-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RYmoRBb4TlT7Dz4BZ9AWadAdanvgp9Wap7SithWmrFgKk3zN80YwfSjCxufx41gJ nXVNL3SKWNL32pXhz4Zyqw== 0000318771-96-000009.txt : 19960816 0000318771-96-000009.hdr.sgml : 19960816 ACCESSION NUMBER: 0000318771-96-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: NYSE SROS: PSE 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09813 FILM NUMBER: 96614836 BUSINESS ADDRESS: STREET 1: 460 POINT SAN BRUNO BLVD CITY: SOUTH SAN FRANCISCO STATE: CA ZIP: 94080 BUSINESS PHONE: 4152251000 MAIL ADDRESS: STREET 1: 460 POINT SAN BRUNO BLVD STREET 2: . CITY: SOUTH SAN FRANCISCO STATE: CA ZIP: 94080 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended June 30, 1996. Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from to . Commission File Number 1-9813 GENENTECH, INC. (Exact name of registrant as specified in its charter) Delaware 94-2347624 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number) 460 Point San Bruno Boulevard, South San Francisco, California 94080 (Address of principal executive offices and zip code) (415) 225-1000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock $.02 par value 76,621,009 Class Outstanding at June 30, 1996 Special Common Stock $.02 par value 44,048,647 Class Outstanding at June 30, 1996 GENENTECH, INC. INDEX PART I. FINANCIAL INFORMATION PAGE NO. Condensed Consolidated Statements of Income - for the three months and six months ended June 30, 1996 and 1995 3 Condensed Consolidated Statements of Cash Flows - for the six months ended June 30, 1996 and 1995 4 Condensed Consolidated Balance Sheets - June 30, 1996 and December 31, 1995 5 Notes to Condensed Consolidated Financial Statements 6-10 Financial Review 11-18 Independent Accountants' Review Report 19 PART II. OTHER INFORMATION 20-21 SIGNATURES 22 Page 2 PART I. FINANCIAL INFORMATION GENENTECH, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (thousands, except per share amounts) (unaudited)
Three Months Six Months Ended June 30 Ended June 30 --------------------- -------------------- 1996 1995 1996 1995 --------- --------- --------- --------- Revenues: Product sales (including amounts from related parties: three months - 1996-$5,537; 1995-$0; six months - 1996-$9,492; 1995-$0) $ 148,305 $ 161,236 $ 300,642 $ 323,303 Royalties (including amounts from related parties: three months - 1996-$5,886; 1995-$2,234; six months - 1996-$12,513; 1995-$4,631) 53,224 49,424 106,117 96,573 Contract and other (including amounts from related parties: three months - 1996-$24,675; 1995-$4,387; six months - 1996-$43,432; 1995-$9,571) 27,032 7,861 49,132 24,083 Interest 15,201 14,532 30,755 28,061 --------- --------- --------- --------- Total revenues 243,762 233,053 486,646 472,020 Costs and expenses: Cost of sales (including amounts from related parties: three months - 1996-$4,379; 1995-$0; six months - 1996-$7,842; 1995-$0) 27,153 24,312 53,032 51,062 Research and development 112,603 87,167 228,236 182,126 Marketing, general and administrative 60,987 67,814 113,029 132,137 Special charge (merger related) - 8,000 - 8,000 Interest 1,333 2,039 2,892 3,910 --------- --------- --------- --------- Total costs and expenses 202,076 189,332 397,189 377,235 Income before taxes 41,686 43,721 89,457 94,785 Income tax provision 19,967 6,558 29,521 14,218 --------- --------- --------- --------- Net income $ 21,719 $ 37,163 $ 59,936 $ 80,567 ========= ========= ========= ========= Net income per share $ .18 $ .31 $ .49 $ .67 ========= ========= ========= ========= Weighted average number of shares used in computing per share amounts 123,257 120,899 123,309 120,696 ========= ========= ========= ========= See notes to condensed consolidated financial statements.
Page 3 GENENTECH, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (thousands) (unaudited)
Six Months Ended June 30 ---------------------- 1996 1995 ---------- ---------- Cash flows from operating activities: Net income $ 59,936 $ 80,567 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 30,714 28,899 Deferred income taxes (7,305) - Gain on sales of securities available-for-sale (90) (5,730) Writedown of securities available-for-sale - 6,609 Gain on sale of a non-marketable equity security - (703) Writedown of non-marketable equity securities - 469 Loss on fixed asset dispositions 529 32 Changes in assets and liabilities: Receivables and other current assets (20,761) (69,980) Inventories 8,201 10,312 Accounts payable, other current liabilities and other long-term liabilities (6,708) 5,023 ---------- ---------- Net cash provided by operating activities 64,516 55,498 Cash flows from investing activities: Purchases of securities held-to-maturity (326,510) (286,197) Proceeds from maturities of securities held-to-maturity 422,329 484,815 Purchases of securities available-for-sale (156,410) (225,942) Proceeds from sales of securities available-for-sale 75,683 20,334 Purchases of non-marketable equity securities (7,523) - Proceeds from sale of a non-marketable equity security - 703 Capital expenditures (58,184) (23,728) Change in other assets 3,136 (25,694) ---------- ---------- Net cash used in investing activities (47,479) (55,709) Cash flows from financing activities: Stock issuances 43,682 26,644 Additions to long-term debt and short-term borrowings - 26,109 Repayment of long-term debt, including current portion (358) (425) ---------- ---------- Net cash provided by financing activities 43,324 52,328 ---------- ---------- Net increase in cash and cash equivalents 60,361 52,117 Cash and cash equivalents at beginning of period 137,043 66,713 ---------- ---------- Cash and cash equivalents at end of period $ 197,404 $ 118,830 ========== ========== See notes to condensed consolidated financial statements.
