-----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, RIc+w4YQGv+qLqhx0b1YKU2UW5GCHueVS+lcZNPsquo94tuwRo24jfQ0ZF3efPqQ 4FVHQEqfwxArCGm/XezXng== 0000318771-96-000011.txt : 19961120 0000318771-96-000011.hdr.sgml : 19961120 ACCESSION NUMBER: 0000318771-96-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 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: 96666887 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 September 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 September 30, 1996 Special Common Stock $.02 par value 44,548,651 Class Outstanding at September 30, 1996 GENENTECH, INC. INDEX PART I. FINANCIAL INFORMATION PAGE NO. Condensed Consolidated Statements of Income - for the three months and nine months ended September 30, 1996 and 1995 3 Condensed Consolidated Statements of Cash Flows - for the nine months ended September 30, 1996 and 1995 4 Condensed Consolidated Balance Sheets - September 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 SIGNATURES 21 Page 2 PART I. FINANCIAL INFORMATION
GENENTECH, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (thousands, except per share amounts) (unaudited) Three Months Nine Months Ended September 30 Ended September 30 --------------------- -------------------- 1996 1995 1996 1995 --------- --------- --------- --------- Revenues: Product sales (including amounts $ 142,463 $ 158,478 $ 443,105 $ 481,781 from related parties: three months 1996-$1,659; 1995-$0; nine months 1996-$11,151; 1995-$0) Royalties (including amounts from 54,429 45,642 160,546 142,215 related parties: three months - 1996-$6,812; 1995-$3,246; nine months - 1996-$19,325; 1995-$7,876) Contract and other (including 38,859 4,494 87,991 28,577 amounts from related parties: three months: 1996-$35,977; 1995-$2,331; nine months: 1996-$79,409; 1995-$11,902) Interest 15,956 15,297 46,711 43,358 --------- --------- --------- --------- Total revenues 251,707 223,911 738,353 695,931 Costs and expenses: Cost of sales (including amounts 24,836 24,369 77,868 75,431 from related parties: three months: 1996-$1,244; 1995-$0; nine months: 1996-$9,085; 1995-$0) Research and development 114,772 85,971 343,008 268,097 Marketing, general and administrative 61,864 55,249 174,893 187,386 Special charge (merger related) - 9,000 - 17,000 Interest 1,094 1,994 3,986 5,904 --------- --------- --------- --------- Total costs and expenses 202,566 176,583 599,755 553,818 Income before taxes 49,141 47,328 138,598 142,113 Income tax provision (benefit) (1,801) 7,099 27,720 21,317 --------- --------- --------- --------- Net income $ 50,942 $ 40,229 $ 110,878 $ 120,796 ========= ========= ========= ========= Net income per share $ .41 $ .33 $ .90 $ 1.00 ========= ========= ========= ========= Weighted average number of shares used in computing per share amounts 123,589 121,334 123,402 120,909 ========= ========= ========= ========= See notes to condensed consolidated financial statements.
Page 3
GENENTECH, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (thousands) (unaudited) Nine Months Ended September 30 ---------------------- 1996 1995 ---------- ---------- Cash flows from operating activities: Net income $ 110,878 $ 120,796 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 46,189 43,702 Deferred income taxes (13,278) - Gain on sales of securities available-for-sale (472) (5,897) Loss on sales of securities available-for-sale 263 - 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 601 32 Changes in assets and liabilities: Receivables and other current assets (30,475) (47,047) Inventories 1,603 10,500 Accounts payable, other current liabilities and other long-term liabilities (10,291) 10,471 ---------- ---------- Net cash provided by operating activities 105,018 138,932 Cash flows from investing activities: Purchases of securities held-to-maturity (543,833) (481,551) Proceeds from maturities of securities held-to-maturity 580,304 666,366 Purchases of securities available-for-sale (237,803) (243,729) Proceeds from sales of securities available-for-sale 134,814 35,800 Purchases of non-marketable equity securities (7,523) - Proceeds from sale of a non-marketable equity security - 703 Capital expenditures (86,574) (38,290) Change in other assets 3,130 (32,594) ---------- ---------- Net cash used in investing activities (157,485) (93,295) Cash flows from financing activities: Stock issuances 61,821 45,607 Additions to long-term debt and short-term borrowings - 27,224 Repayment of long-term debt, including current portion (358) (646) ---------- ---------- Net cash provided by financing activities 61,463 72,185 ---------- ---------- Net increase in cash and cash equivalents 8,996 117,822 Cash and cash equivalents at beginning of period 137,043 66,713 ---------- ---------- Cash and cash equivalents at end of period $ 146,039 $ 184,535 ========== ========== See notes to condensed consolidated financial statements.
