE antibody - project has moved from Phase III studies to awaiting
regulatory approval.
- - Xubix (sibrafiban) oral IIb/IIIa antagonist - project has been
discontinued.
- - Anti-CD18 antibody - project has been discontinued.
- - Anti-VEGF antibody - project has moved from Phase II studies to Phase III
studies.
- - Dornase alfa AERx - project discontinued in January 2001.
- - Activase t-PA - project has completed one Phase III trial and is awaiting
regulatory approval.
- - 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.
- - AMD Fab - project has moved to Phase I trials.
- - LDP-02 - project has moved to Phase II studies.
- - Pulmozyme - project has completed Phase III trials.
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 27.2 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 $20.63 per share, less the exercise price;
- - Options for the purchase of approximately 16.0 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 19.6 million shares of Special
Common Stock were canceled in accordance with the terms of our 1996 Stock
Option/Stock Incentive Plan, or the 1996 Plan. With certain exceptions,
we granted new options for the purchase of 1.333 times the number of
shares under the previous options with an exercise price of $24.25 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, or the 1999 Plan, was
approximately 20.0 million. Alternative arrangements were provided for
certain holders of some of the unvested options under the 1996 Plan.
Of the approximately 16.0 million shares of converted options, options
with respect to approximately 4.0 million shares were outstanding at December
31, 2000, all of which are currently exercisable except for options with
respect to approximately 320,507 shares. These outstanding options are held
by 1,420 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 26.0 million shares (including the 20.0 million
shares referred to above) of Common Stock to approximately 2,400 employees at
an exercise price of $24.25 per share, with the grant of such options made
effective as of July 16, 1999. Of the options to purchase these 26.0 million
shares, options to purchase approximately 19.8 million shares were
outstanding at December 31, 2000, of which options to purchase approximately
7.7 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, 2000, $11.1 million and
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 our 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 $10.0 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 $100.0 million on its aggregate sales of that product and thereafter
a royalty of 15% on its aggregate sales of that product in excess of
$100.0 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, $5.0 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 $100.0 million.
Tax Sharing Agreement
Since the redemption of our Special Common Stock, and until Roche completed
its second 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 provides
that we will, among other things, establish a stock repurchase program
designed to maintain Roche's percentage ownership interest in our common
stock. In addition, Roche has a continuing option to buy stock from us at
prevailing market prices to maintain its percentage ownership interest. In
connection with that provision, 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 is to 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 509,194,352 (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 splits of our common stock in October 2000 and
November 1999. As long as Roche's percentage ownership is greater than 50%,
prior to issuing any shares, Genentech has agreed to repurchase a sufficient
number of shares of its common stock to provide that, immediately after its
issuance of shares, Roche's percentage ownership will be greater than 50%.
We have also agreed, upon request, to repurchase shares of our common stock
to increase Roche's ownership to the Minimum Percentage.
LIQUIDITY AND CAPITAL RESOURCES 2000 1999 1998
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December 31:
Cash, cash equivalents, short-term
investments and long-term marketable
debt and equity securities $2,459.4 $1,957.4 $1,604.6
Working capital 1,340.1 849.1 950.6
Current ratio 4.0:1 2.8:1 4.3:1
Year Ended December 31:
Cash provided by (used in):
Operating activities 193.5 (7.4) 349.9
Investing activities (160.2) (96.2) (421.1)
Financing activities 180.4 160.2 107.9
Capital expenditures
(included in investing activities above) (112.7) (95.0) (88.1)
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 during 2000. In 1999, 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 2000 and 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.
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 "Our Affiliation Agreement With
Roche Could Aversely Affect Our Cash Position" 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 March 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, but not limited to, our
product sales, royalties, contract revenues, expenses and net income.
Fluctuations in Our Operating Results Could Affect the Price of Our Common
Stock
Our operating results may vary from period to period for several reasons
including:
- - The overall competitive environment for our products.
For example, sales of our Activase product decreased in 2000, 1999 and
1998 primarily due to competition from Centocor Inc.'s Retavase and more
recently to a decreasing size of the thrombolytic marketplace as other
forms of acute myocardial infarction treatment gain acceptance.
- - The amount and timing of sales to customers in the United States.
For example, sales of our Growth Hormone products increased in 2000 and
1999 due to fluctuations in distributor ordering patterns.
- - The amount and timing of our sales to Hoffmann-La Roche of products for
sale outside of the United States and the amount and timing of its sales
to its customers, which directly impact both our product sales and royalty
revenues.
For example, in the third quarter of 2000, Hoffmann-La Roche's approval of
Herceptin in Europe increased our sales of Herceptin product.
- - 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 by the FDA for sale.
- - The rate of adoption and use of our products for approved indications and
additional indications.
For example, sales of Pulmozyme increased in 1998 due, in part, to new
patients who were attracted to our product as a result of an FDA approval
for a label extension to include cystic fibrosis patients under the age of
five.
- - The potential introduction of new products and additional indications for
existing products in 2001 and beyond.
- - The ability to successfully manufacture sufficient quantities of any
particular marketed product.
- - The number and size of any product price increases we may issue.
The Successful Development of Pharmaceutical Products Is Highly Uncertain
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 several reasons including:
- - Preclinical and clinical trial results that may show the product to be
less effective than desired or to have harmful problematic side effects;
For example:
- In June 2000, we announced that the preliminary results from
our 415-patient Phase II clinical trial of our recombinant humanized
anti-CD18 monoclonal antibody fragment, which is known as rhuMAb
CD18, for the treatment of myocardial infarction, more commonly known
as a heart attack, did not meet its primary objectives.
- In 1999, our Phase III clinical trial of recombinant human nerve
growth factor, which is known as rhNGF, for use in diabetic
peripheral neuropathy did not meet its objectives and we decided not
to file for product approval with the FDA.
- In 1999, our Phase II clinical study of recombinant human vascular
endothelial growth factor, which is known as VEGF, protein failed to
meet the primary endpoints of the study.
- - Failure to receive the necessary regulatory approvals or delay in
receiving such approvals;
- - Manufacturing costs or other factors that make the product uneconomical;
or
- - The proprietary rights of others and their competing products and
technologies that may prevent the product from being commercialized.
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.
For example, there is no guarantee that internal research efforts will
succeed in generating sufficient data for us to make a positive
development decision or that an external candidate will be available on
terms acceptable to us. In the past, promising candidates have not
yielded sufficiently positive preclinical results to meet our stringent
development criteria.
- - 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.
For example, in February 2000, we entered into an agreement with Actelion
Ltd. for the purchase of rights for the development and co-promotion in
the United States of tezosentan, and paid Actelion an upfront fee of $15.0
million which was recorded as a research and development expense.
- - As part of our strategy, we invest in R&D. R&D as a percent of revenues
can fluctuate with the changes in future levels of revenue. Lower
revenues can lead to more disciplined spending of R&D efforts.
- - Future levels of revenue.
Roche, Our Controlling Stockholder, May Have Interests That Are Adverse to
Other Stockholders
Roche, as our majority stockholder, 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
stockholders that Roche will not institute a new business plan in the future.
Roche's interests may conflict with your interests.
Our Affiliation Agreement With Roche Could Limit Our Ability to Make
Acquisitions and Could Have a Material Negative Impact on Our Liquidity
The affiliation agreement between us and Roche contains provisions that:
- - Require 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;
- - Enable Roche to maintain its percentage ownership interest in our common
stock; and
- - Establish a stock repurchase program designed to maintain Roche's
percentage ownership interest in our common stock.
These provisions may have the effect of limiting our ability to make
acquisitions and while the dollar amounts associated with the stock
repurchase program cannot currently be estimated, these stock repurchases
could have a material adverse impact on our liquidity, credit rating and
ability to access capital in the financial markets.
Our Stockholders May Be Unable to Prevent Transactions That Are Favorable to
Roche but Adverse to Us
Our certificate of incorporation includes provisions relating to:
- - Competition by Roche with us;
- - Offering of corporate opportunities;
- - Transactions with interested parties;
- - Intercompany agreements; and
- - Provisions limiting the liability of specified employees.
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 with Roche, the offer of
corporate opportunities to Roche and intercompany agreements with Roche.
This deemed consent may restrict your ability to challenge transactions
carried out in compliance with these provisions.
Potential Conflicts of Interest Could Limit Our Ability to Act on
Opportunities That Are Adverse to Roche
Persons who are directors and/or officers of Genentech and who are also
directors and/or officers of Roche may decline to take action in a manner
that might be favorable to us but adverse to Roche. Two of our directors,
Dr. Franz B. Humer and Dr. Jonathan K.C. Knowles, currently serve as
directors, officers and employees of Roche Holding Ltd and its affiliates.
We May Be Unable to Retain Skilled Personnel and Maintain 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 these types of personnel and relationships is
intense.
Roche has the right to maintain its percentage ownership interest in our
common stock. Our affiliation agreement with Roche provides that, among
other things, we will establish a stock repurchase program designed to
maintain Roche's percentage ownership in our common stock if we issue or sell
any shares. This right of Roche may limit our flexibility as to the number
of shares we are able to grant under our stock option plans. We therefore
cannot assure you that we will be able to attract or retain skilled personnel
or maintain key 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, either alone or in combination with the use of another Centocor
product, ReoPro, registered trademark, (abciximab) and to the use of other
mechanical therapies to treat acute myocardial infarction; the resulting
adverse effect on sales has been and could continue to be material. Retavase
received approval from the FDA in October 1996 for the treatment of acute
myocardial infarction. We expect that the use of mechanical reperfusion in
lieu of thrombolytic therapy for the treatment of acute myocardial infarction
will continue to grow.
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 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, sales of our Growth Hormone products may decline, perhaps
significantly.
Third, in the non-Hodgkin's lymphoma market, Corixa Corporation,
formerly Coulter Pharmaceutical, Inc., has filed and received an expedited
review of a revised Biologics License Application, or BLA, in 2000 for
Bexxar, trademark, (tositumomab and iodine I 131 tositumomab), which may
potentially compete with our product Rituxan and IDEC has filed a BLA for
Zevalin, trademark, (ibritumomab tiuxetan), a product which could also
potentially compete with Rituxan. Both Bexxar and Zevalin are radiolabeled
molecules while Rituxan is not. 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.