Page 4 GENENTECH, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (thousands) (unaudited)
June 30, December 31, 1996 1995 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 197,404 $ 137,043 Short-term investments 556,187 603,296 Accounts receivable, net (including amounts from related parties: 1996-$49,633; 1995-$19,281) 189,829 172,160 Inventories 85,447 93,648 Prepaid expenses and other current assets 42,725 39,267 ------------ ------------ Total current assets 1,071,592 1,045,414 Long-term marketable securities 391,718 356,475 Property, plant and equipment, less accumulated depreciation (1996-$294,936; 1995-$268,751) 534,484 503,654 Other assets 109,500 105,452 ------------ ------------ Total assets $ 2,107,294 $ 2,010,995 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts and notes payable $ 31,474 $ 37,459 Other current liabilities (including amounts due to related parties: 1996-$9,933; 1995-$8,475) 190,223 195,985 ------------ ------------ Total current liabilities 221,697 233,444 Long-term debt 150,000 150,000 Other long-term liabilities 25,346 25,504 ------------ ------------ Total liabilities 397,043 408,948 Stockholders' equity: Preferred stock - - Special common stock 881 853 Common stock 1,532 1,532 Other stockholders' equity 1,707,838 1,599,662 ------------ ------------ Total stockholders' equity 1,710,251 1,602,047 ------------ ------------ Total liabilities and stockholders' equity $ 2,107,294 $ 2,010,995 ============ ============ See notes to condensed consolidated financial statements.
Page 5 GENENTECH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 1. Statement of Accounting Presentation In the opinion of Genentech, Inc. (the Company), the accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of adjustments of a normal recurring nature) considered necessary for a fair presentation have been included. Operating results for the three-month and six-month periods ended June 30, 1996 and 1995 are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. The condensed consolidated balance sheet as of December 31, 1995 has been derived from the audited financial statements as of that date. For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report to Stockholders for the year ended December 31, 1995. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Note 2. New Accounting Standards In March 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (FAS) 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires the Company to review for impairment long-lived assets, certain identifiable intangibles, and goodwill related to those assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In certain situations, an impairment loss would be recognized. The Company adopted FAS 121 in the quarter ended March 31, 1996. The adoption did not have a material impact on the financial position, results of operations or cash flows of the Company. In October 1995, the FASB issued FAS 123 "Accounting for Stock-Based Compensation" which also is effective for the Company's 1996 fiscal year. FAS 123 allows companies which have stock-based compensation arrangements with employees to adopt a new fair-value basis of accounting for stock options and other equity instruments, or to continue to apply the existing accounting rules under APB Opinion 25 "Accounting for Stock Issued to Employees" but with additional financial statement disclosure. The Company will continue to account for stock-based compensation arrangements under APB Opinion 25, therefore the adoption of FAS 123 did not have a material impact on its financial position, results of operations, or cash flows. Note 3. Agreement with Roche Holdings, Inc. On October 25, 1995, a new agreement (the Agreement) with Roche Holdings, Inc. (Roche) was approved by Genentech's non-Roche stockholders to extend to June 30, 1999, Roche's option to cause Genentech to redeem the outstanding callable putable common stock (special common stock) of the Company at predetermined Page 6 GENENTECH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) prices. Should the call be exercised, Roche will concurrently purchase from the Company a like number of common shares, for a price equal to Genentech's cost to redeem the special common stock. The Agreement also granted the additional right to shareholders to sell all, some or none of their shares to the Company at $60.00 per share in the thirty business day period following June 30, 1999, in the event that Roche has not exercised its redemption rights (and Roche will concurrently provide the necessary redemption funds to the Company by purchasing a like number of shares of common stock at $60.00 per share). In conjunction with the Agreement, F. Hoffmann-La Roche Ltd. (HLR) was granted an option at terms discussed below for ten years for licenses to use and sell certain of Genentech's products in non-U.S. markets. As a general matter, such option for a Genentech product must be exercised at, or prior to if Genentech mutually agrees, the conclusion of phase II clinical trials for each product. In general, for each product for which HLR exercises its option (option product), the Company and HLR will share equally all development expenses, including preclinical, clinical, process development and related expenses, incurred by the Company through that date and prospectively, with respect to the development of the option product in the United States. HLR will pay all non-U.S. development expenses. At the Company's election, and with HLR's consent, HLR may reimburse Genentech for HLR's share of development costs incurred prior to HLR's option exercise date, by payment of such costs at the time of the option exercise, or by making payments prospectively until HLR's share has been fully reimbursed to Genentech. In general, Genentech will supply HLR's clinical requirements of option products at cost and its commercial requirements at cost plus 20%. In general, HLR will pay a royalty of 12.5% until an option product reaches $100 million in aggregate sales outside of the United States, at which time the royalty rate increases to 15%. In addition, HLR has exclusive rights to, and pays the Company 20% royalties on, Canadian sales of the Company's existing approved products in Canada, and European sales of Pulmozyme, registered trademark. Consequently, in the fourth quarter of 1995, the Company transferred to HLR the rights to its Canadian product sales, and its European sales of Pulmozyme, and commenced recording royalty revenue from HLR on such sales. Contract revenue in the quarter ended June 30, 1996 included $19.3 million primarily related to HLR's exercise of its option with respect to the development of insulin-like growth factor (IGF-1) outside of the United States