Page 4
GENENTECH, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (thousands) (unaudited) September 30, December 31, 1996 1995 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 146,039 $ 137,043 Short-term investments 519,538 603,296 Accounts receivable, net (including amounts from related parties: 1996-$54,309; 1995-$19,281) 196,413 172,160 Inventories 92,045 93,648 Prepaid expenses and other current assets 46,064 39,267 ------------ ------------ Total current assets 1,000,099 1,045,414 Long-term marketable securities 510,582 356,475 Property, plant and equipment, less accumulated depreciation (1996-$308,391; 1995-$268,751) 549,059 503,654 Other assets 111,245 105,452 ------------ ------------ Total assets $ 2,170,985 $ 2,010,995 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts and notes payable $ 30,215 $ 37,459 Other current liabilities (including amounts due to related parties: 1996-$9,847; 1995-$8,745) 186,275 195,985 ------------ ------------ Total current liabilities 216,490 233,444 Long-term debt 150,000 150,000 Other long-term liabilities 25,071 25,504 ------------ ------------ Total liabilities 391,561 408,948 Stockholders' equity: Preferred stock - - Special common stock 891 853 Common stock 1,532 1,532 Other stockholders' equity 1,777,001 1,599,662 ------------ ------------ Total stockholders' equity 1,779,424 1,602,047 ------------ ------------ Total liabilities and stockholders' equity $ 2,170,985 $ 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 nine-month periods ended September 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 Page 6 GENENTECH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 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 September 30, 1996, included $28.4 million primarily related to HLR's exercise of its option with respect to the development of nerve growth factor (NGF) outside of the United States. Contract revenue year to date 1996 also includes the following HLR option exercises related to product development outside of the United States: $17.1 million in the first quarter for IDEC-C2B8 (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); and $19.3 million in the second quarter for insulin-like growth factor (IGF-1). All other contract revenue from HLR in the three and nine month periods ended September 30, 1996 totaled $7.6 million and $14.6 million, respectively. 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; and class action lawsuits regarding Protropin. In addition, in 1995 the Company received and responded to grand jury document subpoenas from the United States District Court for the Northern District of California for documents relating to 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 were defendants in a number of suits filed in Delaware, which were 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 entered into a memorandum of understanding settling all claims against the defendants in these actions. In August 1996, a Delaware Chancery Court approved the settlement, and the appeal period for the settlement expired in September 1996. In connection with the settlement, Roche agreed to increase the prices at which it may 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; Genentech paid the plaintiffs' attorneys' fees; and in connection with the then proposed merger, Genentech absorbed the termination costs of 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 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 human growth hormone products will be permanently enjoined from the U.S. market. On May 28, 1996, the Company filed a suit for patent infringement and declaratory judgment of patent infringement in the Federal District Court for the District of Massachusetts against Boehringer Mannheim GmbH (BM) 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. On May 24, 1996, Genentech and its licensee, Boehringer Ingelheim GmbH, filed suit in the commercial court in Dusseldorf, Germany, against BM alleging that BM's manufacture of Reteplase in Germany infringes one of Genentech's European patents relating to Activase. A separate lawsuit brought by BM in Munich, Germany, alleging that Reteplase does not infringe Genentech's patent, has been consolidated by the German court with the lawsuit in Dusseldorf. A hearing on those cases is scheduled to take place in Dusseldorf in March 1997. 