-----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, WdTdFompZqcpGi9SRJN14a5btkNLlBMrgGfAhbFsVdzxNspJu1rBbKsk0dKXH3xQ N2cXHHKPj50iGUk0d+GT1Q== 0000891618-99-003174.txt : 19990719 0000891618-99-003174.hdr.sgml : 19990719 ACCESSION NUMBER: 0000891618-99-003174 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 19990716 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: S-3/A SEC ACT: SEC FILE NUMBER: 333-80601 FILM NUMBER: 99665577 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 S-3/A 1 AMENDMENT NO. 3 TO FORM S-3 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 16, 1999 REGISTRATION NO. 333-80601 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 3 TO FORM S-3 ------------------------ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ GENENTECH, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-2347624 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1 DNA WAY SOUTH SAN FRANCISCO, CALIFORNIA 94080-4990 (650) 225-1000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ STEPHEN G. JUELSGAARD, ESQ. SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY GENENTECH, INC. 1 DNA WAY SOUTH SAN FRANCISCO, CALIFORNIA 94080-4990 (650) 225-1000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: RICHARD A. DRUCKER, ESQ. GERALD S. TANENBAUM, ESQ. DAVIS POLK & WARDWELL CAHILL GORDON & REINDEL 450 LEXINGTON AVENUE 80 PINE STREET NEW YORK, NEW YORK 10017 NEW YORK, NEW YORK 10005 (212) 450-4000 (212) 701-3000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered in connection with dividend or interest reinvestment plans, please check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------------- If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------------- If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------------- If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS Subject to Completion Dated July 16, 1999 20,000,000 Shares [Genentech] Common Stock Roche Holdings, Inc. is offering all of these shares of our common stock and will receive all of the proceeds of this offering. Our common stock has been approved for listing on the New York Stock Exchange under the symbol "DNA", subject to official notice of issuance. It is estimated that the initial public offering price of our common stock will be between $85.00 per share and $95.00 per share. Prior to this offering, we had two classes of common stock outstanding: our common stock, offered hereby, and our special common stock. On June 30, 1999, we redeemed all of our special common stock held by stockholders other than Roche Holdings, Inc. at $82.50 per share in cash and retired all of the shares of special common stock including those held by Roche Holdings, Inc. As a result of the redemption of our special common stock, Roche Holdings, Inc. currently owns 100% of our common stock and, after the completion of this offering, Roche Holdings, Inc. will own approximately 84.3% of our common stock. INVESTING IN OUR COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 9. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- ------------------------------------------------------------------------------------------------------------------------- PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT ROCHE HOLDINGS, INC. - ------------------------------------------------------------------------------------------------------------------------- Per Share $ $ $ - ------------------------------------------------------------------------------------------------------------------------- Total $ $ $ - -------------------------------------------------------------------------------------------------------------------------
Roche Holdings, Inc. has granted the underwriters the right to purchase up to an additional 2,000,000 shares of common stock to cover over-allotments. J.P. MORGAN & CO. GOLDMAN, SACHS & CO. MERRILL LYNCH & CO. WARBURG DILLON READ LLC BANCBOSTON ROBERTSON STEPHENS , 1999 3 TABLE OF CONTENTS
PAGE Prospectus Summary.......................... 1 Risk Factors................................ 9 Special Note Regarding Forward-Looking Statements................................ 14 Dividend Policy............................. 15 Price Range of Special Common Stock......... 15 Unaudited Pro Forma Condensed Consolidated Financial Statements...................... 16 Selected Consolidated Financial Data........ 27 Management's Discussion and Analysis of Results of Operations and Financial Condition................................. 28 Business.................................... 40 Management.................................. 56
PAGE Relationship with Roche..................... 65 Selling Stockholder and Principal Stockholders.............................. 70 Description of Capital Stock................ 71 Material U.S. Federal Tax Considerations for Non-U.S. Holders of Common Stock.......... 74 Shares Eligible for Future Sale............. 76 Underwriting................................ 77 Legal Matters............................... 79 Experts..................................... 79 Where You Can Find More Information......... 79 Index to Consolidated Financial Statements................................ F-1
------------------------- Until , 1999, all dealers that effect transactions in the common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. In this prospectus, "Genentech," "we," "us" and "our" refer to Genentech, Inc. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. Roche Holdings, Inc. is offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock. We have not taken any action to permit a public offering of the shares of common stock outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to this offering of the shares of common stock and the distribution of this prospectus outside the United States. ------------------------- We own or have rights to various copyrights, trademarks and trade names used in our business including the following: Actimmune(R) interferon gamma-1b; Activase(R) (alteplase, recombinant) tissue-plasminogen activator; Herceptin(R)(trastuzumab) anti-HER2 antibody; Nutropin(R) (somatropin (rDNA origin) for injection) growth hormone; Nutropin AQ(R) (somatropin (rDNA origin) injection) liquid formulation growth hormone; Nutropin Depot(TM) encapsulated sustained-release growth hormone; Protropin(R) (somatrem for injection) growth hormone; Pulmozyme(R) (dornase alfa, recombinant) inhalation solution; Rituxan(R) (rituximab) antibody; and Xubix(TM)(sibrafiban) oral IIb/IIIa antagonist. This prospectus also includes trademarks, service marks and trade names of other companies. 4 PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before deciding to invest in our common stock. We urge you to read this entire prospectus carefully, including the "Risk Factors" section, the consolidated financial statements and the notes to those statements and the unaudited pro forma condensed consolidated financial statements and the notes to those statements. GENENTECH, INC. Genentech is a leading biotechnology company that uses human genetic information to discover, develop, manufacture and market human pharmaceuticals for significant unmet medical needs. Twelve of the approved products of biotechnology stem from our science. Science at Genentech focuses primarily on two areas of medicine: cardiovascular and oncology. We also pursue projects where there exists a significant opportunity to fill a therapeutic void in other important areas of medicine, such as with our growth hormone products. In 1998, we had total revenues of $1,150.9 million and net income of $181.9 million. We manufacture and market the following seven products directly in the United States: - Herceptin(R) antibody for the treatment of certain patients with metastatic breast cancer whose tumors overexpress the human epidermal growth factor receptor2, or HER2, protein; - Rituxan(R) (rituximab) antibody for the treatment of patients with relapsed or refractory low-grade or follicular, CD20-positive B-cell non-Hodgkin's lymphoma; - Activase(R) tissue plasminogen activator, or t-PA, for the treatment of heart attack, acute ischemic stroke within three hours of the onset of symptoms, and acute massive pulmonary embolism; - Protropin(R) growth hormone for the treatment of lack of adequate endogenous growth hormone secretion, or growth hormone deficiency, in children; - Nutropin(R) growth hormone for the treatment of growth hormone deficiency in children and adults, growth failure associated with chronic renal insufficiency prior to kidney transplantation and short stature associated with Turner syndrome; - Nutropin AQ(R) liquid formulation growth hormone for the same indications as Nutropin; and - Pulmozyme(R) inhalation solution for the management of cystic fibrosis. We receive royalties on sales of our products in Canada, on sales of Pulmozyme outside of the United States and on sales of rituximab outside of the United States (excluding Japan) from F. Hoffmann-La Roche Ltd, an affiliate of Roche Holdings, Inc., commonly known as Hoffmann-La Roche. We receive royalties on sales of growth hormone products and t-PA outside of the United States and Canada through other licensees. We also receive worldwide royalties on five additional licensed products that originated from our technology and are marketed by other companies. We currently have 17 projects in our development pipeline, including four products or indications in preparation for Phase III clinical trials, four products or indications in Phase III clinical trials, one product for which Phase III clinical trials have been completed and for which we are preparing regulatory filings to seek marketing approval in the United States, and one product for which we have made such regulatory filings and are awaiting regulatory clearance. Our principal executive offices are located at 1 DNA Way, South San Francisco, California 94080-4990 and our telephone number is (650) 225-1000. 