For example, in June 2000 one of our competitors, Novo, received
FDA approval for a liquid formulation of its growth hormone product that
will directly compete with our liquid formulation, Nutropin AQ. Also in
June 2000, another of our competitors, Serono S.A., received FDA approval
to deliver its competitive growth hormone product in a needle-free device.
- - Our pricing decisions and the pricing decisions of our competitors.
For example, we raised the prices of Rituxan in May 2000 and Pulmozyme in
June 2000 by approximately 5%.
- - The degree of patent protection afforded our products by patents granted
to us and by the outcome of litigation involving our patents.
For example, in January 2000, a federal court judge lifted a preliminary
injunction that had been in effect since 1995 against Bio-Technology
General Corporation, or BTG. Although an appeal of the judge's decision
is pending, BTG is now permitted to sell its competitive growth hormone
product in the United States.
- - The outcome of litigation involving patents of other companies concerning
our products or processes related to production and formulation of those
products or uses of those products.
For example, as further described in "Protecting Our Proprietary Rights Is
Difficult and Costly," in May 1999, June 2000 and September 2000, several
companies filed patent infringement lawsuits against us alleging that we
are infringing certain of their patents.
- - The increasing use and development of alternate therapies.
For example, the overall size of the market for thrombolytic therapies,
such as our Activase product, continues to decline as a result of the
increasing use of mechanical reperfusion.
- - The rate of market penetration by competing products.
For example, in the past, we have lost market share to new competitors in
the thrombolytic and growth hormone markets.
In Connection With the Redemption of Our Special Common Stock, We Recorded
Substantial Goodwill and Other Intangibles, the Amortization of Which May
Adversely Affect Our Earnings
As a result of the redemption of our special common stock, Roche owned all of
our outstanding common 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 on our financial statements. Push-down accounting required us to
record goodwill and other intangible assets of approximately $1,685.7 million
and $1,499.0 million, respectively, on June 30, 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. If our assets need to be evaluated for possible impairment, we
may have to reduce the carrying value of our intangible assets. This could
have a material adverse effect on our financial condition and results of
operations during the periods in which we recognize a reduction. We may have
to write down intangible assets in future periods. 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.
For example, we began receiving royalty revenues from Immunex's sale of
Enbrel in 1999.
- - The conclusion of existing arrangements with other companies and Hoffmann-
La Roche.
For example, royalty revenues decreased in 1999 from 1998 due to the
expiration of royalty payments primarily on sales of human insulin, from
Eli Lilly and Company in August 1998.
- - The timing of non-U.S. approvals, if any, for products licensed to
Hoffmann-La Roche and other licensees.
For example, we expect the approval of Herceptin outside the United States
which occurred in third quarter of 2000 to have a continuing positive
impact on royalties.
- - Fluctuations in foreign currency exchange rates.
- - The initiation of new contractual arrangements with other companies.
For example, license fees from Immunex and Schwarz Pharma increased
contract revenues in 1999.
- - Whether and when contract benchmarks are achieved.
For example, milestone payments from Pharmacia increased contract
revenue in 1997.
- - The failure of or refusal of a licensee to pay royalties.
- - The expiration or invalidation of patents or 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, we cannot predict the breadth of claims allowed in these
companies' patents. Patent disputes are frequent and can preclude the
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. In addition, an adverse decision could force
us to either obtain third-party licenses at a material cost or cease using
the technology or product in dispute. For example, in late 1999 we settled a
patent infringement lawsuit brought against us by the Regents of the
University of California in which the University alleged that the manufacture
and sale of our Protropin and Nutropin growth hormone products infringed a
patent owned by the University. In connection with that settlement we paid
the University of California $150.0 million and donated $50.0 million for the
construction of a new life sciences building on the University of California,
San Francisco campus.
The presence of patents or other proprietary rights belonging to other
parties may lead to our 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.
Three lawsuits have been filed against us in which the companies
involved allege that we have infringed their patents by the manufacture and
sale of certain of our products:
- - In May 1999, GlaxoSmithKline plc, or Glaxo, filed a complaint in which it
appears to claim that our manufacture, use and sale of Rituxan and
Herceptin antibody products infringe four Glaxo patents that relate to
certain uses and preparations of antibodies.
- - In June 2000, Chiron Corporation filed a complaint in which it claims that
our manufacture and sale of Herceptin infringe a patent it owns.
- - In September 2000, Glaxo filed another complaint in which it appears to
claim that our manufacture, use and sale of Rituxan and Herceptin antibody
products infringe a Glaxo patent that relates to certain cell culture
methods.
We May Incur Material Litigation Costs
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 might have to incur substantial expense in defending these lawsuits.
We have in the past taken substantial special charges relating to litigation,
including $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. Pharmaceutical product liability exposures could be
extremely large and pose a material risk. Our business may be materially and
adversely affected by a successful product liability claim in excess of any
insurance coverage that we may have.
We May Be Unable to Obtain Regulatory Approvals for Our Products
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, they remain subject to ongoing FDA regulation, including, for
example, changes to their label, written advisements to physicians 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.
For example, in May 2000, we issued letters to physicians advising them of
some serious adverse events associated with the administration of
Herceptin. In October 2000, we issued a new package insert for Herceptin
including this information.
- - Failure to comply with existing or future regulatory requirements.
For example, in 1999, we paid a $50.0 million settlement to the federal
government in connection with a federal investigation of our former
clinical, sales and marketing activities associated with our human growth
hormone products.
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
We currently produce all of our products at our manufacturing facilities
located in South San Francisco, California and Vacaville, California or
through various contract manufacturing arrangements. Problems with any of
our or our contractors' manufacturing processes could result in product
defects, which could require us to delay shipment of products, recall
products previously shipped or be unable to supply products at all.
For example, in March 2000, we issued an important drug notification
regarding a defect in the packaging of our Pulmozyme product. During a
quality assurance inspection, we had discovered that there was a defect in
the packaging of Pulmozyme which occasionally caused a small puncture in
ampules of that product. We suspended shipping the product while we
determined the source and extent of the defect. We ultimately recalled some
of the product.
On December 27, 2000, we received a Warning Letter from the FDA
regarding our quality control at our South San Francisco manufacturing plant.
The products cited were for cystic fibrosis, breast cancer and acute
myocardial infarction. On February 7, 2001, we received a letter from the
FDA accepting our responses and corrective actions with respect to the
Warning Letter.
In addition, any prolonged interruption in the operations of our or our
contractors' 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 our manufacturing processes and those of our
contractors are highly complex and are subject to a lengthy FDA approval
process, alternative qualified production capacity may not be available on a
timely basis or at all. Difficulties or delays in our and our contractors'
manufacturing of existing or new products could increase our costs, cause us
to lose revenue or market share and damage our reputation.
Our Stock Price, Like That of Many Biotechnology Companies, Is Highly
Volatile
The market prices for securities of biotechnology companies in general have
been highly volatile and may continue to be highly volatile in the future.
In addition, due to the absence of the put and call that were associated with
our special common stock, the market price of our common stock has been and
may continue to be more volatile than our special common stock was in the
past.
In addition, the following factors may have a significant impact on the
market price of our common stock:
- - Announcements of technological innovations or new commercial products by
us or our competitors.
For example, our stock increased by approximately 4% on the day we
announced FDA approval for our Nutropin Depot product.
- - Developments concerning proprietary rights, including patents.
For example, our stock price decreased by approximately 4% on the day one
of our competitors, Chiron, announced a patent infringement suit against
us.
- - Publicity regarding actual or potential medical results relating to
products under development by us or our competitors.
For example, our stock price increased by approximately 9% on the day we
announced positive preliminary Phase III results from the Anti-IgE asthma
clinic.
- - Regulatory developments in the United States and foreign countries.
- - Public concern as to the safety of biotechnology products.
For example, on May 8, 2000, we issued a warning concerning our Herceptin
drug after 15 deaths resulted from the administration of Herceptin. Our
stock price decreased by approximately 2% at that time.
- - Economic and other external factors or other disaster or crisis.
For example, our stock reached a high of $122.50 per share in March 2000
and decreased, as the biotech sector and stock market in general
decreased, to a low of $42.25 per share in late May 2000.
- - Period-to-period fluctuations in financial results.
For example, our stock price has historically been affected by whether we
met or exceeded analyst expectations.
Our Affiliation Agreement With Roche Could Adversely Affect Our Cash Position
Our affiliation agreement with Roche provides that we will 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, these 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.
These provisions may have the effect of limiting our ability to make
acquisitions and while the dollar amounts associated with the stock
repurchase program cannot currently be estimated, these stock repurchases
could have a material adverse impact on our liquidity, credit rating and
ability to access capital in the financial markets.
Future Sales by Roche Could Cause the Price of Our Common Stock to Decline
As of December 31, 2000, Roche owned 306,594,352 shares of our common stock
or approximately 58.4% of our outstanding shares. All of our shares owned by
Roche are eligible for sale in the public market subject to compliance with
the applicable securities laws. We have agreed that, upon Roche's request,
we will file one or more registration statements under the Securities Act in
order to permit Roche to offer and sell shares of our common stock. We have
agreed to use our best efforts to facilitate the registration and offering of
those shares designated for sale by Roche. Sales of a substantial number of
shares of our common stock by Roche in the public market could adversely
affect the market price of our common stock.
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, 2000.
Our Interest Income is Subject to Fluctuations in Interest Rates
Our material interest bearing assets, or interest bearing portfolio,
consisted of cash equivalents, restricted cash, short-term investments,
convertible preferred stock investments, convertible loans and long-term
investments. The balance of our interest bearing portfolio was $1,879.6
million or 28% of total assets at December 31, 2000. Interest income related
to this portfolio was $90.4 million or 5% of total revenues. 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 bearing portfolio. To mitigate the impact of
fluctuations in U.S. interest rates, for a portion of our portfolio, we have
entered 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, 2000, 1999
and 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 evaluate our foreign currency exposure on a net basis. We receive royalty
revenues from licensees selling products in countries throughout the world.
Increasingly however, these royalties are being offset by expenses arising
from our foreign facility as well as non-U.S. dollar expenses incurred in our
collaborations. Currently, our foreign royalty revenues exceed our expenses.
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 our net foreign exchange exposure, we could 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
term of these options is generally one to two 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.