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. Page 8 GENENTECH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 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. Note 5. Inventories Inventories at September 30, 1996 and December 31, 1995 are summarized below: 1996 1995 ---------- ---------- (thousands) Raw materials $ 18,261 $ 12,808 Work in process 62,746 67,239 Finished goods 11,038 13,601 ---------- ---------- Total $ 92,045 $ 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 nine months ended September 30, 1995, would have been reduced by $11.8 million or $.10 per share 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 Securities 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 to the quasi-reorganization had been fully utilized; thus there was no impact for the three months ending September 30, 1995 or the three or nine month periods ended September 30, 1996. Page 9 GENENTECH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 7. Change in Effective Income Tax Rate The Company's effective income tax rate for the three and nine month periods ended September 30, 1996 was (4)% and 20%, respectively, compared to 15% in the comparable periods of 1995. The third quarter of 1996 includes a reduction in the tax provision of $11.6 million in order to adjust the year to date rate from 33% to 20%, resulting in a net tax benefit of $1.8 million for the quarter. Genentech is reviewing its operating plan for 1997 and beyond. In connection with that review, the Company has decided not to implement, at this time, the previously announced approach for research and development funding and manufacturing by international subsidiaries of certain of its development products, which are progressing in clinical trials. As a result of the latest change, the Company's effective tax rate is expected to be 20% for the fourth quarter and full year 1996, rather than 33% as previously announced. The rate increase to 20% on a year to date basis in 1996 from 15% in the prior year is due to the recognition of a greater amount of tax credit carryforwards in 1995 than in 1996. 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 September 30, 1996, included $28.4 million primarily related to HLR's exercise of its option with respect to the development of nerve growth factor (NGF) outside of the United States. Contract revenue year to date 1996 also includes the following HLR option exercises related to product development outside of the United States: $17.1 million in the first quarter for IDEC-C2B8 (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); and $19.3 million in the second quarter for insulin-like growth factor (IGF-1). All other contract revenue from HLR in the three and nine month periods ended September 30, 1996 totaled $7.6 million and $14.6 million, respectively. Page 11
RESULTS OF OPERATIONS (dollars in millions, except per share amounts) Quarter ended Nine months ended September 30 September 30 ---------------------- ------------------------ REVENUES 1996 1995 % Change 1996 1995 % Change - ---------------------- ------ ------ -------- ------ ------ -------- Revenues $251.7 $223.9 12% $738.4 $695.9 6% ====== ====== ======== ====== ====== ======== PRODUCT SALES - ---------------------- Activase $ 65.4 $ 73.2 (11)% $214.3 $225.5 (5)% Protropin and Nutropin 57.6 54.2 6 167.6 164.5 2 Pulmozyme 18.0 30.1 (40) 57.7 88.9 (35) Actimmune 1.5 1.0 50 3.5 2.9 21 ------ ------ -------- ------ ------ -------- Total product sales $142.5 $158.5 (10)% $443.1 $481.8 (8)% ====== ====== ======== ====== ====== ========
Overall product sales in the three and nine month periods ended September 30, 1996 decreased from the comparable periods in 1995, as reflected in the table above, primarily due to the fact that product sales to customers in Europe and Canada are now made by HLR 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 third quarter of 1996, Genentech's product sales to HLR for Canadian and European sales were $1.7 million; in the comparable period of 1995 Genentech's sales to customers in these regions were $17.3 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 third quarter of 1996 were $142.5 million, compared to $141.2 million in 1995. In the year to date period, on a pro forma basis, total product sales were $443.1 million in 1996 and $434.3 million in 1995. Year to date sales to HLR for Canadian and European sales in 1996 were $11.2 million; in 1995 Genentech's customer sales in these regions were $47.5 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 tissue plasminogen activator), decreased in the third quarter of 1996 compared