1 5 RELATIONSHIP WITH ROCHE HOLDINGS, INC. Since 1990, Roche Holdings, Inc., a Delaware corporation, commonly known as Roche, has been our majority stockholder. Roche is an indirect, wholly owned subsidiary of Roche Holding Ltd, a Swiss company, and is the holding company for the principal operating subsidiaries of Roche Holding Ltd in the United States. Roche Holding Ltd, through its various direct and indirect subsidiaries, engages primarily in the development and manufacture of pharmaceuticals, vitamins and fine chemicals, diagnostics, flavors and fragrances, and in the business of analytical laboratory services. On June 30, 1999, we redeemed all of our special common stock held by stockholders, other than Roche, at $82.50 per share in cash and retired all of the shares of special common stock including those held by Roche. As a result, Roche currently owns 100% of our outstanding common stock. After the completion of this offering, Roche will own approximately 84.3% of our common stock. In connection with this offering, we will enter into certain affiliation arrangements with Roche, amend our licensing and marketing agreement with Hoffmann-La Roche, and enter into a tax sharing agreement with Roche. Affiliation Arrangements Prior to the completion of this offering, we will amend our certificate of incorporation and bylaws and enter into an affiliation agreement with Roche. In order to provide continuity while at the same time reflecting Roche's controlling interest in our company, the size and composition of our board of directors will change. Upon completion of this offering, our board will consist of two Roche directors, three independent directors nominated by a nominating committee currently controlled by Roche, and one Genentech employee. Arthur D. Levinson, Ph.D., the President and Chief Executive Officer of Genentech, will serve as the Genentech employee director and chairman of the board. However, under the new affiliation agreement, Roche will have the right to obtain proportional representation on our board at any time. Roche intends to continue to allow our current management to conduct our business and operations as we have done in the past. However, we cannot assure you that Roche will not implement a new business plan in the future. Except as follows, the affiliation arrangements will not limit Roche's ability to buy or sell our common stock. If Roche and its affiliates sell their majority ownership of shares of our common stock to a successor, Roche has agreed that it will cause the successor to purchase all shares of our common stock not held by Roche as follows: - with consideration, if that consideration is composed entirely of either cash or equity traded on a U.S. national securities exchange, in the same form and amounts per share as received by Roche and its affiliates; and - in all other cases, with consideration that has a value per share not less than the weighted average value per share received by Roche and its affiliates as determined by a nationally recognized investment bank. If Roche owns more than 90% of our common stock for more than two months, Roche has agreed that it would, as soon as reasonably practicable, effect a merger of Genentech with Roche or an affiliate of Roche. Roche has agreed, as a condition to any merger of Genentech with Roche or the sale of our assets to Roche, that either: - the merger or sale must be authorized by the favorable vote of a majority of non-Roche stockholders, provided no person will be entitled to cast more than 5% of the votes at the meeting; or - in the event such a favorable vote is not obtained, the value of the consideration to be received by non-Roche stockholders would be equal to or greater than the average of the means of the ranges of fair values for the common stock as determined by two nationally recognized investment banks. We have agreed not to approve, without the prior approval of the directors designated by Roche: - any acquisition, sale or other disposal of all or a portion of our business representing 10% or more of our assets, net income or revenues; - any issuance of capital stock except under certain circumstances; or - any repurchase or redemption of our capital stock other than a redemption required by the terms of any security and purchases made at fair market value in connection with any of our deferred compensation plans. 2 6 For more information about our relationship with Roche and its impact on investors, please read "Relationship with Roche" and "Risk Factors--Roche, Our Controlling Stockholder, May Have Interests That Are Adverse to Yours" below. Licensing Agreement We have, in the past, cooperated in various business collaborations with Roche. We expect such cooperation to continue. In 1995, we entered into a licensing and marketing agreement with Hoffmann-La Roche and its affiliates granting it a ten-year option to license to use and sell products in non-U.S. markets. In connection with this offering, we will amend that agreement, the major provisions of which include: - extending Hoffmann-La Roche's option until at least 2015; - Hoffmann-La Roche may exercise its option to license our products upon the occurrence of any of the following: (1) our decision to file an Investigational New Drug exemption application, or IND, for a product, (2) completion of a Phase II trial for a product or (3) if Hoffmann-La Roche previously paid us a fee of $10 million to extend its option on a product, completion of a Phase III trial for that product; - we have agreed, in general, to manufacture for and supply to Hoffmann-La Roche its clinical requirements of our products at cost, and its commercial requirements at cost plus a margin of 20%; however, Hoffmann-La Roche will have the right to manufacture our products under certain circumstances; - Hoffmann-La Roche has agreed to pay, for each product for which Hoffmann-La Roche exercises its option upon either a decision to file an IND with the U.S. Food and Drug Administration, or FDA, or completion of the Phase II trials, a royalty of 12.5% on the first $100 million on its aggregate sales of that product and thereafter a royalty of 15% on its aggregate sales of that product in excess of $100 million until the later in each country of the expiration of our last relevant patent or 25 years from the first commercial introduction of that product; and - Hoffmann-La Roche will pay, for each product for which Hoffmann-La Roche exercises its option after completion of the Phase III trials, a royalty of 15% on its sales of that product until the later in each country of the expiration of our relevant patent or 25 years from the first commercial introduction of that product; however, $5 million of any option extension fee paid by Hoffmann-La Roche will be credited against royalties payable to us in the first calendar year of sales by Hoffmann-La Roche in which aggregate sales of that product exceed $100 million. For more information about this agreement, see "Business--Licensing Agreements with F. Hoffmann-La Roche Ltd--Amended and Restated Licensing Agreement." Tax Sharing Agreement After the redemption of our special common stock, we will be included in Roche's U.S. federal consolidated income tax group. As a result, our tax liability will be included in the consolidated federal income tax liability of Roche and its subsidiaries. We also will be included with Roche and/or one or more Roche subsidiaries in consolidated or combined income tax groups for certain state and local tax jurisdictions. Accordingly, we will enter into a tax sharing agreement with Roche. Pursuant to the tax sharing agreement, we and Roche will make payments so that the net amount paid by us on account of Roche's consolidated or combined taxes will be determined as though Genentech had filed separate, stand-alone income tax returns as the common parent of a group of corporations rather than a consolidated subsidiary of Roche. For more information about the tax sharing agreement, you should read "Relationship with Roche--Tax Sharing Agreement." Roche's Right to Maintain its Percentage Ownership Interest in Our Stock We expect from time to time to issue additional shares of common stock in connection with our stock option and stock purchase plans, and we may issue additional shares for other purposes. In order to preserve our status as a member of Roche's consolidated federal income tax group, the affiliation agreement will require us to, among other things, establish a stock repurchase program designed to maintain Roche's percentage ownership interest in our common stock. In addition, Roche will have a continuing option to buy stock from us at prevailing market prices to maintain its percentage ownership interest. For more information you should read "Relationship with Roche--Roche's Right to Maintain its Percentage Ownership Interest in Our Stock." 3 7 THE OFFERING COMMON STOCK OFFERED BY ROCHE........20,000,000 shares OVER-ALLOTMENT OPTION FROM ROCHE.....2,000,000 shares COMMON STOCK OUTSTANDING AFTER THE OFFERING.............................127,298,588 shares USE OF PROCEEDS......................We will not receive any of the net proceeds from this offering. DIVIDEND POLICY......................We do not intend to declare or pay any cash dividends on our common stock in the foreseeable future. We plan to retain any earnings for use in the operation of our business and to fund future growth. NEW YORK STOCK EXCHANGE SYMBOL......."DNA" Unless we specifically state otherwise, the information in this prospectus does not take into account the sale of up to 2,000,000 shares of common stock by Roche that the underwriters have the option to purchase solely to cover over-allotments. The number of shares of our common stock outstanding listed above does not take into account approximately 10,500,000 shares of common stock that may be issued upon exercise of either outstanding stock options or stock options which will be issued prior to this offering. 4 8 SUMMARY CONSOLIDATED FINANCIAL DATA The following table presents summary consolidated financial data for our company. The historical and pro forma data presented in this table are derived from our reported consolidated financial statements and notes thereto and unaudited pro forma condensed consolidated financial statements and notes thereto, respectively, which are included elsewhere in this prospectus. The pro forma information gives effect to the June 1999 redemption of our special common stock as if it occurred at January 1, 1998 in the case of the statement of operations data and March 31, 1999 in the case of the balance sheet data. The pro forma information also gives effect to the 1990 through 1997 purchases of our common stock and special common stock by Roche. The pro forma statement of operations data for the year ended December 31, 1998 includes amortization of goodwill ($154.4 million) and other intangibles ($228.5 million) and reflects the sale of inventories adjusted to fair value (such adjustment totalling $191.8 million) related to the allocation to our financial statements of Roche's purchase prices and our redemption of the special common stock. The pro forma statement of operations data for the three months ended March 31, 1999 includes amortization of goodwill ($38.6 million) and other intangibles ($57.1 million) related to the allocation of Roche's purchase prices and our redemption of the special common stock to our financial statements. The unaudited pro forma statement of operations data for the three months ended March 31, 1999 excludes an adjustment for the sale of inventories adjusted to fair value as it is assumed that these inventories were sold in 1998 as there is approximately twelve months of inventory on hand. The pro forma statements of operations data also reflect the book tax benefits related to each of these pre- tax pro forma adjustments other than goodwill (which has and will have no book tax benefit) at a 40% marginal rate. For more information regarding this pro forma data, you should read the "Unaudited Pro Forma Condensed Consolidated Financial Statements" elsewhere in this prospectus.