Based on our overall currency rate exposure at December 31, 2000, 1999
and 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. Our biotechnology equity investment portfolio
totaled $652.7 million or 10% of total assets at December 31, 2000. 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 and equity swaps. 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). An equity swap is a derivative instrument where Genentech pays the
counterparty the total return of the security above the current spot price
and receives interest income on the notional amount for the swap term. The
equity swap protects us from a decline in the market value of the security
below the spot price and limits our potential benefit from an increase in the
market value of the security above the spot price. 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, 2000, 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 $94.0 million. We estimated that the potential loss in fair
value of the equity securities portfolio was $43.2 million at December 31,
1999 and $10.6 million at December 31, 1998.
Recent Accounting Pronouncements Could Impact Our Financial Position and
Results of Operations
We will adopt Statement of Financial Accounting Standards 133, or FAS 133,
"Accounting for Derivative Instruments and Hedging Activities," on January 1,
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. Based on our derivative positions at December 31, 2000, we
estimate that upon adoption, we will record a charge from the cumulative
effect of a change in accounting principle of approximately $9.0 million
being recognized in the consolidated statement of operations and an increase
of approximately $8.0 million in other comprehensive income.
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 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, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year
ended December 31, 2000, and for the period from June 30, 1999 to December
31, 1999 (all "New Basis"). We have also audited the related consolidated
statements of operations, stockholders' equity and cash flows for the period
from January 1, 1999 to June 30, 1999, and for the year ended December 31,
1998 (all "Old Basis"). 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 auditing standards generally
accepted in the United States. 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, 2000 and 1999, and the consolidated results of its operations
and its cash flows for the year ended December 31, 2000, the period from June
30, 1999 to December 31, 1999, the period from January 1, 1999 to June 30,
1999, and for the year ended December 31, 1998 in conformity with accounting
principles generally accepted in the United States.
As discussed in the notes to the consolidated financial statements, the
balance sheet as of December 31, 1999, and the statements of operations,
stockholders' equity and cash flows for the periods in the year ended
December 31, 1999 have been restated. In addition, in 2000 the Company
changed its method of accounting for revenue recognition.
/s/Ernst & Young LLP
Palo Alto, California
January 17, 2001
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 accounting principles generally
accepted in the United States. 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 and Vice President,
Chief Executive Officer Chief Financial Officer Controller and
Chief Accounting Officer
</TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 2000 1999 1998
----------- ---------------------------- ----------
New Basis || Old Basis
(June 30 || (January 1
to || to
December 31) (1) || June 30) (1)
Restated (1) || Restated (1)
- ----------------------------------------- ----------- ------------ || ------------ ----------
<S> <C> <C> <C> <C>
Revenues ||
Product sales (including amounts from ||
related parties: 2000-$67,392; ||
1999-$41,324; 1998-$28,738) $ 1,278,344 $ 535,671 || $ 503,424 $ 717,795
Royalties (including amounts ||
from related parties: 2000-$46,795; ||
1999-$42,528; 1998-$35,028) 207,241 96,666 || 92,604 229,589
Contract and other (including amounts ||
from related parties: 2000-$3,506; ||
1999-$17,170; 1998-$61,583) 160,363 26,398 || 56,844 114,795
Interest 90,408 45,049 || 44,385 88,764
----------- ----------- || --------- ----------
Total revenues 1,736,356 703,784 || 697,257 1,150,943
||
Costs and expenses ||
Cost of sales (including amounts from ||
related parties: 2000-$56,674; ||
1999-$36,267; 1998-$23,155) 364,892 187,145 || 98,404 138,623
Research and development (including ||
contract related: 2000-$25,709; ||
1999-$18,366; 1998-$27,660) 489,879 182,387 || 184,951 396,186
Marketing, general and administrative 497,036 253,356 || 214,573 358,931
Special charges: ||
Related to redemption - 1,207,700 || - -
Legal settlements - 180,008 || 50,000 -
Recurring charges related to redemption 375,300 197,742 || - -
Interest 5,276 2,641 || 2,719 4,552
----------- ----------- || --------- ----------
Total costs and expenses 1,732,383 2,210,979 || 550,647 898,292
||
Income (loss) before taxes and cumulative ||
effect of accounting change 3,973 (1,507,195) || 146,610 252,651
Income tax provision (benefit) 20,414 (262,083) || 58,974 70,742
----------- ----------- || --------- ----------
Income (loss) before cumulative effect of ||
accounting change (16,441) (1,245,112) || 87,636 181,909
Cumulative effect of accounting ||
change, net of tax (57,800) - || - -
----------- ----------- || --------- ----------
Net income (loss) $ (74,241) $(1,245,112) || $ 87,636 $ 181,909
=========== =========== || ========= ==========
Earnings (loss) per share: ||
Basic: Earnings (loss) before cumulative ||
effect of accounting change $ (0.03) $ (2.43) || $ 0.17 $ 0.36
Cumulative effect of accounting ||
change, net of tax (0.11) - || - -
----------- ----------- || --------- ----------
Net earnings (loss) per share $ (0.14) $ (2.43) || $ 0.17 $ 0.36
=========== =========== || ========= ==========
Diluted: Earnings (loss) before cumulative ||
effect of accounting change $ (0.03) $ (2.43) || $ 0.16 $ 0.35
Cumulative effect of accounting ||
change, net of tax (0.11) - || - -
----------- ----------- || --------- ----------
Net earnings (loss) per share $ (0.14) $ (2.43) || $ 0.16 $ 0.35
=========== =========== || ========= ==========
Weighted-average shares used to compute ||
basic earnings (loss) per share: 522,179 513,352 || 512,368 503,291
=========== =========== || ========= ==========
Weighted-average shares used to compute ||
diluted earnings (loss) per share: 522,179 513,352 || 531,868 519,488
=========== =========== || ========= ==========
Pro forma amounts assuming the new ||
revenue recognition policy was applied ||
retroactively (unaudited): ||
Net income (loss) $ (16,441) $(1,248,632) || $ 79,916 $ 154,549
=========== =========== || ========= ==========
</TABLE>
(1) All amounts related to the Redemption of our Special Common Stock
transaction are reflected in the New Basis presentation.
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
<TABLE>
<CAPTION>
Increase (Decrease) in Cash and Cash Equivalents
YEAR ENDED DECEMBER 31 2000 1999 1998
----------- ------------------------- ---------
New Basis ||Old Basis
(June 30 ||(January 1
to || to
December 31) (1)|| June 30) (1)
Restated (1)|| Restated (1)
- ---------------------------------------------------------------------- ------------ || --------- ---------
<S> <C> <C> <C> <C>
Cash flows from operating activities: ||
Net income (loss) $ (74,241) $(1,245,112) || $ 87,636 $ 181,909
Adjustments to reconcile net income (loss) to ||
net cash provided by (used in) operating activities: ||
Depreciation and amortization 463,004 236,365 || 44,317 78,101
In-process research and development - 752,500 || - -
Non-cash compensation related to stock options, ||
net of tax - 119,153 || - -
Deferred income taxes (235,315) (143,371) || (924) 29,792
Gain on sales of securities available-for-sale (132,307) (7,092) || (12,283) (9,542)
Loss on sales of securities available-for-sale 3,957 884 || 921 1,809
Write down of securities available-for-sale 4,800 4,955 || 8,467 20,249
Write down of non-marketable securities - - || 432 16,689
Loss (gain) on fixed asset dispositions 1,123 902 || (16) 1,015
Changes in assets and liabilities: ||
Investments in trading securities (20,963) (5,215) || (4,944) 12,725
Receivables and other current assets (60,719) (29,299) || (38,644) 33,767
Inventories, including inventory write-up effect 9,415 49,228 || 10,333 (32,600)
Accounts payable, other current ||
liabilities and other long-term liabilities 234,777 135,084 || 28,277 15,937
----------- ------------ || --------- ---------
Net cash provided by (used in) operating activities 193,531 (131,018) || 123,572 349,851
||
Cash flows from investing activities: ||
Purchases of securities held-to-maturity - - || (186,612) (327,690)
Proceeds from maturities of securities ||
held-to-maturity - 136,140 || 150,357 410,729
Purchases of securities available-for-sale (560,405) (294,814) || (300,254) (800,788)
Proceeds from sales of securities ||
available-for-sale 574,145 369,311 || 257,752 430,936
Purchases of non-marketable equity securities (5,663) (13,781) || (39,177) (29,044)
Capital expenditures (112,681) (53,495) || (41,513) (88,088)
Change in other assets (55,604) (62,430) || 38,879 (17,151)
Transfer to restricted cash included in other assets - - || (56,600) -
----------- ------------ || --------- ---------
Net cash (used in) provided by investing activities (160,208) 80,931 || (177,168) (421,096)
||
Cash flows from financing activities: ||
Stock issuances 180,379 95,912 || 64,291 107,938
----------- ------------ || --------- ---------
Net cash provided by financing activities 180,379 95,912 || 64,291 107,938
----------- ------------ || --------- ---------
Net increase in cash and cash equivalents 213,702 45,825 || 10,695 36,693
Cash and cash equivalents at beginning of period 337,682 291,857 || 281,162 244,469
----------- ------------ || --------- ---------
Cash and cash equivalents at end of period $ 551,384 $ 337,682 || $ 291,857 $ 281,162
=========== ============ || ========= =========
Supplemental cash flow data: ||
Cash paid during the year for: ||
Interest, net of portion capitalized $ 5,282 $ (1,109) || $ 6,469 $ 4,552
Income taxes paid (received) (5,005) 2,842 || 15,898 26,189
Stock received as consideration for outstanding loans 5,000 16,000 || - -
</TABLE>
(1) All amounts related to the Redemption of our Special Common Stock
transaction are reflected in the New Basis presentation.
See Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except par value)
<TABLE>
<CAPTION>
DECEMBER 31 2000 1999
Restated (1)
- ------------------------------------------------------ ----------- -----------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 551,384 $ 337,682
Short-term investments 642,475 405,003
Accounts receivable - trade (net of
allowances of: 2000-$14,126; 1999-$15,767) 162,121 120,497
Accounts receivable - other (net of
allowances of: 2000-$3,184; 1999-$3,184) 63,262 61,054
Accounts receivable - related party 36,299 33,234
Inventories 265,830 275,245
Deferred tax assets 40,619 81,922
Prepaid expenses and other current assets 26,821 11,870
----------- -----------
Total current assets 1,788,811 1,326,507
Long-term marketable securities 1,265,515 1,214,757
Property, plant and equipment, net 752,892 730,086
Goodwill (net of accumulated amortization of:
2000-$843,494; 1999-$690,209) 1,455,778 1,609,063
Other intangible assets (net of accumulated
amortization of: 2000-$1,282,090; 1999-$1,062,181) 1,280,359 1,453,268
Other long-term assets 168,458 201,101
----------- -----------
Total assets $ 6,711,813 $ 6,534,782
=========== ===========
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable $ 34,503 $ 33,123
Accrued liabilities - related party 12,265 14,960
Deferred revenue 15,433 2,000
Other accrued liabilities 386,480 427,333
----------- -----------
Total current liabilities 448,681 477,416
Long-term debt 149,692 149,708
Deferred tax liabilities 349,848 626,466
Deferred revenue 87,600 2,972
Other long-term liabilities 1,789 8,363
----------- -----------
Total liabilities 1,037,610 1,264,925
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.02 par value; authorized:
100,000,000 shares; none issued - -
Common stock, $0.02 par value; authorized:
600,000,000 shares; outstanding:
2000-525,476,771 and 1999-516,220,558 10,510 10,324
Additional paid-in capital 6,651,428 6,245,146
Accumulated deficit, since June 30, 1999 (1,319,353) (1,245,112)
Accumulated other comprehensive income 331,618 259,499
----------- -----------
Total stockholders' equity 5,674,203 5,269,857
----------- -----------
Total liabilities and stockholders' equity $ 6,711,813 $ 6,534,782
=========== ===========
</TABLE>
(1) All amounts related to the Redemption of our Special Common Stock
transaction are reflected in the New Basis presentation.
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
Old Basis (1) Stock Stock Stock Stock Capital Deficit) (Loss) Total
- -------------------------- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1997 190,427 306,484 $3,809 $6,130 $1,456,313 $ 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 9,840 196 86,688 86,884
Issuance of stock under
employee stock plan 1,708 35 21,029 21,064
Income tax benefits
realized from employee
stock option exercises 17,332 17,332
------------------------------------------------------------------------------------------
Balance December 31, 1998 201,975 306,484 $4,040 $6,130 $1,581,362 $ 693,050 $ 59,263 $2,343,845
------------------------------------------------------------------------------------------
Period from January 1 to
June 30, 1999 (Restated) (1):
- --------------------------
Comprehensive income
Net income 87,636 87,636
Net unrealized loss
on securities
available-for-sale (1,158) (1,158)
----------
Comprehensive income 86,478
----------
Issuance of stock
upon exercise of
options 5,085 102 51,613 51,715
Issuance of stock under
employee stock plan 1,014 20 12,557 12,577
Income tax benefits
realized from employee
stock option exercises 6,162 6,162
------------------------------------------------------------------------------------------
Balance June 30, 1999 208,074 306,484 $4,162 $6,130 $1,651,694 $780,686 $ 58,105 $2,500,777
------------------------------------------------------------------------------------------
======================================================================================================================
New Basis (1)
(Effective June 30, 1999)
Period from June 30 to
December 31, 1999 (Restated) (1):
- --------------------------
Push-down accounting:
Redemption of Special
Common Stock and related
issuance of Common Stock (208,074) 202,710 $(4,162) $4,054 $5,361,972 $ - $(20,337) $5,341,527
Eliminate Retained
earnings (Old Basis) 780,686 (780,686) -
Adjustments related to
the 1990 through 1997
purchase period:
In-process research
and development (500,500) (500,500)
Amortization of good-
will, intangibles and
fair value adjustment
to inventories, net of tax (1,221,644) (1,221,644)
Comprehensive loss
Net loss (1,245,112) (1,245,112)
Net unrealized gain
on securities
available-for-sale 221,731 221,731
----------
Comprehensive loss (1,023,381)
----------
Issuance of stock
upon exercise of
options 6,551 131 90,056 90,187
Issuance of stock under
employee stock plan 476 9 6,057 6,066
Income tax benefits
realized from employee
stock option exercises 76,825 76,825
------------------------------------------------------------------------------------------
Balance December 31, 1999 - 516,221 $ - $10,324 $6,245,146 $(1,245,112) $259,499 $5,269,857
------------------------------------------------------------------------------------------
Comprehensive loss
Net loss (74,241) (74,241)
Net unrealized gain
on securities
available-for-sale 72,119 72,119
----------
Comprehensive loss (2,122)
----------
Issuance of stock
upon exercise of
options 8,259 166 148,241 148,407
Issuance of stock under
employee stock plan 997 20 31,968 31,988
Income tax benefits
realized from employee
stock option exercises 226,073 226,073
------------------------------------------------------------------------------------------
Balance December 31, 2000 - 525,477 $ - $10,510 $6,651,428 $(1,319,353) $331,618 $5,674,203
==========================================================================================
</TABLE>
(1) All amounts related to the Redemption of our Special Common Stock
transaction are reflected in the New Basis presentation.
See Notes to Consolidated Financial Statements.
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. All numbers
related 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 splits of our Common Stock that were effected in October 2000
and November 1999.
BASIS OF PRESENTATION AND RESTATEMENT
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, with funds deposited by Roche for that purpose. This event, referred
to as the "Redemption" in this report, caused Roche to own 100% of the
outstanding common stock of Genentech on that date. The Redemption of our
Special Common Stock on June 30, 1999 was reflected as a purchase of a
business which, under U.S. generally accepted accounting principles, required
push-down accounting to reflect in our financial statements the amounts paid
for our stock in excess of our net book value. The Redemption created our
New Basis of accounting as discussed further below. The Redemption was
effective as of June 30, 1999, however, the transaction was reflected as of
the end of the day on June 30, 1999 in the financial statements. We
previously issued consolidated financial statements that presented limited
information related to the results of operations for the period January 1,
1999 through June 30, 1999 immediately prior to the Redemption ("Old Basis"),
and the period June 30, 1999 (including and subsequent to the Redemption) to
December 31, 1999 ("New Basis"). We did not present separate statements of
operations, stockholders' equity or cash flows reflecting the new basis of
accounting. Upon further review and based on discussions with the Securities
and Exchange Commission, our statements of operations, cash flows and
stockholders' equity have been revised and presented on the New Basis of
accounting that resulted from the Redemption transaction. As such, a
vertical black line is inserted to separate the "Old Basis" and "New Basis"
presentation in the financial statements. Accordingly, the Old Basis reflects
the period January 1 through June 30, 1999, and all periods prior to the
Redemption, and the New Basis reflects the period from June 30 through
December 31, 1999, and all subsequent periods. As a result of the accounting
change, we reclassified $941.5 million from accumulated deficit to additional
paid-in capital.
We also restated our financial statements to correct the accounting related
to the write up of the valuation allowance pertaining to unrealized gains on
certain marketable equity securities, resulting from the Redemption. As a
result of this accounting change, the aggregate amount of contract and other
income in 1999 decreased by $20.3 million, and net income decreased by $13.6
million ($0.03 per share) for the quarter and six month period ended June 30,
1999. In addition, amortization expense decreased by $0.6 million (less than
$0.01 per share) during the six month period ended December 31, 1999, and
goodwill, net of accumulated amortization, decreased by $19.7 million, other
accrued liabilities decreased by $6.8 million and accumulated deficit
increased by $12.9 million at December 31, 1999.
DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Genentech is a leading biotechnology company using human genetic information
to discover, develop, manufacture and market human pharmaceuticals that
address significant unmet medical needs. Fourteen of the approved products
of biotechnology stem from our science. We manufacture and market nine
protein-based pharmaceuticals, and license several additional products to
other companies.
On July 23, 1999, October 26, 1999, and March 29, 2000, Roche completed
public offerings of our Common Stock. We did not receive any of the net
proceeds from these offerings. On January 19, 2000, Roche completed an
offering of zero-coupon notes that are exchangeable for an aggregate of
13,034,618 shares of our Common Stock held by Roche. Roche's percentage
ownership of our outstanding Common Stock is approximately 58.4% at December
31, 2000.
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.
Change in Accounting Principle: We previously recognized non-refundable,
upfront product license fees as revenue when the technology was transferred
and when all of our significant contractual obligations relating to the fees
had been fulfilled. Effective January 1, 2000, we changed our method of
accounting for non-refundable upfront product license fees and certain
guaranteed payments to recognize such fees over the term of the related
development collaboration when, at the execution of the agreement, the
development period involves significant risk due to the incomplete stage of
the product's development, or over the period of manufacturing obligation
when, at the execution of the agreement, the product is approved for
marketing, or nearly approvable, and development risk has been substantially
eliminated. Deferred revenue related to manufacturing obligations will be
recognized on a straight-line basis over the longer of the contractual term
of the manufacturing obligation or the expected period over which we will
supply the product. We believe the change in accounting principle is
preferable based on guidance provided in the Securities and Exchange
Commission's, or SEC, Staff Accounting Bulletin No. 101, "Revenue Recognition
in Financial Statements."
The cumulative effect of the change in accounting principle was reported as a
charge in the year ended December 31, 2000. The cumulative effect was
initially recorded as deferred revenue that will be recognized as revenue
over the remaining term of the research and development collaboration or
distribution agreements, as appropriate. For the year ended December 31,
2000, the impact of the change in accounting was to increase net loss by
$52.6 million, or $0.10 per share, comprised of the $57.8 million cumulative
effect of the change (net of tax impact) as described above ($0.11 per
share), net of $5.2 million of the related deferred revenue (less related tax
impact of $3.4 million) that was recognized as revenue during the year ($0.01
per share). The remainder of the related deferred revenue of $90.7 million
will be recognized in 2001 through 2019. Pro forma amounts of net income
(loss) and related per share amounts, assuming retroactive application of the
accounting change for all periods presented, are as follows (in thousands,
except per share amounts):
2000 1999 1998
-------- -------- -------
As Reported:
Net income (loss) $(74,241) $(1,157,476) $181,909
Net income (loss) per
share - diluted $(0.14) $(2.26) $0.35
Pro forma amounts with the change
in accounting principle related
to revenue recognition applied
retroactively (unaudited):
Net income (loss) $(16,441) $(1,168,716) $154,549
Net income (loss) per
share - diluted $(0.03) $(2.28) $0.30
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, preferred stock, 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. All of our equity investments represent less than a 20% ownership
position. 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 periodically monitor
the liquidity progress and financing activities of these entities to
determine if impairment write downs are required. We had investments of
$48.5 million at December 31, 2000, and $53.3 million at December 31, 1999,
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, marketable equity securities are written
down to estimated fair value with a charge to marketing, general and
administrative expenses. Other than temporary declines in fair value on
short-term and long-term investments are charged against interest income.