to the third quarter of 1995 (see table above), due to lower U.S. sales attributable to a drop in market size as discussed below, as well as the impact of not having Canadian customer sales in 1996 (such third quarter sales were $3.5 million in 1995). On a pro forma basis as described above, 1996 third quarter sales of Activase were $65.4 million, compared to $69.7 million in the third quarter of 1995. On a year to date basis, Activase sales decreased due to the loss of Canadian customer sales ($9.4 million on a year to date basis in 1995), as well as 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 $214.3 million in 1996 compared to $216.1 million in 1995. Although Activase's market share remains at approximately 80%, the overall size of the thrombolytic market during the third quarter of 1996 declined by approximately 6% from the third quarter of 1995 as a result of the increasing use of mechanical reperfusion rather than thrombolytic therapy, as well as patients Page 12 receiving therapy through ongoing clinical trials. 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. 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) - increased in the third quarter and year to date periods of 1996 over the comparable periods in 1995 (see table above), due to higher U.S. sales. On a pro forma basis, growth hormone sales were $57.6 million in the third quarter of 1996 compared to $53.4 million in 1995, and on a year to date pro forma basis sales were $167.6 million in 1996 compared to $162.3 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 in the three and nine month periods ended September 30, 1996 from the comparable periods in 1995, as reflected in the table above, primarily in conjunction with the Agreement with Roche. 1995 Pulmozyme sales included $13.0 million of sales to European and Canadian customers in the third quarter, and $35.9 year to date in 1995. In 1996, sales in these territories are made by HLR. On a pro forma basis, Pulmozyme sales were $18.0 million in the third quarter of 1996, compared to $17.1 million in the third quarter of 1995. Pro forma sales were $57.7 million year to date in 1996, and $53.0 in 1995. In October 1996, the Pulmonary-Allergy Drug Advisory Committee to the FDA recommended Pulmozyme for marketing clearance for treatment of cystic fibrosis (CF) patients with advanced disease. The Advisory Committee further recommended that Genentech continue to study the long-term outcome of CF patients.
Quarter ended Nine months ended September 30 September 30 ROYALTIES, CONTRACT AND ---------------------- ------------------------ OTHER, AND INTEREST INCOME 1996 1995 % Change 1996 1995 % Change - ----------------------------- ------ ------ -------- ------ ------ -------- Royalties $54.4 $45.6 19% $160.5 $142.2 13% Contract and other 38.9 4.5 764 88.0 28.6 208 Interest income 15.9 15.3 4 46.8 43.4 8
Royalty income increased 19% in the quarter ended September 30, 1996, and 13% 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 nine months 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. Page 13 Contract and other income increased in the third quarter of 1996 over the third quarter of 1995 primarily due to $28.4 million of contract revenue from HLR primarily related to HLR's exercise of its option regarding NGF, as previously discussed. For the year to date period, contract and other income increased $59.4 million, and included the NGF revenue plus $17.1 million in the first quarter of 1996 related to HLR's exercise of its option regarding IDEC-C2B8, and $19.3 in the second quarter from HLR's IGF-1 option exercise. All other contract revenue from HLR in the three and nine month periods ended September 30, 1996 totaled $7.6 million and $14.6 million, respectively. The increase attributable to contract revenue from HLR was partially offset by two factors - the inclusion in other income in the first nine months of 1995 of $6.4 million of gains on sales on biotechnology equity securities; and a decrease in other contract revenue in 1996 resulting from normal variations in the timing of contract benchmark achievements and payments. Interest income increased in 1996 compared to 1995 due to a larger investment portfolio. The total investment portfolio, consisting of cash and cash equivalents, and short- and long-term marketable securities, increased to $1,176.2 million as of September 30, 1996 from $1,080.2 million as of September 30, 1995, and from $1,096.8 million as of December 31, 1995.