------------------------------------------------------------------------------------------------ THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ------------------------------------------- ------------------------------------------------ PRO FORMA PRO FORMA 1999 1999 1998 1998 1998 1997 1996 ----------- ----------- ----------- ----------- -------- -------- ------ (UNAUDITED) (UNAUDITED) (UNAUDITED) In millions, except per share data STATEMENT OF OPERATIONS DATA Total revenues................. $318.0 $322.3 $264.7 $1,133.7 $1,150.9 $1,016.7 $968.7 Product sales................ 234.1 234.1 164.7 717.8 717.8 584.9 582.8 Royalties.................... 46.6 46.6 64.5 229.6 229.6 241.1 214.7 Contract and other........... 19.2 19.2 14.9 114.8 114.8 121.6 107.0 Interest..................... 18.1 22.4 20.6 71.5 88.7 69.1 64.2 Total costs and expenses....... $380.7 $285.0 $207.7 $1,473.0 $ 898.3 $ 846.9 $820.8 Cost of sales................ 45.7 45.7 33.6 330.4 138.6 102.5 104.5 Research and development..... 90.7 90.7 98.2 396.2 396.2 470.9 471.1 Marketing, general and administrative............ 97.2 97.2 74.9 358.9 358.9 269.9 240.1 Special charge -- legal settlement................ 50.0 50.0 -- -- -- -- -- Goodwill amortization........ 38.6 -- -- 154.4 -- -- -- Amortization of other intangibles............... 57.1 -- -- 228.5 -- -- -- Interest..................... 1.4 1.4 1.0 4.6 4.6 3.6 5.1 Income (loss) before taxes..... $(62.7) $ 37.3 $ 57.0 $ (339.3) $ 252.6 $ 169.8 $147.9 Income tax provision (benefit).................... (5.1) 22.9 16.0 (115.8) 70.7 40.8 29.6 Net income (loss).............. $(57.6) $ 14.4 $ 41.0 $ (223.5) $ 181.9 $ 129.0 $118.3 Effective tax rate............. 8% 61% 28% 34% 28% 24% 20% Earnings (loss) per share Basic........................ $(0.45) $ 0.11 $ 0.33 $ (1.78) $ 1.45 $ 1.05 $ 0.98 Diluted...................... (0.45) 0.11 0.32 (1.78) 1.40 1.02 0.95 Weighted average shares outstanding Basic........................ 127.7 127.7 124.8 125.8 125.8 123.0 120.6 Diluted...................... 127.7 132.5 128.8 125.8 129.9 126.4 124.0 Actual shares outstanding at period-end................... 128.0 128.0 125.2 127.1 127.1 124.2 121.4 OTHER DATA Cash flow from operations...... $ 54.4 $ 53.6 $ 68.9 $ 351.1 $ 349.9 $ 118.3 $139.7 Depreciation expense........... 20.2 20.2 16.5 72.7 72.7 58.9 57.6 Amortization expense........... 97.4 1.7 1.4 388.3 5.4 6.6 4.5 Capital expenditures........... 18.2 18.2 21.0 88.1 88.1 154.9 141.8
5 9 SUMMARY CONSOLIDATED FINANCIAL DATA (CONTINUED)
---------------------- AS OF MARCH 31, 1999 ---------------------- PRO FORMA ACTUAL ----------- -------- (UNAUDITED) In millions BALANCE SHEET DATA Cash and cash equivalents, short-term investments and long-term marketable securities........................... $1,378.0 $1,662.5 Working capital............................................. 820.4 942.6 Goodwill and other intangible assets........................ 3,302.3 64.1 Total assets................................................ 6,044.6 2,926.1 Long-term debt.............................................. 150.0 150.0 Total liabilities........................................... 965.5 536.4 Total stockholders' equity.................................. 5,079.1 2,389.7 Total liabilities and stockholders' equity.................. 6,044.6 2,926.1
6 10 RECENT DEVELOPMENTS On July 12, 1999, we announced our 1999 second quarter results.
------------------------------------------------------------- SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30, -------------------------- --------------------------- 1999 1998 1999 1998 ---------- -------- ---------- ------- (UNAUDITED) (UNAUDITED) In millions, except per share data STATEMENT OF OPERATIONS DATA Total revenues.................................... $ 717.5 $532.7 $ 395.2 $268.0 Product sales................................... 503.4 341.0 269.3 176.3 Royalties....................................... 92.6 121.9 46.0 57.4 Contract and other.............................. 77.1 28.9 57.9 14.0 Interest........................................ 44.4 40.9 22.0 20.3 Total costs and expenses.......................... $1,697.9 $419.6 $ 1,412.9 $211.9 Cost of sales................................... 98.4 70.8 52.7 37.2 Research and development........................ 184.9 191.1 94.2 92.9 Marketing, general and administrative........... 214.6 155.5 117.4 80.6 Special charge--legal settlement................ 50.0 -- -- -- Special charge related to redemption............ 1,147.3 -- 1,147.3 -- Interest........................................ 2.7 2.2 1.3 1.2 Income (loss) before taxes........................ $ (980.4) $113.1 $(1,017.7) $ 56.1 Income tax provision (benefit).................... (71.6) 31.7 (94.5) 15.7 Net income (loss)................................. $ (908.8) $ 81.4 $ (923.2) $ 40.4 Earnings (loss) per share Basic........................................... $ (7.09) $ 0.65 $ (7.19) $ 0.32 Diluted......................................... (7.09) 0.63 (7.19) 0.31 Weighted average shares outstanding Basic........................................... 128.1 125.2 128.5 125.6 Diluted......................................... 128.1 129.3 128.5 129.8
---------------------- AS OF JUNE 30, ---------------------- 1999 1998 -------- -------- (UNAUDITED) In millions BALANCE SHEET DATA Cash and cash equivalents, short-term investments and long-term marketable securities........................... $1,721.0 $1,388.3 Working capital............................................. 823.1 1,004.9 Goodwill and other intangible assets........................ 3,269.6 65.0 Total assets................................................ 6,369.4 2,606.7 Long-term debt.............................................. 150.0 150.0 Total liabilities........................................... 1,240.5 447.7 Total stockholders' equity.................................. 5,128.9 2,159.0 Total liabilities and stockholders' equity.................. 6,369.4 2,606.7
For the three months ended June 30, 1999: - Exclusive of charges related to the redemption of our special common stock, net income for the second quarter of 1999 would have been $73.2 million, or 55 cents per share, an increase in earnings per share of 77% over the second quarter of 1998. Year-to-date earnings per share in 1999, excluding the redemption related charges in the second quarter and the legal settlement charge of $50 million in the first quarter of 1999, would have been 99 cents per share, a 57% increase as compared to the same period in 1998. - The accounting treatment under U.S. generally accepted accounting principles requires us to establish a new accounting basis for our assets and liabilities based on the cost of Roche's 1990 through 1997 purchases of our shares and the redemption of our special common stock. Roche's cost of acquiring Genentech is "pushed down" to us and reflected on our financial statements beginning June 30, 1999. The effect of the push-down accounting on our statement of operations is primarily a non-cash adjustment to earnings. In addition to the push-down impact, the special charge includes the cash-out of certain stock options and a non-cash charge related to the continuance of certain stock options. - Due to the redemption of our special common stock and related accounting treatment, we recorded a second quarter net loss of $923.2 million, or a net loss per share of $7.19, as compared to net income of $40.4 million, or 31 cents per share, in the second quarter of 1998. 7 11 - Revenues increased 47% to $395.2 million from $268.0 million in the same quarter of 1998. This revenue growth was driven primarily by sales of Herceptin and Rituxan. Contract revenues increased due to the recognition of $20.3 million corresponding to an adjustment to unrealized gains on marketable securities due to the accounting treatment described above. Contract revenues also include an initial license fee and retroactive royalties from a licensing agreement with Immunex Corporation for ENBREL(R) and a milestone payment from Schwarz Pharma AG related to the FDA filing for Nutropin Depot. The revenue increases were offset partially by a decrease in royalties, primarily related to the expiration of royalties from Eli Lilly and Company in August 1998. - As a result of the redemption of our special common stock and related accounting treatment as described above, we recorded in the second quarter of 1999 a special charge of $1,147.3 million, that includes $752.5 million as a non-cash charge for in-process research and development, $284.5 million primarily for the cash-out of special common stock options and $102.3 million as a non-cash charge for the remeasurement of the value of continuing employee stock options. Product Sales Sales of marketed products increased 53% in the second quarter of 1999 to $269.4 million from $176.3 million in the second quarter of 1998. Sales of Herceptin in the second quarter of 1999 were $46.2 million. We first recorded sales for Herceptin of $30.5 million in the fourth quarter of 1998. An increase of physician acceptance of Herceptin has contributed to a positive sales trend and successful penetration into the breast cancer market. Sales of Rituxan in the second quarter of 1999 increased 114% to $74.4 million from $34.8 million in the second quarter of 1998. This sales increase is due primarily to increased market penetration for the treatment of non-Hodgkin's lymphoma. Sales of Activase during the second quarter of 1999 increased to $58.1 million from $54.1 million in the second quarter of 1998. This increase in Activase sales is due largely to usage in peripheral indications previously served by another company's thrombolytic currently in short supply in the marketplace. This increase is offset in part by a decline in the overall size of the thrombolytic therapy market due to mechanical reperfusion and continued competition. Sales of our three growth hormone products, Protropin, Nutropin and Nutropin AQ, decreased in the second quarter of 1999 to $59.3 million compared to $62.3 million in the second quarter of 1998. This decrease primarily reflects fluctuations in distributor ordering patterns. Sales of Pulmozyme increased to $30.6 million in the second quarter of 1999 compared to $24.1 million in the second quarter of 1998. This increase is due primarily to increased market penetration in the early and mild patient populations for the management of cystic fibrosis, partially offset by a decrease in sales to Hoffmann-La Roche. Total Costs and Expenses Costs and expenses increased during the second quarter of 1999 as compared to the second quarter of 1998 due primarily to redemption related charges described above. Primarily as a result of the increase in product sales, costs of sales increased to $52.7 million in the second quarter of 1999 from $37.2 million in the second quarter of 1998. Research and development expenses of $94.2 million in the second quarter of 1999 were comparable to $92.9 million in the second quarter of 1998. For the quarter, we invested approximately 24% of revenues into research and development, compared to 35% in the second quarter of 1998. This is consistent with the goal of our long-range plan to decrease research and development spending as a percent of revenues as products progress through late-stage clinical trials and revenues increase. Marketing, general and administrative expenses increased to $117.4 million in the second quarter of 1999 from $80.6 million in the second quarter of 1998. This increase was driven primarily by the growth of Rituxan and the resultant profit sharing expense and the introduction of Herceptin, as well as the write-down of certain biotechnology investments. Income taxes reflect a benefit of $94.5 million in the second quarter of 1999 primarily due to the income tax benefit of redemption related charges. This was partially offset by the effect of an increase in the income tax rate on year-to-date earnings. 