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.
FDA Validation Costs: U.S. Food and Drug Administration, or FDA, validation
costs are capitalized as part of the effort required to acquire and construct
long-lived assets, including readying them for their intended use, and are
amortized over the estimated useful life of the asset or the term of the
lease, whichever is shorter.
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:
Useful Lives
- -----------------------------------------------------------------------------
Buildings 25 years
Certain manufacturing equipment 15 years
Other equipment 4 or 8 years
Leasehold improvements length of applicable lease
The costs of repairs and maintenance are expensed as incurred. 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):
2000 1999 1998
- -----------------------------------------------------------------------------
Repairs and maintenance expenses $42.1 $39.9 $35.9
Capitalized interest 2.2 2.1 3.0
Property, plant and equipment balances at December 31 are summarized below
(in thousands):
2000 1999
- -----------------------------------------------------------------------------
At cost:
Land $ 90,274 $ 89,983
Buildings 392,119 380,236
Equipment 761,696 667,884
Leasehold improvements 18,456 4,655
Construction-in-progress 94,679 106,824
--------------------------
1,357,224 1,249,582
Less: accumulated depreciation 604,332 519,496
--------------------------
Net property, plant and equipment $ 752,892 730,086
==========================
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 arising from Roche's purchases of our Special Common Stock and
push-down 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, 2000 and 1999,
other assets included $56.6 million of restricted cash related to such a
lease agreement.
Product Sales and Royalty Revenue: We recognize revenue from product sales
when there is persuasive evidence that an arrangement exists, delivery has
occurred, the price is fixed and determinable and collectibility is
reasonably assured. Allowances are established for estimated product returns
and discounts. Royalties from licensees are based on third-party sales and
recorded as earned in accordance with contract terms, when third-party
results are reliably measured and collectibility is reasonably assured.
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.
Contract Revenue: Contract revenue for research and development, or R&D, is
recorded as earned based on the performance requirements of the contract.
Non-refundable contract fees for which no further performance obligations
exist, and there is no continuing involvement by Genentech, are recognized on
the earlier of when the payments are received or when collection is assured.
Revenue from non-refundable upfront license fees and certain guaranteed
payments where we continue involvement through development collaboration or
an obligation to supply product is recognized ratably over the development
period when, at the execution of the agreement, the development period
involves significant risk due to the incomplete stage of the product's
development, or over the period of the manufacturing obligation, when, at the
execution of the agreement, the product is approved for marketing, or nearly
approvable, and development risk has been substantially eliminated. Deferred
revenues related to manufacturing obligations are recognized on a straight-
line basis over the longer of the contractual term of the manufacturing
obligation or the expected period over which we will supply the product.
Revenue associated with performance milestones is recognized based upon
the achievement of the milestones, as defined in the respective agreements.
Revenue under R&D cost reimbursement contracts is recognized as the related
costs are incurred.
Advance payments received in excess of amounts earned are classified as
deferred revenue.
Royalty Expenses: Royalty expenses directly related to product sales are
classified in cost of sales. Other royalty expenses, relating to royalty
revenue, totaled $34.4 million in 2000, $39.0 million in 1999, and $38.3
million in 1998 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 were $86.5
million in 2000, $80.0 million in 1999, and $47.7 million in 1998.
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 splits of our Common
Stock that were effected on October 24, 2000 and November 2, 1999.
Financial Instruments: As part of our overall portfolio, we have contracted
with two external money managers to manage part of our investment portfolio
that is held for trading purposes and one external manager that manages our
available-for-sale securities portfolio. The investment portfolios consist
entirely of debt securities. When the money managers purchase securities
denominated in a foreign currency, they enter into derivative instruments
such as foreign currency forward contracts, or forward contracts, which are
recorded at fair value with the related gain or loss recorded in interest
income.
We also enter into derivative forward contracts as hedging instruments
of our foreign denominated available-for-sale debt securities. These forward
contracts are not recorded on our balance sheet. Any gains and losses from
these forward contracts are recorded in interest income with the related
hedged revenues.
We purchase derivative instruments such as 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.
Interest rate swaps are derivative instruments used to adjust the
duration of the investment portfolio in order to meet duration targets.
Interest rate swaps, or swaps, are contracts in which two parties agree to
swap future streams of payments over a specified period. The accrued net
settlement amounts on swaps are reflected on the balance sheet as a component
of interest receivable. Net payments made or received on swaps are included
in interest income as adjustments to the interest received on invested cash.
Amounts deferred on terminated swaps are classified as other assets and are
amortized to interest income over the original contractual term of the swaps
by a method that approximates the level-yield method. For early termination
of swaps where the underlying asset is not sold, the amount of the terminated
swap is deferred and amortized over the remaining life of the original swap.
For early termination of swaps with the corresponding termination or sale of
the underlying asset, the amounts are recognized through interest income. As
of December 31, 2000, we had not terminated any of our swap contracts prior
to maturity. Changes in the fair value of swap hedging instruments that
qualify as a hedge are not recognized and changes on the fair value of swap
instruments that do not qualify as a hedge would be recognized in other
income. As of December 31, 2000, our interest rate swap contracts qualified
as a hedge and none were held for trading purposes.
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 enter into
derivative instruments such as costless collar instruments or equity swaps 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 or equity
swap 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 $10.1
million in 2000, $8.5 million in 1999, and $7.3 million in 1998, 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, 2000, 1999, and 1998 has been reflected in the Consolidated
Statements of Stockholders' Equity.
New Accounting Standards: We will adopt Statement of Financial Accounting
Standards 133, or FAS 133, "Accounting for Derivative Instruments and Hedging
Activities," on January 1, 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. Based on our derivative
positions at December 31, 2000, we estimate that upon adoption, we will
record a charge from the cumulative effect of a change in accounting
principle of approximately $9.0 million being recognized in the consolidated
statement of operations and an increase of approximately $8.0 million in
other comprehensive income.
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 2000 decreased from 1999 due primarily to
the Redemption and push-down accounting offset by increases in inventory
production. As a result of push-down accounting, we recorded $186.2 million
related to the write up of inventory, of which $92.8 million of expense was
recognized through the sale of inventory in 2000 and $93.4 million of expense
was recognized through the sale of inventory in 1999. Inventories at
December 31, 2000 and 1999 are summarized below (in thousands):
2000 1999
-----------------------------------------------------------------
Raw materials and supplies $ 17,621 $ 19,903
Work in process 233,121 228,092
Finished goods 15,088 27,250
--------------------
Total $265,830 $275,245
====================
Reclassifications: Certain reclassifications of prior year amounts have been
made to conform with the current year presentation.
Redemption of Our Special Common Stock
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, which
results in our New Basis presentation. 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, or IPR&D, 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):
Purchase Period
--------------------
1990-1997 1999 Total
--------- --------- ---------
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
========= ========= =========
The following table shows the allocation of the excess of the purchase price
over net book value (in millions):
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 1,208.1 2,299.3
Deferred tax liability (456.8) (629.2) (1,086.0)
Write up of valuation allowance
related to marketable securities - 20.3 20.3
--------- --------- ---------
Total $ 2,276.9 $ 2,925.0 $ 5,201.9
========= ========= =========
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
included: a non-cash charge of $752.5 million for IPR&D; $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.)
- - 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 was approximately one year based upon the
expected time to sell inventories on hand at June 30, 1999. As the fair-
valued inventory is sold, the related write up amount is charged to cost
of sales. In 2000, we recognized $92.8 million of expense related to
the inventory write up adjustment. In 1999, we recognized $93.4 million
of expense related to the inventory write up adjustment. All inventory
written up as a result of the Redemption has been sold as of December 31,
2000. The entire inventory adjustment related to Roche's 1990 through
1997 purchases was reflected as an adjustment to additional paid-in
capital.
- - 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.
- - Recorded $1,091.2 million of goodwill, which reflects Roche's 1990 through
1997 purchases, net of related accumulated amortization of $613.6 million
through June 30, 1999. The accumulated amortization was recorded as an
adjustment to additional paid-in capital at June 30, 1999. 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.
- - $1,208.1 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.
- - We recorded a write up of our valuation allowance related to marketable
securities of $20.3 million related to Roche's percentage ownership
purchased, at the time of Redemption, of the net unrealized gains on
investments.
- - In 2000, we recorded amortization expense of $153.3 million related to
goodwill and $211.0 million related to other intangible assets. In 1999,
we recorded amortization expense of $76.6 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 balances of our Common Stock and additional paid-in capital at the
Redemption include Roche's cost of acquiring our shares in 1990 and the
cost of subsequent equity purchases, net of the amortization of the
goodwill, IPR&D and other prior period charges related to the 1990 through
1997 purchases. 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 additional paid-in capital.
In addition, the following adjustments were made to additional paid-in
capital 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 additional paid-in capital $ (1,722.1)
==========
- - Our retained earning prior to the Redemption was not carried forward. This
resulted in an adjustment of $780.7 million to increase additional paid-in
capital and eliminate the retained earnings balance immediately prior to
the Redemption.
- - The tax provision benefit of $203.1 million for 1999 consists of tax
expense of $114.8 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.
- - Recorded $1,040.0 million of other intangible assets, which reflects
Roche's 1990 through 1997 purchases, net of related accumulated
amortization of $911.5 million of those assets through June 30, 1999. The
accumulated amortization was recorded as an adjustment to additional
paid-in capital at June 30, 1999. 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 IPR&D 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 recorded as an adjustment
to additional paid-in capital at June 30, 1999. The amount 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 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
IPR&D 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 IPR&D 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 IPR&D
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.
The following table represents unaudited consolidated pro forma information
as if the June 30, 1999 redemption of our Special Common Stock occurred at
January 1, 1999, and January 1, 1998. The pro forma information also gives
effect to the 1990 through 1997 purchases of our Common Stock and Special
Common Stock by Roche. The pro forma results for each of the years ended
December 31, 1999 and 1998 include amortization of goodwill ($153.3 million)
and other intangible assets ($227.6 million), and compensation expense ($13.7
million) related to certain stock option arrangements. In addition, the 1998
and 1999 pro forma results reflect the sale of inventories adjusted to fair
value at the beginning of each period (such adjustments totaling $186.2
million for the periods 1998 and 1999) related to the allocation to our
financial statements of Roche's purchase prices and our redemption of the
Special Common Stock. The pro forma results also reflect the book tax
benefits related to each of these pre-tax pro forma adjustments other than
goodwill (which will have no book tax benefits) at a 40% marginal rate. The
pro forma results exclude $1,207.7 million of non-recurring Redemption-
related charges, including charges for IPR&D, as these items are non-
recurring. (Refer to above for further information on these charges and
adjustment.) The following table is in thousands, except per share amounts.