Quarter ended Nine months ended September 30 September 30 ---------------------- ------------------------ COSTS AND EXPENSES 1996 1995 % Change 1996 1995 % Change - ----------------------------- ------ ------ -------- ------ ------ -------- Cost of sales $ 24.8 $ 24.4 2% $ 77.9 $ 75.4 3% Research and development 114.8 86.0 33 343.0 268.1 28 Marketing, general and administrative 61.9 55.2 12 174.9 187.4 (7) Special charge (merger related) - 9.0 (100) - 17.0 (100) Interest expense 1.1 2.0 (45) 4.0 5.9 (32) ------ ------ -------- ------ ------ -------- Total costs and expenses $202.6 $176.6 15% $599.8 $553.8 8% ====== ====== ======== ====== ====== ========
Cost of sales as a percent of product sales increased in the third quarter of 1996 over the third 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 similarly 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 33% and 28% in the third quarter and year to date periods of 1996, respectively, over the comparable periods in 1995 due to increased expenditures for scale-up, material production and clinical trials for products in late stage development, including IGF-1, currently in Phase III trials for diabetes, and IDEC-C2B8, which recently completed Phase III Page 14 clinical trials for treating non-Hodgkin's B-cell lymphoma, with results expected by year end; costs to license technology from collaborative partners; and expenses for the increased number of projects in early stage development, including two projects which are currently being prepared to enter Phase I clinical trials - vascular endothelial growth factor (VEGF) for coronary ischemic disease, and an anti-VEGF antibody for cancer. R&D as a percent of revenue was approximately 46% in both the quarter and year to date periods in 1996. Marketing, general and administrative (MG&A) expenses increased in the quarter ended September 30, 1996 versus the comparable period in 1995 primarily due to higher general and administrative (G&A) costs attributable to the timing of various corporate expenses, and higher royalty expense related to increased royalty revenue from non-Roche licensees. The increase in G&A in the quarter more than offset a decrease in marketing and sales expense resulting from the closure of the Company's European and Canadian operations in conjunction with the Agreement. On a year to date basis, MG&A expenses decreased in 1996 compared to 1995 primarily due to the foreign operations' closure. 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 Nine months ended September 30 September 30 --------------------- ------------------------ INCOME TAXES 1996 1995 1996 1995 - -------------------------- -------- -------- ---------- ---------- Income taxes $(1.8) $ 7.1 $ 27.7 $ 21.3 The Company's effective income tax rate for the three and nine month periods ended September 30, 1996 was (4)% and 20%, respectively, compared to 15% in the comparable periods of 1995. Genentech is reviewing its operating plan for 1997 and beyond. In connection with that review, the Company has decided not to implement, at this time, the previously announced approach for research and development funding and manufacturing by international subsidiaries of certain of its development products, which are progressing in clinical trials. The large number of products which remain in late stage clinical development at this time will potentially require high levels of financial and human resources, necessitating focusing on successful development of these projects utilizing domestic, rather than international, manufacturing facilities and resources. As a result of the latest change, the Company's tax rate is expected to be 20% for the fourth quarter and for the full year 1996, rather than 33% as previously announced. The third quarter results include a reduction in the tax provision of $11.6 million in order to adjust the year to date rate from 33% through the second quarter of 1996, to 20% in the third quarter. This results in a net $1.8 million tax benefit for the quarter. The rate increase to 20% in 1996 from 15% in 1995 is due to the recognition of a greater amount of tax credit carryforwards in 1995 than in the 1996. Quarter ended Nine months ended September 30 September 30 ---------------------- ------------------------ NET INCOME 1996 1995 % Change 1996 1995 % Change - ------------------------- ------ ------ -------- ------ ------ -------- Net income $50.9 $40.2 27% $110.9 $120.8 (8)% Earnings per share $ .41 $ .33 $ .90 $ 1.00 Page 15 Net income increased in the third quarter of 1996 over the third quarter of 1995 due to higher contract and royalty revenue and a net income tax benefit for the quarter, partially offset by higher expenses, primarily R&D. On a year to date basis, net income decreased in 1996 compared to 1995 due to higher R&D and income tax expenses, partially offset by increased contract and royalty revenue. LIQUIDITY AND CAPITAL RESOURCES September 30, 1996 December 31, 1995 - ----------------------------- -------------------- ------------------- Cash, cash equivalents, $ 1,176.2 $ 1,096.8 short-term investments and long-term marketable securities Working capital 783.6 812.0 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 September 30, 1996 rose slightly compared to December 31, 1995, and working capital decreased $28.4 million. Capital expenditures totaled $86.6 million in the first nine months of 1996 compared to $38.3 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, increased competition in the growth hormone and thrombolytic markets, and the timing and amount of bulk shipments to licensees. Activase Sales - The Company faces new competition in the thrombolytic market. Genentech is aware that one company received FDA approval in October, 1996, to market its product for the treatment of acute myocardial infarction (AMI) in the United States. Genentech has brought suit against that company for patent infringement. In addition, there is an increasing use of mechanical reperfusion in the treatment of AMI patients in lieu of the use of thrombolytic therapy. 