8 12 RISK FACTORS You should carefully consider each of the risks and uncertainties described below and all of the other information in this prospectus or incorporated by reference before deciding to invest in shares of our common stock. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business. If any of the following risks and uncertainties develop into actual events, our business, financial condition or results of operations could be materially and adversely affected. In such case, the trading price of our common stock could decline. FLUCTUATIONS IN OUR OPERATING RESULTS COULD AFFECT THE PRICE OF OUR COMMON STOCK Our operating results may vary from period to period for several reasons including, but not limited to: - the overall competitive environment for our products; - the amount and timing of sales to customers in the United States; - the amount and timing of our sales to Hoffmann-La Roche and the timing of its sales to its customers; - the timing and volume of bulk shipments to licensees; - the availability of third-party reimbursements for the cost of therapy; - the effectiveness and safety of our products; - the rate of adoption and use of our products for approved indications and additional indications; - the potential introduction of new products and additional indications for existing products in 1999 and beyond; and - the ability to manufacture sufficient quantities of any particular marketed product. These fluctuations may not match the expectations of securities analysts and investors. This could cause the trading price of our common stock to decline. THE RESULTS OF OUR RESEARCH AND DEVELOPMENT ARE UNPREDICTABLE Successful pharmaceutical product development is highly uncertain and is dependent on numerous factors, many of which are beyond our control. Products that appear promising in the early phases of development may fail to reach the market for numerous reasons, including, but not limited to: - they may be found to be ineffective or to have harmful side effects in preclinical or clinical testing; - they may fail to receive necessary regulatory approvals; - they may turn out to be uneconomical because of manufacturing costs or other factors; or - they may be precluded from commercialization by the proprietary rights of others or by competing products or technologies for the same indication. Success in preclinical and early clinical trials does not ensure that large-scale clinical trials will be successful. Clinical results are frequently susceptible to varying interpretations that may delay, limit or prevent regulatory approvals. The length of time necessary to complete clinical trials and to submit an application for marketing approval for a final decision by a regulatory authority varies significantly and may be difficult to predict. Factors affecting our research and development expenses include, but are not limited to: - the number of and the outcome of clinical trials currently being conducted by us and/or our collaborators; - the number of products entering into development from late-stage research; - Hoffmann-La Roche's decisions whether to exercise its options to develop and sell our future products in non-U.S. markets and the timing and amount of any related development cost reimbursement; 9 13 - in-licensing activities, including the timing and amount of related development funding or milestone payments; and - future levels of revenues. ROCHE, OUR CONTROLLING STOCKHOLDER, MAY HAVE INTERESTS THAT ARE ADVERSE TO YOURS Upon the completion of this offering, Roche will own approximately 84.3% of our outstanding common stock. Roche may in the future, through open market purchases or otherwise, acquire additional shares of our common stock. Roche will control the outcome of actions requiring the approval of our stockholders. Prior to the completion of this offering, we will amend our certificate of incorporation and bylaws and enter into a new affiliation agreement with Roche. Our bylaws will provide, among other things, that the composition of our board of directors will consist of two Roche directors, three independent directors nominated by a nominating committee and one Genentech employee who in the future will be nominated by the nominating committee. As long as Roche owns in excess of 50% of our common stock, Roche directors will comprise two of the three members of the nominating committee. However, at any time until Roche owns less than 5% of our stock, Roche will have the right to obtain proportional representation on our board. Roche intends to continue to allow our current management to conduct our business and operations as we have done in the past. However, we cannot assure you that Roche will not institute a new business plan in the future. The interests of Roche may conflict with the interests of other holders of common stock. See "Relationship with Roche." The affiliation agreement between us and Roche requires the approval of the directors designated by Roche to make any acquisition or any sale or disposal of all or a portion of our business representing 10% or more of our assets, net income or revenues. Moreover, in order to preserve our status as a member of Roche's consolidated federal income tax group, the affiliation agreement also contains provisions which are designed to enable Roche to maintain its percentage ownership interest in our common stock. These provisions may have the effect of limiting our ability to make acquisitions. For more information, see "Relationship with Roche -- Roche's Right to Maintain its Percentage Ownership Interest in Our Stock." Our certificate of incorporation will include provisions relating to competition by Roche with us, allocations of corporate opportunities, transactions with interested parties and intercompany agreements and provisions limiting the liability of certain people. Our certificate of incorporation will provide that any person purchasing or acquiring an interest in shares of our capital stock shall be deemed to have consented to the provisions in the certificate of incorporation relating to competition with Roche, conflicts of interest, corporate opportunities and intercompany agreements, and such consent may restrict such person's ability to challenge transactions carried out in compliance with such provisions. Persons who are directors and/or officers of ours and who are also directors and/or officers of Roche may choose to take action in reliance on such provisions rather than act in a manner that might be favorable to us but adverse to Roche. Two of our directors currently serve as directors, officers and employees of Roche Holding Ltd and its affiliates. For more information, see "Description of Capital Stock -- Certain Provisions of Genentech's Certificate of Incorporation and Bylaws." WE DEPEND ON SKILLED PERSONNEL AND KEY RELATIONSHIPS The success of our business depends, in large part, on our continued ability to attract and retain highly qualified management, scientific, manufacturing and sales and marketing personnel, and on our ability to develop and maintain important relationships with leading research institutions and key distributors. Competition for such personnel and relationships is intense. In connection with the redemption of our special common stock, two of our existing employee stock option plans terminated and a number of employee options, including many of those held by senior management, were canceled. We intend to issue new employee stock options to attract and retain employees. However, certain provisions of our affiliation agreement with Roche are designed to enable Roche to maintain its percentage ownership interest in our common stock, which may limit our flexibility as to the number of shares we are able to grant under our stock option plans. We cannot assure you that we will be able to attract or retain such personnel or maintain such relationships. See "Management -- Treatment of Options in Connection with the Redemption of the Special Common Stock and the Issuance of Options Prior to this Offering." WE FACE GROWING AND NEW COMPETITION We face growing competition in two of our therapeutic markets and expect new competition in a third market. First, in the thrombolytic market, Activase has lost market share and could lose additional market share to Centocor, Inc.'s Retavase(R); the resulting adverse effect on sales could be material. Retavase received approval from the FDA in October 1996 for the treatment of acute myocardial infarction. In addition, Bristol-Myers Squibb recently completed a Phase III trial for another 10 14 competitive product for the treatment of acute myocardial infarction and it may file for product approval in the near future. There is also an increasing use of mechanical reperfusion in lieu of thrombolytic therapy for the treatment of acute myocardial infarction, which we expect to continue. Second, in the growth hormone market, we continue to face increased competition from five other companies with growth hormone products, although one company has been preliminarily enjoined from selling its product. As a result of this competition, we have experienced a loss in new patient market share. Four of these competitors have also received approval to market their existing human growth hormone products for additional indications. As a result of this competition, our sales of Protropin, Nutropin and Nutropin AQ may decline, perhaps significantly. Third, in the