Year Ended December 31
---------------------------------
Pro Forma 1999 Pro Forma 1998
-------------- --------------
Total revenues $ 1,382,941 $ 1,133,743
Total costs and expenses 1,843,578 1,479,018
Net loss $ (345,755) $ (226,645)
Earnings (loss) per share:
Basic $ (0.67) $ (0.45)
Diluted $ (0.67) $ (0.45)
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 is as follows (in millions):
Product Sales 2000 1999 1998
- --------------------------------------------------------------------------
Herceptin $ 275.9 $188.4 $ 30.5
Rituxan 444.1 279.4 162.6
Activase/TNKase 206.2 236.0 213.0
Growth hormone (Nutropin Depot, Nutropin
AQ, Nutropin and Protropin) 226.6 221.2 214.0
Pulmozyme 121.8 111.4 93.8
Actimmune 3.7 2.7 3.9
------------------------------
Total product sales $1,278.3 $1,039.1 $717.8
Hoffmann-La Roche contributed approximately 7% of our total revenues in 2000,
7% in 1999 and 11% in 1998. 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
2000 and 1999, it accounted for 10% in 1998 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 13% in 2000, 14% in 1999 and 11% in 1998 of our total revenues.
Cardinal Distribution, a national wholesaler distributor of all our products,
contributed 15% in 2000, 13% in 1999 and 11% in 1998 of our total revenues.
Net foreign revenues were $164.2 million in 2000, $155.0 million in 1999 and
$199.6 million in 1998. Material foreign revenues by country were as follows
(in millions):
2000 1999 1998
------ ------ ------
Europe:
Switzerland $ 72.6 $ 61.5 $ 88.8
Germany 22.5 39.6 24.2
Italy 10.4 14.6 21.5
Denmark - - 20.0
Others 24.3 17.9 16.5
Canada 19.8 11.8 11.7
Asia 14.6 9.6 16.9
------ ------ ------
$164.2 $155.0 $199.6
====== ====== ======
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 2000,
1999 and 1998, 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 took an other than temporary charge of $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 took another charge of our
remaining $10.8 million investment in Alteon.
INCOME TAXES
The income tax provision consists of the following amounts (in thousands):
2000 1999 1998
New Basis || Old Basis
- ------------------------------------------------||---------------------
Current: ||
Federal $ 191,334 $ (110,991)|| $ 76,819 $ 39,945
State 25,862 (6,165)|| 1,366 1,004
-----------------------||---------------------
Total current 217,196 (117,156)|| 78,185 40,949
-----------------------||---------------------
||
Deferred: ||
Federal (151,817) (119,624)|| (16,397) 29,006
State (44,965) (25,303)|| (2,814) 787
-----------------------||---------------------
Total deferred (196,782) (144,927)|| (19,211) 29,793
-----------------------||---------------------
Total income tax $ 20,414 $ (262,083)|| $ 58,974 $ 70,742
provision (benefit) =======================||=====================
Tax benefits of $226.1 million in 2000, $83.0 million in 1999 and $17.3
million in 1998 related to employee stock options and stock purchase plans
were credited to stockholders' equity, and reduced the amount of taxes
currently payable and deferred income taxes.
A reconciliation between our income tax provision and the U.S. statutory rate
follows (in thousands):
2000 1999 1998
New Basis || Old Basis
- ------------------------------------------------||----------------------
Tax at U.S. statutory ||
rate of 35% $ 1,391 $ (527,518)|| $ 51,313 $ 88,428
Research credits (32,092) (5,803)|| (5,802) (11,919)
Tax benefit of certain ||
realized gains on ||
securities available- ||
for-sale (6,604) (617)|| (2,388) (2,982)
Foreign losses realized - (1,363)|| (1,364) (10,500)
State taxes 959 (22,924)|| 5,371 7,491
Goodwill amortization 53,649 26,825 || - -
Legal settlements - - || 12,250 -
IPR&D - 263,375 || - -
Other 3,111 5,942 || (406) 224
-----------------------||----------------------
Income tax provision ||
(benefit) $ 20,414 $ (262,083)|| $ 58,974 $ 70,742
========================||======================
The components of deferred taxes consist of the following at December 31
(in thousands):
2000 1999
- -----------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation $(130,892) $ (85,036)
Unrealized gain on securities
available-for-sale (229,294) (181,233)
Adjustment to fair value of inventories - (38,272)
Adjustment to fair value of intangibles (476,313) (560,699)
Other (18,999) (16,893)
-----------------------
Total deferred tax liabilities (855,498) (882,133)
Deferred tax assets:
Capitalized R&D costs 58,333 45,436
Federal credit carryforwards 109,917 111,711
Expenses not currently deductible 150,638 93,121
State credit carryforwards 73,827 44,109
Net operating losses 153,097 41,619
Other 457 1,593
-----------------------
Total deferred tax assets 546,269 337,589
-----------------------
Total net deferred taxes $(309,229) $(544,544)
=======================
Total tax credit carryforwards of $183.7 million expire in the years 2006
through 2017, except for $81.0 million of R&D credits and $43.0 million of
alternative minimum tax credits which have no expiration date.
Net operating loss carryfowards of $456.4 million expire in the years 2017
through 2020.
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, 2000, 1999, and 1998 (in thousands):
2000 1999 1998
New Basis || Old Basis
------------------------||--------------------
Numerator: ||
Net income (loss) - ||
numerator for basic ||
and diluted earnings ||
(loss) per share $(74,241) $(1,245,112)|| $87,636 $181,909
------------------------||--------------------
Denominator: ||
Denominator for basic earnings ||
(loss) per share - weighted- ||
average shares 522,179 513,352 || 512,368 503,291
||
Effect of dilutive securities: ||
Stock options - - || 19,500 16,197
------------------------||--------------------
Denominator for diluted earnings ||
(loss) per share - adjusted ||
weighted-average shares and ||
assumed conversions 522,179 513,352 || 531,868 519,488
========================||====================
Options to purchase 40,944,862 shares of our Common Stock ranging from
$12.53 to $95.66 per share were outstanding during 2000, but were not
included in the computation of diluted earnings per share. Options to
purchase 41,551,604 shares of our Common Stock ranging from $12.03 to $42.94
per share were outstanding during 1999, but were not included in the
computation of diluted earnings per share. Options to purchase 714,300
shares of our Special Common Stock ranging from $17.63 to $17.79 per share
and 414,800 shares of Special Common Stock at $14.75 per share were
outstanding during 1998, but were not included in the computation of diluted
earnings per share. The above option exercise prices were 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, we had convertible subordinated debentures which were
convertible to 4,053,788 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 and available-for-sale at December 31, 2000
and 1999 are summarized below. Estimated fair value is based on quoted
market prices for these or similar investments.
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 2000 Cost Gains Losses Value
- -------------------------------------------------------------------------------
(thousands)
TOTAL TRADING SECURITIES
(carried at estimated
fair value) $ 273,348 $ 1,827 $ (4,152) $ 271,023
===============================================
SECURITIES AVAILABLE-FOR-SALE
(carried at estimated
fair value):
Equity securities $ 120,416 $585,961 $ (21,546) $ 684,831
Preferred stock 88,517 4,335 (20) 92,832
U.S. Treasury securities
and obligations of other
U.S. government agencies
maturing:
between 5-10 years 84,796 2,497 (242) 87,051
Corporate debt securities
maturing:
within 1 year 169,569 2,079 (2,248) 169,400
between 1-5 years 217,838 1,865 (1,463) 218,240
between 5-10 years 103,309 935 (1,572) 102,672
Other debt securities
maturing:
within 1 year 109,132 211 (123) 109,220
between 1-5 years 138,854 284 (1,541) 137,597
between 5-10 years 34,911 492 (279) 35,124
-----------------------------------------------
TOTAL AVAILABLE-FOR-SALE $1,067,342 $598,659 $ (29,034) $1,636,967
===============================================
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1999 Cost Gains Losses Value
- -------------------------------------------------------------------------------
(thousands)
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
===============================================
The carrying value of all investment securities held at December 31, 2000 and
1999 is summarized below (in thousands):
<TABLE>
<CAPTION>
Security 2000 1999
- --------------------------------------------------------------------------------------
<S> <C> <C>
Trading securities $ 271,023 $ 250,060
Securities available-for-sale maturing within one year 278,620 154,943
Preferred stock 92,832 -
----------------------
Total short-term investments $ 642,475 $ 405,003
======================
Securities available-for-sale maturing between 1-10 years,
including equity securities $1,265,515 $1,214,757
----------------------
Total long-term marketable securities $1,265,515 $1,214,757
======================
</TABLE>
In 2000, proceeds from the sales of available-for-sale securities totaled
$574.1 million; gross realized gains totaled $132.3 million and gross
realized losses totaled $4.0 million. 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. We
recorded charges of $0.8 million in 2000 and $13.4 million in 1999, 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 $0.2 million in 2000, ($6.1) million in 1999
and $7.4 million in 1998.
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. In 2000, we recorded a charge of $4.0 million
for credit impairment on marketable debt securities. In 1999 and 1998, no
material charges were recorded.
FINANCIAL INSTRUMENTS
Foreign Currency Instruments: Certain of our revenues are earned outside of
the U.S. 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, 2000, we hedged approximately 50% of probable net foreign revenues
anticipated within 12 months and 25% of probable net foreign revenues through
the year 2002. The notional amounts of the options totaled $37.6 million at
December 31, 2000, and $51.9 million at December 31, 1999. The notional
amounts consisted of the following currencies: Australian dollars, Euro,
British pounds, Canadian dollars, Japanese yen, Swiss franc and Swedish
krona. All option contracts mature within the next two years. The fair
value of the options was based on the forward exchange rates as of December
31, 2000 and 1999. Total aggregate foreign exchange loss including option
amortization included in earnings was $4.4 million, $0.8 million and $3.7
million for 2000, 1999 and 1998, respectively.