for the treatment of diabetes. On a year to date basis, contract revenue also included $17.1 million recorded in the first quarter of 1996 related to HLR's exercise of its option regarding IDEC-C2B8, representing a one time option fee of $13.1 million, and $4.0 million for reimbursement of development costs incurred by Genentech during the first quarter but after the exercise date. Note 4. Legal Proceedings The Company is a party to various legal proceedings including patent infringement cases involving human growth hormone products and Activase, registered trademark; product liability cases involving Activase and Protropin, registered trademark; class action lawsuits regarding Protropin; and employment related cases. In addition, the Company has received and responded to grand jury document subpoenas from the United States District Court for the Northern District of California for documents relating to Genentech's clinical, sales, and marketing activities associated with human growth hormone. Page 7 GENENTECH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) The Company, its directors, two former directors and Roche are defendants in a number of suits filed in Delaware, which have been consolidated in a single action, by certain individual stockholders purporting to represent stockholders as a class alleging, in general, breach of the defendants' fiduciary duties to the Company in connection with the then proposed extension of Roche's option to cause the Company to redeem the outstanding non-Roche owned redeemable common stock and transactions related thereto. The Company, Roche and the attorneys representing the plaintiff stockholders have entered into a memorandum of understanding settling all claims against the defendants in these actions. In connection with the settlement, if approved by the court, Roche would increase the prices at which it could cause Genentech to redeem the non-Roche owned special common stock by $0.50 per share per quarter, to a final price of $82.50 in the quarter ending June 30, 1999, and Genentech would pay the plaintiffs' attorneys up to $3.5 million in attorneys fees, and in connection with the then proposed merger, Genentech would absorb the termination costs of up to six Europe-based Genentech employees. On June 28, 1995 and August 10, 1995, the U.S. District Court for the Southern District of New York issued preliminary injunctions against Novo Nordisk A/S and certain of its affiliates (Novo) and Biotechnology General Corporation and its affiliate (BTG), respectively, which prohibited each of them, pending the Court's final determination of the action, from importing, making, using and selling their human growth hormone products in the United States. Each of Novo and BTG appealed the Court's decision. On April 8, 1996, the U.S. Court of Appeals for the Federal Circuit upheld the preliminary injunction against BTG. On February 26, 1996, the same court had overruled the preliminary injunction against Novo. However, on June 27, 1996, a United States District Court judge in New York granted the Company's request for a second preliminary injunction against Novo, based on a recently issued U.S. patent that the Company did not assert in the earlier proceeding. Future court decisions will determine whether Novo's and BTG's products will be permanently enjoined from the U.S. market. On May 28, 1996, the Company filed a suit for patent infringement and declaratory judgement of patent infringement in the Federal District Court for the District of Massachusetts against Boehringer Mannheim GmbH and Boehringer Mannheim Corporation, alleging that the manufacture, use and sale of their thrombolytic agent, reteplase, infringes five Genentech patents relating to Activase and/or general biotechnology processes. In July 1996, the Company and Tanox Biosystems, Inc. (Tanox) announced the settlement of pending lawsuits filed by each company against the other and new joint development and cross license agreements relating to anti-IgE monoclonal antibodies. The two companies and Ciba-Geigy Ltd., which is jointly developing anti-IgE antibodies with Tanox, agreed in principle to combine their existing anti-IgE antibody development projects into a cooperative development effort, and, upon commercialization, to participate in a joint U.S. marketing and U.S. and European profit sharing arrangement. Based upon the nature of the claims made and the investigations completed to date by the Company and its counsel, the Company believes the outcome of the above actions will not have a material adverse effect on the financial position, results of operations or cash flows of the Company. However, were an unfavorable ruling to occur in any quarterly period, there exists the possibility of a material impact on the net income of that period. Page 8 GENENTECH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 5. Inventories Inventories at June 30, 1996 and December 31, 1995 are summarized below: 1996 1995 ---------- ---------- (thousands) Raw materials $ 17,332 $ 12,808 Work in process 56,157 67,239 Finished goods 11,958 13,601 ---------- ---------- Total $ 85,447 $ 93,648 ========== ========== Note 6. Quasi-Reorganization On February 18, 1988, the Company's Board of Directors approved the elimination of the Company's accumulated deficit through an accounting reorganization of its stockholders' equity accounts (a quasi-reorganization) effective October 1, 1987, that did not involve any revaluation of assets or liabilities. The Company eliminated the accumulated deficit of $329.5 million by a transfer from additional paid-in capital in an amount equal to the accumulated deficit. The Company has been reporting in income the recognition of operating loss and tax credit carryforward items arising prior to the quasi-reorganization due to the Company's adoption of its quasi-reorganization in the context of the accounting and quasi-reorganization literature existing at the date the quasi- reorganization was effected. If the provisions of the subsequently issued Staff Accounting Bulletin 86 (SAB 86) had been applied, net income for the quarter ended June 30, 1995, would have been reduced by $1.8 million or $.01 per share ($11.8 million or $.10 per share for the year to date period), because SAB 86 would require that the tax benefits of prior operating loss and tax credit carryforwards be reported as a direct addition to additional paid- in capital rather than being recorded in the income statement. The Securties and Exchange Commission staff has indicated that it would not object to the Company's accounting for such tax benefit. As of June 30, 1995, the operating loss and tax credit carryforwards arising prior the quasi-reorganization had been fully