non-Hodgkin's lymphoma market, Coulter Pharmaceutical Inc., or Coulter, recently filed a Biologics License Application, or BLA, for a product that would compete with our product Rituxan. We are also aware of other potentially competitive biologic therapies for non-Hodgkin's lymphoma in development. OTHER COMPETITIVE FACTORS COULD AFFECT OUR PRODUCT SALES Other competitive factors that could affect our product sales include, but are not limited to: - the timing of FDA approval, if any, of competitive products; - our pricing decisions and the pricing decisions of our competitors; - the degree of patent protection afforded to particular products; - the outcome of litigation involving our patents and patents of other companies for products and processes related to production and formulation of those products; - the increasing use and development of alternate therapies; and - the rate of market penetration by competing products. IN CONNECTION WITH THE REDEMPTION OF OUR SPECIAL COMMON STOCK WE WILL RECORD SUBSTANTIAL GOODWILL AND OTHER INTANGIBLES, THE AMORTIZATION OF WHICH WILL ADVERSELY AFFECT OUR EARNINGS As a result of the redemption of our special common stock, Roche currently owns all of our outstanding stock. Because we are wholly owned by Roche, push-down accounting is required under generally accepted accounting principles. Push-down accounting requires that we establish a new accounting basis for our assets and liabilities, based on Roche's cost in acquiring all of our stock. In other words, Roche's cost of acquiring Genentech is "pushed down" to us and reflected on our financial statements. Push-down accounting requires us to record goodwill and other intangible assets of approximately $1,706.0 million and $1,499.1 million, respectively, during the second quarter of 1999. The amortization of this goodwill and other intangible assets will have a significant negative impact on our financial results in future years. In addition, we will continuously evaluate whether events and circumstances have occurred that indicate the remaining balance of this and other intangible assets may not be recoverable. When factors indicate that assets should be evaluated for possible impairment, we may be required to reduce the carrying value of our intangible assets, which could have a material adverse effect on our financial condition and results of operations during the periods in which such a reduction is recognized. We may be required to write down intangible assets in future periods. For more information about push-down accounting, see "Unaudited Pro Forma Condensed Consolidated Financial Statements." OUR ROYALTY AND CONTRACT REVENUES COULD DECLINE Royalty and contract revenues in future periods could vary significantly. Major factors affecting these revenues include, but are not limited to: - Hoffmann-La Roche's decisions whether to exercise its options to develop and sell our future products in non-U.S. markets and the timing and amount of any related development cost reimbursements; - variations in Hoffmann-La Roche's sales and other licensees' sales of licensed products; - the conclusion of existing arrangements with other companies and Hoffmann-La Roche; 11 15 - the timing of non-U.S. approvals, if any, for products licensed to Hoffmann-La Roche and other licensees; - fluctuations in foreign currency exchange rates; - the initiation of new contractual arrangements with other companies; - whether and when contract benchmarks are achieved; - the failure of or refusal of a licensee to pay royalties; and - the expiration or invalidation of patents or other licensed intellectual property. PROTECTING OUR PROPRIETARY RIGHTS IS DIFFICULT AND COSTLY The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions. Accordingly, the breadth of claims allowed in these companies' patents cannot be predicted. Patent disputes are frequent and can preclude commercialization of products. We have in the past been, are currently, and may in the future be involved in material patent litigation. Patent litigation is costly in its own right and could subject us to significant liabilities to third-parties and, if decided adversely, we may need to obtain third-party licenses at a material cost or cease using the technology or product in dispute. The presence of patents or other proprietary rights belonging to other parties may lead to the termination of the research and development of a particular product. We believe that we have strong patent protection or the potential for strong patent protection for a number of our products that generate sales and royalty revenue or that we are developing. However, the courts will determine the ultimate strength of patent protection of our products and those on which we earn royalties. You should read "Business--Legal Proceedings." WE ARE EXPOSED TO MARKET RISK We are exposed to market risk, including changes to interest rates, foreign currency exchange rates and equity investment prices. To reduce the volatility relating to these exposures, we enter into various derivative transactions pursuant to our investment and risk management policies and procedures in areas such as hedging and counterparty exposure practices. We could be exposed to losses related to these financial instruments should one of our counterparties default. Variations in interest rates, foreign currency exchange rates and equity investment prices may also affect our financial results. You should read "Management's Discussion and Analysis of Results of Operations and Financial Condition--Market Risk." WE MAY INCUR MATERIAL LITIGATION COSTS We are subject to legal proceedings, including those matters described in "Business--Legal Proceedings." Litigation to which we are currently or have been subjected relates to, among other things, our patent and intellectual property rights, licensing arrangements with other persons, product liability and financing activities. We cannot predict with certainty the eventual outcome of pending litigation, and we could be required to incur substantial expense in defending these lawsuits. We have in the past taken substantial special charges relating to certain litigation, including a special charge of $50 million in the first quarter of 1999. WE MAY INCUR MATERIAL PRODUCT LIABILITY COSTS The testing and marketing of medical products entail an inherent risk of product liability. We maintain limited product liability insurance coverage. Our business may be materially and adversely affected by a successful product liability claim in excess of our insurance coverage. We cannot assure you that product liability insurance coverage will continue to be available to us in the future on reasonable terms or at all. OUR PRODUCTS ARE SUBJECT TO GOVERNMENTAL REGULATIONS AND APPROVALS The pharmaceutical industry is subject to stringent regulation with respect to product safety and efficacy by various federal, state and local authorities. Of particular significance are the FDA's requirements covering research and development, testing, manufacturing, quality control, labeling and promotion of drugs for human use. A pharmaceutical product cannot be marketed in the United States until it has been approved by the FDA, and then can only be marketed for the indications and claims approved by the FDA. As a result of these requirements, the length of time, the level of expenditures and the laboratory and clinical information required for approval of a New Drug Application, or NDA, or a BLA, are substantial and can require a 12 16 number of years. We cannot be sure that we can obtain necessary regulatory approvals on a timely basis, if at all, for any of the products we are developing, and all of the following could have a material adverse effect on our business: - significant delays in obtaining or failing to obtain required approvals; - loss of or changes to previously obtained approvals; and - failing to comply with existing or future regulatory requirements. Moreover, it is possible that the current regulatory framework could change or additional regulations could arise at any stage during our product development, which may affect our ability to obtain approval of our products. OUR STOCK PRICE, LIKE THAT OF MANY BIOTECHNOLOGY COMPANIES, IS LIKELY TO BE HIGHLY VOLATILE The market prices for securities of biotechnology companies in general have been highly volatile and may continue to be highly volatile in the future. In addition, due to the absence of the put and call associated with our special common stock and the reduction in the number of shares of our publicly traded stock, the market price of our common stock may be more volatile in the future than our special common stock was in the past. The following factors, in addition to other risk factors described in this section, may have a significant impact on the market price of our common stock: - announcements of technological innovations or new commercial products by us or our competitors; - developments concerning proprietary rights, including patents; - publicity regarding actual or potential medical results relating to products under development by us or our competitors; - regulatory developments in the United States and foreign countries; - public concern as to the safety of biotechnology products; - economic and other external factors or other disaster or crisis; and - period-to-period fluctuations in financial results. WE MAY LOSE REVENUE OR INCUR SIGNIFICANT COSTS IF YEAR 2000 COMPLIANCE ISSUES ARE NOT PROPERLY ADDRESSED We use and rely on a wide variety of information technologies, computer systems and scientific and manufacturing equipment containing computer related components (such as programmable logic controllers and other embedded systems). Some of our older computer software programs and equipment are unable to distinguish between the year 1900 and the year 2000. As a result, time-sensitive functions of those software programs and equipment may misinterpret dates after January 1, 2000 to refer to the twentieth century rather than the twenty-first century. This could cause system or equipment shutdowns, failures or miscalculations resulting in inaccuracies in computer output or disruptions of operations, including, among other things, inaccurate processing of financial information and/or temporary inabilities to process transactions, manufacture products or engage in similar normal business activities. In addition to risks associated with our own computer systems and equipment, we have relationships with, and are to varying degrees dependent upon, a large number of third parties that provide information, goods and services to us. These include financial institutions, suppliers, vendors, research partners, governmental