We have entered into forward contracts to hedge our foreign dollar
denominated available-for-sale debt securities. The notional amounts of the
forward contracts were $66.9 million and $65.0 million at December 31, 2000
and 1999, respectively.
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 have
entered into swaps as part of our overall strategy of limiting our exposure
to fluctuations in U.S. short-term interest rates.
As of December 31, 2000, we had interest rate swaps and a commercial paper
portfolio with notional amounts of $200.0 million. During 2000,
counterparties paid us interest at a fixed rate of 7.08% and we paid
counterparties interest at a weighted-average variable rate, based upon a
three-month LIBOR rate, of 6.74%. The three-month LIBOR rate applicable to
these agreements was 6.4% at December 31, 2000. The amounts exchanged are
based on the notional amounts multiplied by the interest rates in effect.
The weighted-average variable rates are subject to change over time as LIBOR
fluctuates. Terms expire at various dates throughout 2003.
We and our counterparties, which are prominent financial institutions with
strong credit ratings, are not required to collateralize our respective
obligations under the agreements. We are exposed to losses if one or more of
the counterparties default. As of December 31, 2000, we were exposed to
potential credit losses of $8.2 million, the unrealized gains associated with
these contracts. During 2000, we did not incur any credit losses associated
with interest rate swaps. We do not believe that any reasonable likely
change in interest rates would have a material adverse effect on our
financial position, the results of operations or cash flows. 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.
For further discussion, see "Forward-Looking Information and Cautionary
Factors That May Affect Future Results-We Are Exposed to Market Risk."
Equity Instruments: To hedge against fluctuations in the market value of a
portion of the marketable equity portfolio, we entered into costless collars
that expire in 2001 and will require physical or cash settlement. The fair
value of the equity derivatives was determined based on closing market prices
of the underlying securities at year end. At December 31, 2000, the notional
amount of the put options was $165.0 million and the call options was $251.0
million. At December 31, 1999, the notional amount of the put options was
$7.1 million and the call options was $9.7 million.
We have also entered into equity swaps that mature in 2002. An equity
swap is a derivative instrument where Genentech pays the counterparty the
total return of the security above the current spot price and receives
interest income on the notional amount for the swap term. The equity swap
protects us from a decline in the market value of the security below the spot
price and limits our potential benefit from an increase in the market value
of the security above the spot price. At December 31, 2000, the notional
amount of the equity swaps was $111.0 million. We did not enter into equity
swaps in 1999.
Financial Instruments Held for Trading Purposes: As part of our 2000 overall
investment strategy, we have contracted with two external money managers to
manage part of our investment portfolio. These portfolios at December 31,
2000, 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,
2000 and 1999 were $110.9 million and $146.2 million, respectively. The fair
value at December 31, 2000 and 1999 of the forward contracts totaled ($5.8)
million and $3.1 million, respectively. The average fair value during 2000
and 1999 totaled $2.8 million and $2.5 million, respectively. Net realized
and unrealized trading gains (loss) on the portfolio totaled approximately
$3.5 million in 2000 and ($2.5) million in 1999 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, 2000 and 1999, 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>
2000 1999
------------------------ -----------------------
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) $1,907,990 $1,907,990 $1,619,760 $1,619,760
Convertible equity loans 48,492 48,492 53,295 53,295
Purchased foreign exchange put
options 384 3,342 1,547 1,957
Equity forwards 7,372 7,372 - -
Outstanding interest rate swaps 2,519 8,228 - -
Liabilities:
Long-term debt 149,692 151,438 149,708 148,938
Equity collars 32,172 41,569 33,499 33,602
Forward contracts - 300 - 1,500
</TABLE>
OTHER ACCRUED LIABILITIES
Other accrued liabilities at December 31 are as follows (in thousands):
2000 1999
- -----------------------------------------------------------------------
Accrued legal settlement $ - $200,000
Accrued compensation 56,028 52,005
Accrued royalties 34,811 37,692
Hedge payable 32,172 33,499
Accrued clinical and other studies 35,626 18,012
Accrued marketing and promotion costs 21,229 17,897
Taxes payable 29,022 -
Accrued collaborations 111,254 20,708
Other 66,338 47,520
------------------------
Total other accrued liabilities $386,480 $427,333
========================
LONG-TERM DEBT
Our long-term debt consists of $149.7 million of convertible subordinated
debentures, with interest payable at 5%, due in March 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, 2000, are as follows (in thousands):
2001 2002 2003 2004 2005 Thereafter Total
- -------------------------------------------------------------------------
$47,545 48,029 46,419 41,848 32,973 1,731 $218,545
We lease various real property under operating leases that generally require
us to pay taxes, insurance and maintenance. Rent expense was approximately
$17.5 million in 2000, $13.9 million in 1999 and $12.7 million in 1998.
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 $536.4 million. We are also
required to maintain certain financial ratios and are limited to the amount
of additional debt we can assume.
Commitments: 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,
2000, there were no outstanding loans to CuraGen.
Also, in December 1997, we entered into a collaboration agreement with
Millennium Pharmaceuticals, Inc., or Millennium, formerly LeukoSite, Inc., to
develop and commercialize Millennium's LDP-02, a humanized monoclonal
antibody for the potential treatment of inflammatory bowel disease. Under
the terms of the agreement, we made a $4.0 million equity investment in
Millennium 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 Millennium agrees to fund 25% of Phase
III development costs, we have agreed to provide a second loan to Millennium
for such funding. As of December 31, 2000, there were no outstanding loans
to Millennium.
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 $15.9 million was contributed as of December 31,
2000. 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, product liability litigation, 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 $150.0 million and agreed to
make a contribution in the amount of $50.0 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, GlaxoSmithKline plc, or Glaxo, 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. Two of the patents relate
to the use of specific kinds of antibodies for the treatment of human
disease, including cancer. The other two patents asserted against us relate
to preparations of specific kinds of antibodies which are made more stable
and the methods by which such preparations are made. Glaxo's 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/or sale of our Herceptin and Rituxan
antibody products. On July 19, 1999, we filed our answer to the complaint,
and in our answer we also stated counterclaims against Glaxo. On or about
October 27, 2000, Glaxo filed a motion for summary judgment that our
Herceptin and Rituxan antibody products infringe two of the patents asserted
against us in this suit, U.S. Patent Nos. 5,545,403 and 5,545,405. On
November 21, 2000, we filed an opposition to that motion. The trial of this
suit was previously scheduled to begin January 29, 2001, but has been
rescheduled to begin April 16, 2001.
On September 14, 2000, Glaxo filed another patent infringement
lawsuit against us in the U.S. District Court in Delaware, alleging that we
are infringing U.S. Patent No. 5,633,162 owned by Glaxo. The patent relates
to specific methods for culturing Chinese Hamster Ovary cells. Glaxo's
complaint fails to specify which of our products or methods of manufacture
are allegedly infringing that patent. However, the complaint makes a general
reference to Genentech's making, using and selling "monoclonal antibodies,"
and so we believe that the suit relates to our Herceptin and Rituxan antibody
products. On October 4, 2000, we filed our answer to the complaint, and in
our answer we also stated counterclaims against Glaxo. The judge has
scheduled the trial for this suit to begin January 25, 2002. This lawsuit is
separate from and in addition to the Glaxo suit mentioned above.
We and the City of Hope National 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, denying all the claims made by the City of Hope.
On or about December 22, 2000, City of Hope filed a dismissal of its
declaratory relief claims. On January 4, 2001, we filed a motion to dismiss
the case. The judge denied the motion on February 1, 2001, but issued a
temporary stay of proceedings to permit us to file a petition with the
appellate court. We filed our petition on February 13, 2001, which was
denied by the appellate court on February 22, 2001. The trial of this suit
has been rescheduled to begin on August 22, 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
judgments 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 judgment 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.
Genentech and BTG each filed appeals with the Federal Circuit relating
to the proceedings in the District Court, and those appeals are now pending.
Genentech filed its appeal brief with the Federal Circuit on May 15, 2000.
BTG filed its appeal brief on July 11, 2000. In it, BTG included a request
that its antitrust claims against Genentech (which previously had been
dismissed by the District Court) be reinstated. The Federal Circuit held a
hearing on the appeals on December 4, 2000, but has not yet given a decision
on the appeals. At this time, and in the future if Genentech's appeal is not
successful, BTG could enter the United States market with its human growth
hormone product.
On June 7, 2000, Chiron Corporation filed a patent infringement suit against
us in the U.S. District Court in the Eastern District of California
(Sacramento), alleging that the manufacture, use, sale and offer for sale of
our Herceptin antibody product infringes Chiron's U.S. Patent No. 6,054,561.
This patent relates to certain antibodies that bind to breast cancer cells
and/or other cells. On August 4, 2000, we filed our answer to Chiron's
complaint, and in our answer we also stated counterclaims against Chiron.
The judge has scheduled the trial of this suit to begin June 25, 2002.
We and Pharmacia AB are parties to a 1978 agreement relating to Genentech's
development of recombinant human growth hormone products, under which
Pharmacia is obligated to pay Genentech royalties on sales of Pharmacia's
growth hormone products throughout the world. On January 5, 1999, Pharmacia
filed a request for arbitration with the International Chamber of Commerce to
resolve several disputed issues between Genentech and Pharmacia under the
agreement. One of the claims made by Pharmacia is for a refund of some of
the royalties previously paid to Genentech for sales of Pharmacia's growth
hormone products in certain countries. Although the International Chamber of
Commerce has not yet given a decision on that claim, we do not believe its
decision is likely to have a material adverse effect on our financial
position, result of operations or cash flows.
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 operating results of that period.
In addition to the above, in April 1999, we paid $50.0 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 a price of
$20.63 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 of the Redemption, on that date, Roche owned 100% of our
outstanding Common Stock. On July 23, 1999, Roche completed a public
offering of 88.0 million shares of our Common Stock. On October 26, 1999,
Roche completed a public offering of 80.0 million shares of our Common Stock.
On January 19, 2000, Roche completed an offering of zero-coupon notes that
are exchangeable for an aggregate of 13,034,618 shares of our Common Stock
held by Roche. On March 29, 2000, Roche completed a public offering of 34.6
million shares of our Common Stock. Roche's percentage ownership of our
Common Stock was approximately 58.4% at December 31, 2000.
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 our 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 $10.0 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 $100.0 million on its aggregate
sales of that product and thereafter a royalty of 15% on its aggregate
sales of that product in excess of $100.0 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, $5.0 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 $100.0 million.