utilized; thus there was no impact for the three- or six-month periods ended June 30, 1996. Note 7. Change in Effective Income Tax Rate The Company's effective income tax rate in the three-month and six-month periods ended June 30, 1996 was 48% and 33%, respectively, compared to 15% in the first half of 1995. The effective rate for the full year 1996 is expected to be 33%. The second quarter effective rate was 48% as it included an adjustment to bring the year to date rate to 33%. The rate increase was primarily due to the implementation of a new approach for funding future R & D costs of certain development products and related manufacture of these products, by international subsidiaries of the Company, resulting in foreign losses not currently providing a tax benefit. Also contributing to the 1996 rate increase was the recognition of a greater amount of tax credit carryforwards in 1995 than in 1996. The higher tax rates resulted in net income that was $13.7 million and $16.1 million lower in the second quarter and first half of 1996, respectively, than it would have been if the prior year rate had been used. Page 9 GENENTECH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 8. Subsequent Event In July 1996, the Company and Tanox Biosystems, Inc. (Tanox) announced the settlement of pending lawsuits filed by each company against the other and new joint development and cross license agreements relating to anti-IgE monoclonal antibodies. The two companies and Ciba-Geigy Ltd., which is jointly developing anti-IgE antibodies with Tanox, agreed in principle to combine their existing anti-IgE antibody development projects into a cooperative development effort, and, upon commercialization, to participate in a joint U.S. marketing and U.S. and European profit sharing arrangement. A definitive agreement is expected to be concluded within six months. In July, 1996, the Company made a payment to Tanox in connection with the agreements. A portion of the payment was accrued by the Company in previous periods as marketing, general and administrative expense related to expected settlement costs of this litigation. The remaining portion of the payment will be charged to research and development expense in the third quarter of 1996 related to the technology rights acquired under the new joint development and cross license agreements. Page 10 GENENTECH, INC. FINANCIAL REVIEW AGREEMENT WITH ROCHE HOLDINGS, INC. On October 25, 1995, a new agreement (the Agreement) with Roche Holdings, Inc. (Roche) was approved by Genentech's non-Roche stockholders to extend to June 30, 1999, Roche's option to cause Genentech (the Company) to redeem the outstanding callable putable common stock (special common stock) of the Company at predetermined prices. Should the call be exercised, Roche will concurrently purchase from the Company a like number of common shares, for a price equal to Genentech's cost to redeem the special common stock. The Agreement also granted the additional right to shareholders to sell all, some or none of their shares to the Company at $60.00 per share in the thirty business day period following June 30, 1999 in the event that Roche has not exercised its redemption rights (and Roche will concurrently provide the necessary redemption funds to the Company by purchasing a like number of shares of common stock at $60.00 per share). In conjunction with the Agreement, F. Hoffmann-La Roche Ltd. (HLR) was granted an option at terms discussed below for ten years for licenses to use and sell certain of Genentech's products in non-U.S. markets. As a general matter, such option for a Genentech product must be exercised at, or prior to if Genentech mutually agrees, the conclusion of phase II clinical trials for each product. In general, for each product for which HLR exercises its option (option product), the Company and HLR will share equally all development expenses, including preclinical, clinical, process development and related expenses, incurred by the Company through that date and prospectively, with respect to the development of the option product in the United States. HLR will pay all non-U.S. development expenses. At the Company's election, and with HLR's consent, HLR may reimburse Genentech for HLR's share of development costs incurred prior to HLR's option exercise date, by payment of such costs at the time of the option exercise, or by making payments prospectively until HLR's share has been fully reimbursed to Genentech. In general, Genentech will supply HLR's clinical requirements of option products at cost and its commercial requirements at cost plus 20%. In general, HLR will pay a royalty of 12.5% until an option product reaches $100 million in aggregate sales outside of the United States, at which time the royalty rate increases to 15%. In addition, HLR has exclusive rights to, and pays the Company 20% royalties on, Canadian sales of the Company's existing approved products in Canada, and European sales of Pulmozyme, registered trademark. Consequently, in the fourth quarter of 1995, the Company transferred to HLR the rights to its Canadian product sales, and its European sales of Pulmozyme, and commenced recording royalty revenue from HLR on such sales. Contract revenue in the quarter ended June 30, 1996 included $19.3 million primarily related to HLR's exercise of its option with respect to the development of insulin-like growth factor (IGF-1) outside of the United States for the treatment of diabetes. On a year to date basis, contract revenue also included $17.1 million recorded in the first quarter of 1996 related to HLR's exercise of its option regarding IDEC-C2B8, representing a one time option fee of $13.1 million, and $4.0 million for reimbursement of development costs incurred by Genentech during the first quarter but after the exercise date. Page 11 RESULTS OF OPERATIONS (dollars in millions, except per share amounts)
Quarter ended June 30 Six months ended June 30 ---------------------- ------------------------ REVENUES 1996 1995 % Change 1996 1995 % Change - ---------------------- ------ ------ -------- ------ ------ -------- Revenues $243.8 $233.0 5% $486.6 $472.0 3% ====== ====== ======== ====== ====== ======== PRODUCT SALES - ---------------------- Activase $ 72.3 $ 74.1 (2)% $148.9 $152.3 (2)% Protropin and Nutropin 54.1 55.9 (3) 110.1 110.3 0 Pulmozyme 20.8 30.3 (31) 39.7 58.8 (32) Actimmune 1.1 .9 22 1.9 1.9 0 ------ ------ -------- ------ ------ -------- Total product sales $148.3 $161.2 (8)% $300.6 $323.3 (7)% ====== ====== ======== ====== ====== ========