entities and customers. If significant numbers of these third parties experience failures in their computer systems or equipment due to Year 2000 non-compliance, it could affect our ability to process transactions, manufacture products, or engage in similar normal business activities. FUTURE SALES BY ROCHE COULD CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE Sales of a substantial number of shares of our common stock in the public market following this offering could adversely affect the market price of our common stock. You should read "Shares Eligible for Future Sale." 13 17 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained or incorporated by reference in this prospectus are forward-looking statements concerning our operations, economic performance and financial condition. Forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, are included, for example, in the discussions about: - our strategy; - our future relationship with Roche; - our liquidity; - product sales, royalties and contract revenues; - new product development or product introduction; - expenses and net income; - our credit risk management; - our asset/liability risk management; - our operational and legal risks; - the assumptions used in our unaudited pro forma condensed consolidated financial statements; - our consumer business; - Year 2000 issues; and - how we may be affected by certain legal proceedings. These statements involve risks and uncertainties. Actual results may differ materially from those expressed or implied in those statements. Factors that could cause such differences include, but are not limited to, those discussed under "Risk Factors" and "Management's Discussion and Analysis of Results of Operations and Financial Condition." 14 18 DIVIDEND POLICY We have never declared or paid cash dividends. We do not intend to declare or pay any cash dividends on our common stock in the foreseeable future. We plan to retain any earnings for use in the operation of our business and to fund future growth. PRICE RANGE OF SPECIAL COMMON STOCK From October 26, 1995 until June 16, 1999, our special common stock traded on the New York Stock Exchange and the Pacific Exchange under the symbol "GNE". The following table sets forth the high and low reported sale prices for our special common stock on the NYSE for the periods indicated. Since its issuance, our special common stock was subject to a redemption right, exercisable at the option of Roche, at predetermined prices per share. On June 30, 1999, we redeemed all of our special common stock held by stockholders, other than Roche, at $82.50 per share in cash and retired all of the shares of special common stock including those held by Roche.
---------------- HIGH LOW ---- --- 1997 First Quarter............................................. $58 $53 1/4 Second Quarter............................................ 59 1/4 56 1/2 Third Quarter............................................. 58 15/16 56 1/2 Fourth Quarter............................................ 60 5/8 57 1/2 1998 First Quarter............................................. $72 1/2 $59 1/4 Second Quarter............................................ 73 3/4 65 3/4 Third Quarter............................................. 72 11/16 63 9/16 Fourth Quarter............................................ 79 3/4 68 1/8 1999 First Quarter............................................. $88 15/16 $74 1/2 Second Quarter (through June 16).......................... 90 81 15/16
Our common stock has been approved for listing on the New York Stock Exchange under the symbol "DNA", subject to official notice of issuance. 15 19 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following unaudited pro forma condensed consolidated financial statements are presented for illustrative purposes only. These statements are not necessarily indicative of our financial position or results of operations for future periods or the results that actually would have been realized had the Redemption (as defined below) occurred and had push-down accounting for Roche's purchases of our common and special common stock and the Redemption (as defined below) been applied during the specified periods. The unaudited pro forma condensed consolidated financial statements, including the notes thereto, are based on and qualified in their entirety by reference to, and should be read in conjunction with our reported audited consolidated financial statements and unaudited condensed consolidated financial statements and the notes thereto, which are included elsewhere herein. The unaudited pro forma condensed consolidated financial statements give effect to our June 30, 1999 redemption of all of our outstanding special common stock held by stockholders other than Roche at a price of $82.50 per share in cash with funds deposited by Roche for such purpose (the "Redemption"), resulting in Roche owning 100% of our common stock. Roche will account for the Redemption as a purchase of a business and we are required to push-down the effect of the Redemption and Roche's 1990 through 1997 purchases of our common and special common stock into our consolidated financial statements. Under this method of accounting, our assets and liabilities, including intangible assets, will be recorded at their fair values not to exceed the aggregate Roche purchase price, including Roche's transaction costs. In 1990 and 1991 through 1997 Roche purchased 60% and 5%, respectively, of our outstanding stock. The push-down effect of Roche's aggregate purchase price and the Redemption price in the following unaudited pro forma condensed consolidated balance sheet is allocated based on Roche's ownership percentages as if the purchases had occurred at the original purchase dates for the 1990 and 1991 through 1997 purchases and at March 31, 1999 for the Redemption. The unaudited pro forma condensed consolidated statements of operations assume that the purchases had occurred at the original purchase dates for the 1990 and 1991 through 1997 purchases and at January 1, 1998 for the Redemption. The unaudited pro forma condensed consolidated statements of operations exclude the effect of charges for in-process research and development and employee compensation for stock option related transactions to be recorded at the redemption date and thereafter. The projected or assumed completion dates, revenues, expenses, cash flows and other financial information described below are forward-looking statements that involve substantial risks and uncertainties. Actual results or performance may differ materially for a variety of reasons. There are a number of risks with respect to the timely completion and commercialization of the in-process research and development projects, including the risk that the product candidates may be found to be ineffective or to have harmful side effects in clinical testing and that a competitor may develop products which compete with or replace the in-process research and development projects or that we may lose key personnel. Other risks that may affect future results or performance are described under "Risk Factors." 16 20 GENENTECH, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
--------------------------------------- AS OF MARCH 31, 1999 --------------------------------------- AS PRO FORMA REPORTED ADJUSTMENTS PRO FORMA -------- -------------- --------- In millions, except share data ASSETS Current assets Cash and cash equivalents................................. $ 213.6 $ -- $ 213.6 Short-term investments.................................... 681.4 (284.5)(a) 396.9 Accounts receivable....................................... 168.8 -- 168.8 Inventories............................................... 146.7 191.8(b) 338.5 Prepaid expenses and other current assets................. 51.9 (43.5)(q) 8.4 -------- --------- --------- Total current assets.............................. 1,262.4 (136.2) 1,126.2 Long-term marketable securities............................. 767.5 -- 767.5 Property, plant and equipment, net.......................... 698.8 16.5(c) 715.3 Goodwill.................................................... -- 495.8(d) 1,225.2(e) 1,721.0 Other intangible assets..................................... -- 146.7(f) 1,370.5(g) 64.1(q) 1,581.3 Other assets................................................ 197.4 (64.1) (q) 133.3 -------- --------- --------- Total assets...................................... $2,926.1 $ 3,118.5 $ 6,044.6 ======== ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable.......................................... $ 31.6 $ -- $ 31.6 (56.9)(a) 23.0(r) Other accrued liabilities................................. 288.2 19.9(e,i) 274.2 -------- --------- --------- Total current liabilities......................... 319.8 (14.0) 305.8 Long-term debt.............................................. 150.0 -- 150.0 Deferred income taxes....................................... -- 464.3(e) (56.9)(a) (23.0)(r) 58.7(i) 41.5(q) 484.6 Other long-term liabilities................................. 66.6 (41.5)(q) 25.1 -------- --------- --------- Total liabilities................................. 536.4 429.1 965.5 Stockholders' equity Special common stock (51,346,989 shares outstanding, none pro forma)............................................. 1.0 (1.0)(j) -- Common stock (76,621,009 shares outstanding, 127,298,588 shares pro forma)...................................... 1.5 1.0(j) 2.5 Additional paid-in capital................................ 1,630.3 2,276.9(k) 3,027.3(k) 62.8(i) 6,997.3 Retained earnings (accumulated deficit)................... 707.5 (1,693.0)(h,l) (967.3)(h,l) (1,952.8) Accumulated other comprehensive income.................... 49.4 (17.3)(l) 32.1 -------- --------- --------- Total stockholders' equity........................ 2,389.7 2,689.4 5,079.1 -------- --------- --------- Total liabilities and stockholders' equity........ $2,926.1 $ 3,118.5 $ 6,044.6 ======== ========= =========