Tax Sharing Agreement
Since the redemption of our Special Common Stock, and until Roche completed
its second 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. 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 509,194,352 (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 splits of Genentech common stock that were
effected in October 2000 and 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.
RELATED PARTY TRANSACTIONS
We enter into transactions with Roche, Hoffmann-La Roche and its affiliates
in the ordinary course of business. We recorded 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 $3.5 million in 2000, $17.2 million in 1999,
and $21.6 million in 1998. All other revenue from Roche, Hoffmann-La Roche
and their affiliates, principally royalties and product sales, totaled $114.2
million in 2000, $83.9 million in 1999, and $63.8 million in 1998.
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, and March 2000, Roche consummated
public offerings of our Common Stock. On January 19, 2000, Roche completed
an offering of zero-coupon notes that are exchangeable for an aggregate of
13,034,618 shares of our Common Stock held by Roche. See "Redemption of Our
Special Common Stock" and "Relationship With Roche" notes above for a
discussion of these transactions.
On October 24, 2000, 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 of
each share held at the close of business on October 17, 2000. Our stock
began trading on a split-adjusted basis on October 25, 2000. 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 27.2 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 $20.63 per share, less the exercise price;
- - Options for the purchase of approximately 16.0 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 19.6 million shares of Special
Common Stock were canceled, in accordance with the terms of our 1996 Stock
Option/Stock Incentive Plan, or the 1996 Plan. With certain exceptions,
we granted new options for the purchase of 1.333 times the number of
shares under the previous options with an exercise price of $24.25 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, or the 1999 Plan, was approximately 20.0
million. Certain key employees who held unvested options under the 1996
Plan were provided the opportunity to participate in a cash basis long-
term incentive plan in lieu of their options.
Of the approximately 16.0 million shares of converted options, options
with respect to approximately 4.0 million shares were outstanding at December
31, 2000, all of which are currently exercisable except for options with
respect to approximately 320,507 shares. These outstanding options are held
by 1,420 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 26.0 million shares (including the 20.0 million
shares referred to above) of Common Stock to approximately 2,400 employees at
an exercise price of $24.25 per share. The grant date of such options was
July 16, 1999. Of the options to purchase these 26.0 million shares, options
to purchase approximately 19.8 million shares were outstanding at December
31, 2000, of which options to purchase approximately 7.7 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, 2000 and 1999, $11.1
million and $7.3 million, respectively, of compensation expense has been
recorded related to these alternative arrangements.
We have a stock option plan adopted in 1999, and amended in 2000, which
variously allows for the granting of non-qualified stock options, stock
awards and stock appreciation rights to employees, 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 21.2 million
shares of Common Stock reserved for issuance under the 1991 Plan, 17.5
million shares have been issued as of December 31, 2000. During 2000, 4,013
of the eligible employees participated in the 1991 Plan.
We have elected to continue to follow Accounting Principles Board, or 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 2000, 1999 and 1998, respectively: risk-
free interest rates of 5.3%, 5.8% and 5.5%; dividend yields of 0%; volatility
factors of the expected market price of our Common Stock of 75.0%, 45.0% and
11.9%; 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 periods presented (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
2000 1999 1998
New Basis || Old Basis
-----------------------||---------------------
<S> <C> <C> <C> <C>
Net (loss) income - as reported $ (74,241) $(1,245,112)|| $87,636 $181,909
||
Net (loss) income - with FAS 123 (159,067) (1,275,577)|| 57,105 140,995
||
Earnings (loss) per share - ||
as reported: ||
Basic (0.14) (2.43)|| 0.17 0.36
Diluted (0.14) (2.43)|| 0.16 0.35
||
||
Earnings (loss) per share - ||
with FAS 123: ||
Basic (0.31) (2.49)|| 0.11 0.28
Diluted (0.31) (2.49)|| 0.11 0.27
</TABLE>
A summary of our stock option activity and related information is as
follows:
Weighted-Average
Shares Price
---------- ----------------
Options outstanding at December 31, 1997 64,958,436 $ 11.11
Grants 18,379,700 16.96
Exercises (9,843,628) 8.83
Cancellations (4,992,084) 13.66
----------
Options outstanding at December 31, 1998 68,502,424 $ 12.82
Grants 34,092,336 28.54
Exercises (11,638,378) 12.19
Cancellations (49,404,778) 13.03
----------
Options outstanding at December 31, 1999 41,551,604 $ 25.65
Grants 9,986,353 $ 78.70
Exercises (8,258,743) 17.96
Cancellations (2,334,352) 30.82
----------
Options outstanding at December 31, 2000 40,944,862 $ 39.84
==========
The following table summarizes information concerning currently
outstanding and exercisable options:
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
- ----------------------------------------------------------------------------
$12.531 - $17.782 3,819,753 13.20 $ 14.97 3,595,599 $ 14.87
$20.000 - $24.250 19,968,555 10.09 24.22 7,795,989 24.22
$32.094 - $42.938 7,238,099 10.13 42.80 1,985,115 42.67
$55.000 - $82.000 9,718,733 10.01 78.47 38,933 73.35
$88.500 - $95.655 199,722 10.01 90.75 1,254 91.05
---------- ----------
40,944,862 13,416,890
========== ==========
Using the Black-Scholes option valuation model, the weighted-average
fair value of options granted was $51.05 in 2000, $13.66 in 1999, $4.31 in
1998. Shares of Common Stock available for future grants under all stock
option plans were 8,131,998 at December 31, 2000.
SUBSEQUENT EVENT (UNAUDITED)
During 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. In late
January 2001, we canceled the program and forgave the loan. We expect to
record a charge of approximately $7.0 million to development costs in the
first quarter of 2001 related to this cancellation.
QUARTERLY FINANCIAL DATA (UNAUDITED)
(thousands, except per share amounts)
<TABLE>
<CAPTION>
2000 Quarter Ended
-------------------------------------------------------
December 31 September 30 June 30 March 31
Restated(7) Restated(7) Restated(7)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $ 485,340 $ 447,340 $ 415,826 $ 387,850
Product sales 351,579 334,173 309,414 283,178
Gross margin from product sales 281,835 (1) 242,817 (1) 211,757 (1) 177,043 (1)
Income (loss) before cumulative
effect of accounting change (2) 15,274 5,760 (12,865) (24,610)
Cumulative effect of accounting
change, net of tax - - - (57,800)
Net income (loss) 15,274 5,760 (12,865) (82,410)
Earnings (loss) per share (5):
Basic 0.03 0.01 (0.02) (0.16)
Diluted 0.03 0.01 (0.02) (0.16)
Increase (decrease) (7):
Revenues $ - $ 2,158 $ 2,158 $ 2,158
Net income (loss) - 1,295 1,295 (56,505)
Earnings (loss) per
share - diluted $ - $ 0.00 $ 0.00 $ (0.11)
</TABLE>
<TABLE>
<CAPTION>
1999 Quarter Ended
------------------------------------------------||------------------------
|| April 1
|| to
December 31 September 30 June 30 || June 30 March 31
------------ ||---------
New Basis New Basis New Basis ||Old Basis Old Basis (8)
Restated (8) Restated (8) Restated (8) ||Restated (8)
- ---------------------------------------------------------------------------------||------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 358,456 $ 345,328 $ - || $374,905(6) $ 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) (172,567)(2) (62,506)(2) (1,010,039)(3)|| 73,221 14,415(4)
Earnings (loss) per share (5): ||
Basic (0.33) (0.13) (1.97) || 0.14 0.03
Diluted (0.33) (0.13) (1.97) || 0.13 0.03
</TABLE>
(1) Reflects expense of $2.3 million, $15.8 million, $31.4 million and $43.3
million in the fourth, third, second and first quarters of 2000,
respectively, 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. For 1999, reflects expense of $46.6 million in the
fourth quarter and $46.8 million in the third quarter related to the
sales 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 $78.6 million, $95.2 million, $95.2 million and $95.2 million in the
fourth, third, second and first quarters of 2000, respectively, and $95.2
million in both the fourth and third quarters of 1999; and $57.8 million
for the remeasurement of the value of continuing employee stock options
in the third quarter of 1999. This also reflects the $180.0 million
charge in the fourth quarter of 1999 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 the
early cash settlement of certain employee stock options and $102.3
million for the remeasurement of the value of continuing employee stock
options.
(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 splits in each of 2000 and
1999.
(6) 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.
(7) In addition, we adopted the Securities and Exchange Commission's Staff
Accounting Bulletin No. 101 on revenue recognition effective January 1,
2000, and recorded a $57.8 million charge, net of tax, as a cumulative
effect of a change in accounting principle related to contract revenues
recognized in prior periods. The related deferred revenue is being
recognized over the term of the agreements. The increase (decrease) in
revenues, net income (loss) and earnings (loss) per diluted shares
reflect the impact of this adoption.
(8) As a result of the Redemption, we revised our presentation of our
quarterly data to reflect the New Basis and Old Basis of accounting and
also corrected the accounting related to the write up of the valuation
allowance pertaining to unrealized gains on certain marketable
securities, which resulted in a reduction in revenues of $20.3 million
during the quarter ended June 30, 1999 and a reduction of goodwill of
$20.3 million as of June 30, 1999. The aggregate effect of this revision
was an increase in net loss by approximately $13.6 million ($0.03 per
share), as compared to amounts previously reported for the quarter ended
June 30, 1999. Amortization expense and net loss was reduced by $0.3
million in each of the quarters ended September 30, 1999 and December 31,
1999 (less than $0.01 per share in each quarter).
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 October 24, 2000, 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 17, 2000. Our stock began trading on a split-
adjusted basis on October 25, 2000. 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, 2000, there were approximately 1,205 stockholders of
record of our Common Stock.
Stock Prices
Common/Special Common Stock
-------------------------------------------
2000 1999
-------------------------------------------
High Low High Low
- ---------------------------------------------------------------------
4th Quarter $ 90.75 $65.25 $71.50 $33.44
3rd Quarter 95.66 73.44 44.88 24.25
2nd Quarter 85.95 46.13 22.50 20.48
1st Quarter 117.25 61.25 22.23 18.63
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>5
<FILENAME>exhibit23_1.txt
<DESCRIPTION>CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
<TEXT>
<PAGE>
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 17, 2001, included in the
2000 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
17, 2001 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, 2000.
Ernst & Young LLP
Palo Alto, California
March 9, 2001
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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