Overall product sales in the three- and six-month periods ended June 30, 1996 decreased 8% and 7%, respectively, from the comparable periods in 1995 primarily due to the fact that sales of products to customers in Europe and Canada are now made by Roche instead of Genentech. In conjunction with the Agreement with Roche, in the fourth quarter of 1995 Genentech stopped recording customer sales of Pulmozyme in Europe and of each of its products in Canada. The Company instead began to provide its products to HLR at cost plus 20% for HLR's sales to customers in these territories, and began to receive royalties from HLR on such sales. In the second quarter of 1996, Genentech's product sales to HLR for Canadian and European sales were $5.5 million; in the comparable period of 1995 Genentech's sales to customers in these regions were $16.4 million. On a pro forma basis, including sales to HLR in 1996 and excluding Canadian and European customer sales in 1995, total product sales in the second quarter of 1996 were $148.3 million, compared to $144.8 million in 1995. In the year to date period, on a pro forma basis, total product sales were $300.6 million in 1996 and $293.1 million in 1995. Year to date sales to HLR for Canadian and European sales in 1996 were $9.5 million; in 1995 Genentech's customer sales in these regions were $30.2 million. The new arrangement with Roche also resulted in higher royalties in 1996 and had an impact on cost of sales as a percent of sales; see comments below regarding these items. Net sales of Activase, registered trademark, (Alteplase, recombinant) recombinant tissue plasminogen activator, decreased 2% in the second quarter of 1996 compared to the second quarter of 1995, as the impact of not having Canadian customer sales in 1996 (such sales were $3.6 million in 1995) more than offset an increase in U.S. sales due to higher market share, and the new sales to Roche. On a pro forma basis as described above, 1996 second quarter sales of Activase were $72.3 million, compared to $70.5 million in the second quarter of 1995. On a year to date basis, Activase sales decreased 2% for the same reasons, in addition to the sale in 1995 of $3.8 million of bulk product to Japanese licensees. Activase sales on a pro forma basis for the year to date period were $148.9 million in 1996 compared to $146.4 million in 1995. Despite Activase's continued market share growth, the overall size of the thrombolytic therapy market during the second quarter of 1996 declined by 5% from the second quarter of 1995 as a result of the increasing use of alternate therapies in the treatment of heart attack patients. In June 1996, the Company received clearance from the U.S. Food and Drug Administration (FDA) to market Activase for the treatment of acute ischemic stroke or brain attack. Activase is the first therapy to be indicated for the management of stroke. Page 12 Net sales of the Company's two growth hormone products - Protropin, registered trademark, (somatrem for injection) and Nutropin, registered trademark, (somatropin [rDNA origin] for injection) - decreased 3% in the second quarter of 1996 over the comparable period in 1995, resulting from lower U.S. sales as well as the transfer of Canadian sales of growth hormone to HLR in late 1995. On a pro forma basis, growth hormone sales were $54.1 million in the second quarter of 1996 compared to $55.2 million in 1995. On a year to date basis, growth hormone sales were essentially flat. For the year to date period on a pro forma basis, sales of growth hormone were $110.1 million in 1996 compared to $108.9 million in 1995. In June 1996, a preliminary injunction was granted against Novo Nordisk and certain of its affiliates (Novo), prohibiting the sale of Novo's human growth hormone in the United States until a full trial on the matter is concluded. In April 1996, an appeals court upheld the preliminary injunction against Biotechnology General and its affiliate (BTG), another of the Company's possible competitors, similarly prohibiting the sale of BTG's growth hormone product pending final determination of the action. Net sales of Pulmozyme decreased 31% in the quarter ended June 30, 1996 compared to the second quarter of 1995, primarily due to the Agreement with Roche. 1995 Pulmozyme sales included $12.2 million of sales to European and Canadian customers. In 1996, sales in these territories are made by HLR. On a pro forma basis, Pulmozyme sales were $20.8 million in the second quarter of 1996, compared to $18.1 million in the second quarter of 1995. Pulmozyme sales in the six months ended June 30, 1996 were down 32% from the prior year, primarily due to the Agreement with Roche. On a pro forma basis, sales in the first half of 1996 were $39.7 million versus $35.9 million in 1995.
Quarter ended June 30 Six months ended June 30 ROYALTIES, CONTRACT AND ---------------------- ------------------------ OTHER, AND INTEREST INCOME 1996 1995 % Change 1996 1995 % Change - ----------------------------- ------ ------ -------- ------ ------ -------- Royalties $53.2 $49.4 8% $106.1 $96.6 10% Contract and other 27.0 7.9 242 49.1 24.1 104 Interest income 15.3 14.5 6 30.8 28.1 10
Royalty income increased 8% in the quarter ended June 30, 1996, and 10% in the year to date period, primarily due to new royalties from HLR in conjunction with the Agreement. Under the new arrangement with Roche, effective in the fourth quarter of 1995, Genentech receives royalties from HLR on their sales of Genentech products in Europe and Canada. The first half of 1995 did not include such royalties because at that time Genentech recorded sales to customers in those territories. Royalties in 1996 also included higher income from existing licensees due to increased licensee sales. Contract and other income increased in the second quarter of 1996 over the second quarter of 1995 due to $19.3 million of contract revenue from HLR primarily related to HLR's exercise of its option regarding IGF-1, as discussed previously. For the year to date period, contract and other income increased $25.0 million, due to the IGF-1 revenue plus $17.1 million in the first quarter of 1996 related to Roche's exercise of its option regarding IDEC-C2B8. This increase was partially offset by two factors - the inclusion in other income in 1995 of $6.3 million of gains on sales on biotechnology equity securities; and a decrease in other contract revenue in 1996 resulting from normal quarterly variations in the timing of contract benchmark achievements and payments. Page 13 Interest income increased in 1996 compared to 1995 due to a larger investment portfolio and a higher average portfolio yield. The total investment portfolio, consisting of cash and cash equivalents, and short- and long-term marketable securities, increased to $1,145.3 million as of June 30, 1996 from $985.8 million as of June 30, 1995, and from $1,096.8 million as of December 31, 1995.