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 additional competitive products, pricing decisions made by the Company, the outcome of litigation against Boehringer Mannheim GmbH and Boehringer Mannheim Corporation involving the Company's patents for tissue plasminogen activator and processes related to its production, the increasing use of other therapies such as mechanical reperfusion techniques for the treatment of AMI, and the impact of the FDA's recent clearance for the Company to market Activase for the treatment of acute ischemic stroke. Page 16 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, and a fourth company received FDA approval in October 1996, 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 "Results of Operations" for further information). Two of Genentech's competitors have received approval to market their existing human growth hormone products for additional indications. 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 other new competitive products, the outcome of litigation involving the Company's patents for human 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. 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 (including the impact of competition), 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 its effective tax rate will increase from the current rate of 20% to approximately 35% in 1997, and continue at or near 35% for the next several years dependent upon several factors. These factors include, but are not limited to, changes in tax laws and rates, future levels of R&D spending, the outcome of clinical trials of certain development products, the Company's success in commercializing such products, and potential competition regarding the products. Page 17 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 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 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 and contract revenues, and expenses. 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 September 30, 1996, and the related condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 1996 and 1995, and the condensed consolidated statements of cash flows for the nine-month periods ended September 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 October 9, 1996 Page 19 GENENTECH, INC. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On July 9, 1996, Genentech 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. Tanox had filed a lawsuit against Genentech relating to the development of anti-IgE, and Genentech had filed a patent infringement suit against Tanox and Ciba-Geigy Ltd., which is jointly developing anti-IgE antibodies with Tanox. The three companies 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. On August 26, 1996, a Delaware Chancery Court approved the settlement of a consolidated stockholder class action lawsuit filed following the announcement of Genentech's new agreement with Roche Holdings, Inc. (Roche) in October 1995, and the appeal period expired 30 days later. In connection with the settlement, Roche agreed to increase the prices at which it may cause Genentech to redeem the non-Roche owned special common stock by $0.50 per share per quarter, with a final redemption price of $82.50 in the quarter ending June 30, 1999. Genentech paid the plaintiff's attorneys' fees and, in connection with the then proposed merger, absorbed the termination costs of six Europe-based Genentech employees. See also Note 4 "Legal Proceedings" in Part I "Notes to Condensed Consolidated Financial Statements." 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 September 30, 1996. Page 20 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: November 14, 1996 GENENTECH, INC. /S/ARTHUR D. LEVINSON /S/LOUIS J. LAVIGNE, JR. ------------------------------------- ---------------------------- 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 21 EX-27 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 SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO. 9-MOS DEC-31-1996 SEP-30-1996 146,039 1,030,120 196,413 0 92,045 1,000,099 857,450 308,391 2,170,985 216,490 150,000 0 0 2,423 1,777,001 2,170,985 443,105 738,353 77,868 77,868 343,008 0 3,986 138,598 27,720 110,878 0 0 0 110,878 .90 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 OR STATEMENT OF CASH FLOWS.
EX-15.1 3 Exhibit 15.1 November 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 October 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 nine months ended September 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-----