Quarter ended June 30 Six months ended June 30 ---------------------- ------------------------ COSTS AND EXPENSES 1996 1995 % Change 1996 1995 % Change - ----------------------------- ------ ------ -------- ------ ------ -------- Cost of sales $ 27.2 $ 24.3 12% $ 53.0 $ 51.1 4% Research and development 112.6 87.2 29 228.3 182.1 25 Marketing, general and administrative 61.0 67.8 (10) 113.0 132.1 (14) Special charge (merger related) - 8.0 (100) - 8.0 (100) Interest expense 1.3 2.0 (35) 2.9 3.9 (26) ------ ------ -------- ------ ------ -------- Total costs and expenses $202.1 $189.3 7% $397.2 $377.2 5% ====== ====== ======== ====== ====== ========
Cost of sales as a percent of product sales increased in the second quarter of 1996 over the second quarter of 1995 primarily due to the impact of lower margin sales to HLR in 1996, in conjunction with the Agreement as discussed above, and to a lesser extent due to increases in certain production costs. Inventory reserve provisions were not a significant factor. For the year to date period, the cost of sales percentage also increased primarily due to the new lower margin sales to HLR in 1996, partially offset by lower inventory reserves provided in 1996 ($0.6 million in 1996 versus $2.2 million in 1995). The 1996 reserve of $0.6 million was provided in the first quarter for expected obsolescence of certain Activase inventories in connection with the discontinuance of the 20 milligram vial configuration of the product. The main component of the 1995 provision was $1.7 million provided in the first quarter of 1995 for expected product expiration of certain Activase inventories. R&D expenses increased 29% and 25% in the second quarter and year to date periods of 1996, respectively, over the comparable periods in 1995 due to increased expenditures for scale-up, other process improvements and clinical material production for products in Phase II and III clinical development; and other expenses for products in late stage clinical trials including the Company's cardiovascular products and IGF-1. There was also an increased number of projects in early stage development in 1996. Partially offsetting these increases were projects with decreased expenditures from the prior year, including the Phase III trial for Pulmozyme for Chronic Obstructive Pulmonary Disease (COPD), which was halted in the third quarter of 1995. R&D as a percent of revenue was approximately 46% in the second quarter of 1996, and 47% on a year to date basis. Marketing, general and administrative expenses decreased in the quarter ended June 30, 1996 versus the comparable period in 1995 primarily due to the closure of the Company's European and Canadian operations in conjunction with the Agreement, partially offset by higher U.S. sales and marketing expenses stemming from the timing of various promotional activities. Also Page 14 contributing to the decrease was the $5.7 million writedown of an equity investment in the second quarter of 1995. Marketing, general and administrative expenses also decreased on a year to date basis, for the same reasons as in the quarterly period. Interest expense declined in 1996 compared to the prior year primarily because 1995 included interest on the Company's $25 million borrowing arrangement, which commenced in February 1995 and was repaid in December 1995. Quarter ended June 30 Six months ended June 30 --------------------- ------------------------ INCOME TAXES 1996 1995 1996 1995 - -------------------------- -------- -------- ---------- ---------- Income taxes $ 20.0 $ 6.6 $ 29.5 $ 14.2 The Company's effective income tax rate rose to 33% for the six months ended June 30, 1996, compared to 15% in the first half of 1995, primarily due to the implementation of a new approach for funding future R & D costs of certain development products and related manufacture of these products, by international subsidiaries of the Company, resulting in foreign losses not currently providing a tax benefit. The effective tax rate is expected to be 33% for the second half and full year of 1996. The effective rate in the second quarter of 1996 was 48% as it included an adjustment to bring the year to date rate to 33%. Also contributing to the 1996 rate increase was the recognition of a greater amount of tax credit carryforwards in 1995 than in 1996. Quarter ended June 30 Six months ended June 30 ---------------------- ------------------------ NET INCOME 1996 1995 % Change 1996 1995 % Change - ------------------------ ------ ------ -------- ------ ------ -------- Net income $21.7 $37.2 (42)% $59.9 $80.6 (26)% Earnings per share $ .18 $ .31 $ .49 $ .67 Net income decreased in the second quarter and first half of 1996 compared to 1995 primarily due to the Company's higher effective income tax rate, and secondarily due to increased R & D expenses which more than offset higher revenues from contract payments and royalties. LIQUIDITY AND CAPITAL RESOURCES June 30, 1996 December 31, 1995 - ----------------------------- ---------------- ------------------- Cash, cash equivalents, $ 1,145.3 $ 1,096.8 short-term investments and long-term marketable securities Working capital 849.9 812.0 Page 15 Cash generated from operations, maturities of investments and stock issuances was used to make investments in marketable securities and capital additions. Cash and cash equivalents at June 30, 1996 rose slightly compared to December 31, 1995, and working capital increased $37.9 million. Capital expenditures totaled $58.2 million in the first six months of 1996 compared to $23.7 million in the same period in 1995. The increase was primarily due to improvements to existing manufacturing and administrative facilities in 1996. FORWARD-LOOKING STATEMENTS The following statements are forward-looking and are based on the Company's current expectations. The Company's actual results could differ materially from these forward-looking statements. Total Product Sales - The Company anticipates that a year over year decrease in total reported quarterly product sales may continue throughout 1996. Factors affecting the Company's total product sales include, but are not limited to, the amount and timing of Genentech's sales to HLR, the amount of sales to customers in the United States and the timing and amount of bulk shipments to Japanese licensees. Activase Sales - The Company faces the possibility of potential new competition in the thrombolytic market. Genentech is aware that one company is seeking FDA approval to market its product for the treatment of acute myocardial infarction (AMI) in the United States, and recently an advisory committee of the FDA recommended that the product be approved for such treatment. Genentech has brought suit against that company for patent infringement. Depending on the extent and type of new competition, the Company's total Activase sales could be materially affected. Other factors affecting the Company's Activase sales include, but are not limited to, the timing of FDA approval, if any, of new competitive products, pricing decisions made by the Company, the outcome of litigation involving the Company's patents for Activase and related processes, the increasing use of other therapies such as angioplasty for the treatment of AMI, and the impact of the FDA's recent clearance to market Activase for the treatment of acute ischemic stroke. Growth Hormone Sales - The Company continues to face the possibility of new competition in the growth hormone market. Three companies received FDA approval in 1995 to market their growth hormone products for treatment of growth hormone inadequacy in children, although two of those companies have been preliminarily enjoined from selling their products (see page 13 "Results of Operations" for further information). A fourth company received notice from the FDA in April 1996 that such approval is imminent, and additionally is seeking approval to sell its human growth hormone product to treat AIDS wasting. Another of Genentech's competitors has received approval to market its existing human growth hormone product for an additional indication. Genentech expects such competition to have an adverse effect on its sales of Protropin and Nutropin which, depending on the extent and type of the competition, could be material. Other factors affecting the Company's growth hormone sales include, but are not limited to, the timing of FDA approval, if any, of new competitive products, the outcome of litigation involving the Company's patents for growth hormone and related processes, decisions made by the Company about prices to be charged for its growth hormone products, and the availability of third party reimbursement for the cost of growth hormone therapy. Page 16 Pulmozyme sales - Factors that may influence the future sales of Pulmozyme include physician perception of the number and kinds of patients who will benefit from such therapy, the availability of third party reimbursement for the costs of therapy, the timing of the development of alternative therapies for the treatment and care of cystic fibrosis, whether and when additional indications are approved for Pulmozyme, and the cost of Pulmozyme therapy. Royalty and Contract Revenues - The Company's 1996 royalty and contract revenues could continue to vary significantly from the prior year, both on a quarterly and annual basis, and future royalties and contract revenues could vary significantly from 1996 levels. Major factors affecting these items include, but are not limited to, HLR's decisions to exercise or not to exercise its option to develop and sell the Company's future products in non- U.S. markets and the timing and amount of related development cost reimbursement, if any; variations in HLR's sales of Genentech products; the timing of non-U.S. approvals, if any, for products licensed to HLR; whether and when contract benchmarks are achieved; the initiation of other new contractual arrangements; and the conclusion of existing arrangements with other companies and HLR. R&D Expenses - The Company intends to continue its commitment to aggressive investment in R&D. The Company has announced its intention for R&D spending to remain at approximately half of total revenues for the short-term. Over the long-term, however, R&D as a percent of revenues should decrease, although in dollar terms R&D spending is expected to rise as revenues rise. Factors affecting the Company's R&D expenses include, but are not limited to, the outcome of clinical trials currently being conducted; the number of products entering into development from late-stage research; future levels of the Company's product sales, royalty revenues and contract revenues; the possibility of competition with respect to products or technologies under development; and decisions by HLR to exercise or not to exercise its option to develop and sell potential products of the Company in non-U.S. markets and the timing of such decisions. Income Tax Provision - The Company expects that as a result of its new approach for funding and manufacturing certain development products (see page 15 "Income Taxes" for further information), and due to rate increases expected following the recognition in 1996 of the balance of the Company's federal tax credit carryforwards, Genentech's effective tax rate will continue to trend upwards through 1999, and then decline as these development products are brought to market. Factors affecting future effective tax rates include, but are not limited to, future levels of R&D spending, the outcome of clinical trials of certain development products, the Company's success in commercializing such products, potential competition regarding the products, and changes in tax laws and rates. Successful development of products - The Company intends to continue to develop new products. Successful pharmaceutical product development is highly uncertain and is dependent on numerous factors, many of which are beyond the Company's control. Products that appear promising in the early phases of development may fail to reach the market for numerous reasons. They may be found to be ineffective or to have harmful side effects in preclinical or clinical testing, may fail to receive necessary regulatory approvals, may turn out to be uneconomical because of manufacturing costs or other factors, or they may be precluded from commercialization by the proprietary rights of others or by competing products or technologies for the same indication. Success in preclinical and early clinical trials does not ensure that large scale clinical trials will be successful. Clinical results are frequently susceptible to varying interpretations which may delay, limit or prevent Page 17 regulatory approvals. The length of time necessary to complete clinical trials and from submission of an application for marketing approval to a final decision by a regulatory authority varies significantly and may be difficult to predict. Uncertainties surrounding proprietary rights - The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions. Accordingly, the breadth of claims allowed in such company's patents cannot be predicted. Patent disputes are frequent and can preclude commercialization of products. The Company, as in the past, may be involved in future material patent litigation. Such litigation is costly in its own right and could subject the Company to significant liabilities to third parties and, if decided adversely, the Company may need to obtain third party licenses or cease using the technology or product in dispute. As discussed above, the presence of patents or other proprietary rights belonging to other parties may lead to the termination of research and development of a particular product. Liquidity - The Company believes that its cash, cash equivalents, and short- term and long-term investments, together with funds provided by operations and leasing arrangements, will be sufficient to meet its foreseeable cash requirements. Factors affecting the Company's cash position include, but are not limited to, future levels of the Company's product sales, royalty revenues and contract revenues. Page 18 INDEPENDENT ACCOUNTANTS' REVIEW REPORT The Board of Directors and Stockholders Genentech, Inc. We have reviewed the accompanying condensed consolidated balance sheet of Genentech, Inc. as of June 30, 1996, and the related condensed consolidated statements of income for the three-month and six-month periods ended June 30, 1996 and 1995, and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 1996 and 1995. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Genentech, Inc. as of December 31, 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended (not presented herein) and in our report dated January 17, 1996, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1995, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. ERNST & YOUNG LLP San Jose, California July 9, 1996 Page 19 GENENTECH, INC. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On May 28, 1996, the Company filed a suit for patent infringement and declaratory judgement of patent infringement in the Federal District Court for the District of Massachusetts against Boehringer Mannheim GmbH and Boehringer Mannheim Corporation, alleging that the manufacture, use and sale of their thrombolytic agent, reteplase, infringes five Genentech patents relating to Activase, registered trademark, and/or general biotechnology processes. On June 27, 1996, the United States District Court for the Southern district of New York granted the Company's request for a second preliminary injunction against Novo Nordisk A/S and certain of its affiliates (Novo) to prohibit the sale of Novo's human growth hormone product in the United States until a full trial on the matter is concluded, based on a recently issued U.S. patent that the Company did not assert in an earlier proceeding. See also Note 4 "Legal Proceedings" in Part I "Notes to Condensed Consolidated Financial Statements." ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's Annual Meeting of Stockholders, held on April 18, 1996, three matters were voted upon. A description of each matter and tabulation of votes follows: 1. Election of four Directors: Nominee Votes ------------------- ---------------------------------- For Withheld --------------- --------------- J. Richard Munro 102,866,738 445,469 C. Thomas Smith, Jr. 102,867,699 444,508 Robert A. Swanson 102,882,373 429,834 David S. Tappan, Jr. 102,844,049 468,158 There were no abstentions or broker nonvotes. 2. Approval of the Company's 1996 Stock Option/Stock Incentive Plan: Votes ------------------------------------------------------------- For Against Abstain Nonvotes -------------- ------------- ----------- -------------- 89,024,393 7,292,966 218,406 6,776,442 Page 20 3. Ratification of Ernst & Young LLP as the Company's Independent Accountants: Votes ------------------------------------------------------------- For Against Abstain Nonvotes ------------- ------------- ----------- -------------- 103,177,219 48,290 86,698 0 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 15.1 Letter re: Unaudited Interim Financial Information 27.1 Financial Data Schedule (b) Reports on Form 8-K There were no reports on Form 8-K filed during the quarter ended June 30, 1996. Page 21 GENENTECH, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 14, 1996 GENENTECH, INC. /S/ARTHUR D. LEVINSON /S/LOUIS J. LAVIGNE ------------------------------------- ---------------------------- Arthur D. Levinson, Ph.D. Louis J. Lavigne, Jr. President and Chief Executive Officer Senior Vice President and Chief Financial Officer /S/BRADFORD S. GOODWIN ---------------------------- Bradford S. Goodwin Vice President and Controller Page 22 EX-27.1 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO. 1,000 6-MOS DEC-31-1996 JUN-30-1996 118,830 1,026,479 189,829 0 85,447 1,071,592 829,420 294,936 2,107,294 221,697 150,000 0 0 2,413 1,707,838 2,107,294 300,642 486,646 53,032 53,032 228,236 0 2,892 89,457 29,521 59,936 0 0 0 59,936 .49 0 ACCOUNTS RECEIVABLE ARE PRESENTED NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS IN THE CONDENSED CONSOLIDATED BALANCE SHEET. THE PROVISION FOR LOSSES ON DOUBTFUL ACCOUNTS IS NOT REPORTED AS A SEPARATE LINE IN THE CONDENSED CONSOLIDATED STATEMENT OF INCOME OF STATEMENT OF CASH FLOWS.
EX-15.1 3 Exhibit 15.1 August 14, 1996 The Board of Directors and Stockholders Genentech, Inc. We are aware of the incorporation by reference in the Registration Statements pertaining to the 1991 Employee Stock Plan, the 1996 Stock Option/Stock Incentive Plan, the 1994 Stock Option Plan, the 1990 Stock Option/Stock Incentive Plan, the 1984 Incentive Stock Option Plan and the 1984 Non-Qualified Stock Option Plan, the shares issuable to certain warrant holders, the shares issuable to certain convertible subordinated debenture holders, the Genentech, Inc. Tax Reduction Investment Plan and in the related prospectuses, as applicable, contained in such Registration Statements of our report dated July 9, 1996 relating to the unaudited condensed consolidated interim financial statements of Genentech, Inc. which are included in its Form 10-Q for the quarter and six months ended June 30, 1996. Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a part of the registration statement prepared or certified by accountants within the meaning of Section 7 or 11 of the Securities Act of 1933. Very truly yours, ERNST & YOUNG LLP -----END PRIVACY-ENHANCED MESSAGE-----