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements 17 21 GENENTECH, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------ THREE MONTHS ENDED MARCH 31, 1999 ------------------------------------ AS PRO FORMA REPORTED ADJUSTMENTS PRO FORMA -------- ----------- --------- In millions, except per share data Revenues Product sales............................................. $234.1 $ -- $234.1 Royalties................................................. 46.6 -- 46.6 Contract.................................................. 7.2 -- 7.2 Other..................................................... 12.0 -- 12.0 Interest.................................................. 22.4 (4.3)(m) 18.1 ------ ------- ------ Total revenues.................................... 322.3 (4.3) 318.0 Cost and expenses Cost of sales............................................. 45.7 -- 45.7 Research and development.................................. 90.7 -- 90.7 Marketing, general and administrative..................... 97.2 -- 97.2 Special charge -- legal settlement........................ 50.0 -- 50.0 Goodwill amortization..................................... -- 18.2(d) 20.4(e) 38.6 Amortization of other intangibles......................... -- 18.4(f) 38.7(g) 57.1 Interest.................................................. 1.4 -- 1.4 ------ ------- ------ Total costs and expenses.......................... 285.0 95.7 380.7 ------ ------- ------ Income (loss) before taxes.................................. 37.3 (100.0) (62.7) Income tax provision (benefit).............................. 22.9 (24.6)(o) (3.4)(p) (5.1) ------ ------- ------ Net income (loss)........................................... $ 14.4 $ (72.0) $(57.6) ====== ======= ====== Earnings (loss) per share Basic..................................................... $ 0.11 $(0.45) Diluted................................................... 0.11 (0.45) Weighted average shares used to compute earnings (loss) per share Basic..................................................... 127.7 127.7 Diluted................................................... 132.5 127.7
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements 18 22 GENENTECH, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
--------------------------------------- YEAR ENDED DECEMBER 31, 1998 --------------------------------------- AS PRO FORMA REPORTED ADJUSTMENTS PRO FORMA -------- -------------- --------- In millions, except per share data Revenues Product sales............................................. $ 717.8 $ -- $ 717.8 Royalties................................................. 229.6 -- 229.6 Contract.................................................. 106.0 -- 106.0 Other..................................................... 8.8 -- 8.8 Interest.................................................. 88.7 (17.2)(m) 71.5 -------- ------- -------- Total revenues.................................... 1,150.9 (17.2) 1,133.7 Cost and expenses Cost of sales............................................. 138.6 191.8(n) 330.4 Research and development.................................. 396.2 -- 396.2 Marketing, general and administrative..................... 358.9 -- 358.9 Goodwill amortization..................................... -- 72.7(d) 81.7(e) 154.4 Amortization of other intangibles......................... -- 73.8(f) 154.7(g) 228.5 Interest.................................................. 4.6 -- 4.6 -------- ------- -------- Total costs and expenses.......................... 898.3 574.7 1,473.0 -------- ------- -------- Income (loss) before taxes.................................. 252.6 (591.9) (339.3) Income tax provision (benefit).............................. 70.7 (175.0) (o) (11.5) (p) (115.8) -------- ------- -------- Net income (loss)........................................... $ 181.9 $(405.4) $ (223.5) ======== ======= ======== Earnings (loss) per share Basic..................................................... $ 1.45 $ (1.78) Diluted................................................... 1.40 (1.78) Weighted average shares used to compute earnings (loss) per share Basic..................................................... 125.8 125.8 Diluted................................................... 129.9 125.8
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements 19 23 GENENTECH, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION Roche will account for the Redemption as a purchase of a business and we are required to push down the effect of the Redemption and Roche's 1990 through 1997 purchases into our consolidated financial statements. Under this method of accounting, Genentech's assets and liabilities, including intangible assets, will be recorded at their fair values not to exceed the aggregate purchase price, including Roche's transaction costs. In 1990 and 1991 through 1997 Roche purchased 60% and 5%, respectively, of the outstanding stock of Genentech. Further, in June 1999, we redeemed all of our special common stock held by stockholders other than Roche resulting in Roche owning 100% of our common stock. The push-down effect of Roche's aggregate purchase price and the Redemption price in the accompanying unaudited pro forma condensed consolidated balance sheet is allocated based on Roche's ownership percentages as if the purchases occurred at the original purchase dates for the 1990 and 1991 through 1997 purchases, and at March 31, 1999 for the Redemption. Management of Genentech determined the values of tangible and intangible assets, including in-process research and development, used in allocating the purchase prices. The aggregate purchase prices for acquisition of all of Genentech's outstanding shares, including Roche's estimated transaction costs of $10.0 million, was $6,604.9 million, consisting of approximately $2,843.5 million for the 1990 and 1991 through 1997 purchases and approximately $3,761.4 million for the Redemption. Approximately $284.5 million of compensation expense related to Genentech's early cash settlement of employee stock options will be paid by Genentech and charged to earnings at June 30, 1999, the Redemption date. In addition, we expect to record in the second and third quarters of 1999 an aggregate of approximately $102.3 million and $30.4 million, respectively, of non-cash compensation expense in connection with the modification and remeasurement, for accounting purposes, of a number of options assuming a public offering price of $90 per share, the midpoint of the range set forth on the cover of this prospectus, and assuming none of the limited number of eligible employees elect to participate in our new long-term deferred compensation plan. The unaudited pro forma condensed consolidated statements of operations exclude the effect of the charge for in-process research and development and the employee-related compensation amounts described above, which are reflected as charges to retained earnings in the unaudited pro forma condensed consolidated balance sheet. The as reported balance sheet as of March 31, 1999 and the as reported statements of operations for the year ended December 31, 1998 and for the three months ended March 31, 1999 are derived from Genentech's historical consolidated financial statements included elsewhere herein. The following table shows details of the excess of purchase price over net book value:
----------------------------------- PURCHASE PERIOD ----------------------- 1990 - 1997 1999 TOTAL ----------- -------- -------- In millions Total purchase price........................................ $2,843.5 $3,761.4 $6,604.9 Less portion of net book value purchased.................. 566.6 836.4 1,403.0 -------- -------- -------- Excess of purchase price over net book value................ $2,276.9 $2,925.0 $5,201.9 ======== ======== ========
20 24 GENENTECH, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table shows the allocation of the excess of the purchase price over net book value:
------------------------------------ PURCHASE PERIOD ----------------------- 1990 - 1997 1999 TOTAL ----------- -------- --------- In millions Inventories................................................. $ 102.0 $ 191.8 $ 293.8 Land........................................................ -- 16.5 16.5 In-process research and development......................... 500.5 752.5 1,253.0 Developed product technology................................ 429.0 765.0 1,194.0 Core technology............................................. 240.5 203.0 443.5 Developed license technology................................ 292.5 175.0 467.5 Trained and assembled workforce............................. 32.5 49.0 81.5 Tradenames.................................................. 39.0 105.0 144.0 Key distributor relationships............................... 6.5 73.5 80.0 Goodwill.................................................... 1,091.2 1,225.2 2,316.4 Deferred tax liability...................................... (456.8) (631.5) (1,088.3) -------- -------- --------- Total............................................. $2,276.9 $2,925.0 $ 5,201.9 ======== ======== =========
NOTE 2. PRO FORMA ADJUSTMENTS The pro forma adjustments are based on management's estimates of the value of the tangible and intangible assets acquired. Following is a description of the pro forma adjustments: (a) Represents the cash to be paid by Genentech associated with the early cash settlement of employee stock options. This amount, net of related income tax benefit of $113.8 million, will be charged to earnings on June 30, 1999. The income tax benefit reduced the current tax payable in other accrued liabilities by $56.9 million and reduced long-term deferred income taxes by $56.9 million. (See also "Management's Discussion and Analysis of Results of Operations and Financial Condition -- Redemption of Our Special Common Stock" for a description of these stock option arrangements.) (b) Represents the adjustment of inventory to fair value. The estimated useful life of the inventory adjustment is one year based upon the expected time to sell inventories on hand at the balance sheet date. The entire inventory adjustment related to the 1990 through 1997 purchases is assumed to be reflected as a charge to earnings prior to January 1, 1998. (c) Represents adjustment to record the fair value of land in 1999. There were no such adjustments for the periods 1990 through 1997. (d) Represents $1,091.2 million of goodwill recorded as a result of push-down accounting applied to Roche's 1990 through 1997 purchases less related accumulated amortization of $595.4 million through March 31, 1999. Included in goodwill is $456.8 million related to the recording of deferred tax liabilities. Deferred taxes were recorded for the adjustment to fair value for other intangible assets and inventories as a result of Roche's 1990 through 1997 purchases. The deferred tax liability was calculated based on a marginal tax rate of 40%. The goodwill related to the 1990 through 1997 purchases is amortized over 15 years. (e) Represents $1,225.2 million of goodwill recorded as a result of the Redemption. Included in goodwill is $631.5 million related to the recording of deferred tax liabilities. Deferred taxes were recorded for the adjustment to fair value for other intangible assets, inventories and land. The deferred tax liability was calculated based on a marginal tax rate of 40% and has been allocated between short- and long-term classifications to match the asset classifications. The goodwill related to the Redemption is amortized over 15 years. 21 25 GENENTECH, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (f) Represents $1,040.0 million of other intangible assets recorded as a result of Roche's 1990 through 1997 purchases less related accumulated amortization of $893.3 million of those assets through March 31, 1999. The components of other intangible assets related to these purchases and their estimated lives are as follows:
------------------------------------- FAIR ACCUMULATED ESTIMATED VALUE AMORTIZATION LIFE In millions -------- ------------ --------- Developed product technology........................... $ 429.0 $ 351.1 10 Core technology........................................ 240.5 196.8 10 Developed license technology........................... 292.5 286.1 6 Trained and assembled workforce........................ 32.5 31.6 7 Tradenames............................................. 39.0 21.3 15 Key distributor relationships.......................... 6.5 6.4 5 -------- -------- $1,040.0 $ 893.3 ======== ========
(g) Represents $1,370.5 million of other intangible assets which were recorded as a result of the Redemption. The components of other intangible assets related to this purchase and their estimated lives are as follows:
--------------------- FAIR ESTIMATED VALUE LIFE In millions -------- --------- Developed product technology........................... $ 765.0 10 Core technology........................................ 203.0 10 Developed license technology........................... 175.0 6 Trained and assembled workforce........................ 49.0 7 Tradenames............................................. 105.0 15 Key distributor relationships.......................... 73.5 5 -------- $1,370.5 ========
22 26 GENENTECH, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (h) Represents $500.5 million and $752.5 million of in-process research and development recorded as a result of Roche's 1990 through 1997 purchases and the Redemption, respectively. At the date of each purchase, Genentech concluded that technological feasibility of the acquired in-process technology was not established and that the in-process technology had no future alternative uses. Such amounts are reflected as charges to retained earnings in the unaudited pro forma condensed consolidated balance sheet at March 31, 1999. The amounts assigned to in-process research and development were determined based upon an analysis employing the risk-adjusted cash flows expected to be generated by the products that result from the in-process projects. The analyses performed included forecasting future cash flow that was expected to result from the progress made on each of the in-process projects prior to the purchase dates. These cash flows were estimated by first forecasting, on a product-by-product basis, total revenues expected to result from sales of the first generation of each in-process product. From this amount, a portion of the gross in-process product revenues was removed to account for the contribution provided by any core technology which was considered to benefit the in-process products. The net in-process revenue was then multiplied by the project's estimated percentage of completion as of the purchase dates to arrive at a forecast of net in-process research and development revenues attributable to projects completed prior to the purchase dates. From this forecast, appropriate operating expenses, cash flow adjustments and contributory asset returns were deducted to arrive at a forecast of net returns on the completed portion of the in-process technology. Finally, these net returns were discounted to a present value at discount rates that incorporate both the weighted average cost of capital (relative to the biotech industry and Genentech) as well as the product-specific risk associated with the purchased in-process research and development products. The product specific risk factors considered include where each product is in each phase of development, type of molecule under development, likelihood of regulatory approval, manufacturing process capability, scientific rationale, pre-clinical safety and efficacy data, target product profile and development plan. The discount rates employed ranged from 16% to 19% for the 1999 valuation and 20% to 28% for the 1990 purchase valuation, all of which represent a significant risk premium to Genentech's weighted average cost of capital. The forecast data employed in the analyses was based upon internal product level forecast information maintained by Genentech management in the ordinary course of managing its business. The inputs used by Genentech in analyzing in-process research and development were based upon assumptions which Genentech believes to be reasonable but which are inherently uncertain and unpredictable. These assumptions may be incomplete or inaccurate, and no assurance can be given that unanticipated events and circumstances will not occur. Accordingly, actual results may vary from the forecasted results. Any such variance may result in a material adverse effect on Genentech's financial condition and results of operations. A brief description of in-process research and development projects is set forth below including an estimated percentage of completion of products within each project at the Redemption date. Genentech does not track all costs associated with research and development on a project-by-project basis, therefore we believe a calculation of cost incurred as a percentage of total incurred project cost as of FDA approval is not possible. Management estimates, however, that the research and development expenditures that will be required to complete the in-process projects will total at least $700 million. We have estimated percentage complete data for each project based upon an equal weighting of three indicators, as follows: PTS: Probability of technical success ("PTS") is a project level statistic maintained by Genentech on an ongoing basis, which is intended to represent the current likelihood of project success, i.e., FDA approval. This is a quantitative calculation based upon the stage of development and the complexity of the project, and it is highly correlated with the project's phase of development. PTS is periodically adjusted to reflect actual experiences over a reasonable period of time. 23 27 GENENTECH, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Status compared to Baseline Model: We developed a baseline model which allocated percentages of a standard development project to each major phase of the project based upon our experience. We then overlayed the time-based status of each project to this baseline model, in order to calculate a percentage complete for each project. Management's Estimate of Percentage Complete: Genentech's senior product development management representatives provided an estimate of the percentage complete, on a technological basis, of each project. Nutropin Depot sustained-release growth hormone -- A sustained release version of human growth hormone based on Alkermes' ProLease sustained release drug delivery system, which is designed to deliver human growth hormone by monthly or semi-monthly injections. This product is being developed in collaboration with Alkermes. On June 25, 1999, Genentech made U.S. regulatory filings seeking marketing approval for Nutropin Depot, and we are currently awaiting regulatory clearance. We estimate the initial indication on this project will be substantially complete by the year 2000, and that this project was approximately 85% complete at the Redemption date. TNK-tPA -- A second generation t-PA that is a selectively mutated version of a wild-type t-PA. This t-PA version may be faster acting and easier to administer, and may restore blood flow faster. We have completed enrollment in Phase III clinical trials in patients with acute myocardial infarction and are currently preparing FDA regulatory filings. This product is being developed in collaboration with Boehringer Ingelheim International GmbH. We estimate that this project will be substantially complete by the year 2000, and that it was approximately 90% complete at the Redemption date. Anti-IgE antibody -- An anti-IgE monoclonal antibody designed to interfere early in the process that leads to symptoms of allergic asthma and seasonal allergic rhinitis. This product is being developed in collaboration with Tanox, Inc. and Novartis Pharmaceuticals Corporation. Phase III trials are ongoing in patients with allergic asthma. Phase III trials have been completed in patients with seasonal allergic rhinitis and the results have been analyzed. We estimate that this project was approximately 75% complete at the Redemption date. Pulmozyme inhalation solution -- A recombinant human protein that is an approved treatment for the management of cystic fibrosis. We are conducting a trial to determine the effect of Pulmozyme on pulmonary function in patients with early-stage cystic fibrosis. We estimate this project to be approximately 75% complete at the Redemption date. We are also preparing to begin clinical testing of Pulmozyme delivery via Aradigm Corporation's AERx(TM) delivery system. We estimate that this project was approximately 45% complete at the Redemption date. These projects will be substantially complete by the year 2003. Rituxan antibody -- A monoclonal antibody approved for the treatment of relapsed or refractory low-grade or follicular, CD20-positive B-cell non-Hodgkin's lymphoma, a cancer of the immune system. Genentech is in Phase III clinical trials for the treatment of intermediate- and high-grade non-Hodgkin's lymphoma. This product is being developed in collaboration with IDEC Pharmaceuticals, Inc., or IDEC. We estimate that this project will be substantially complete by the year 2004 and that it was approximately 60% complete at the Redemption date. Xubix(TM) (sibrafiban) oral IIb/IIIa antagonist -- An orally administered inhibitor of platelet aggregation that may be useful in the prevention of unwanted clotting in certain cardiovascular conditions, including acute coronary syndrome. Hoffmann-La Roche is conducting global development of this molecule, and we retain certain opt-in rights with respect to the United States. We estimate that this project will be substantially complete by the year 2000 and that it was approximately 65% complete at the Redemption date. Activase t-PA -- A protein that is an approved treatment for heart attack, acute ischemic stroke within three hours of symptom onset, and acute massive pulmonary embolism. We are preparing for Phase III trials of this product for intravenous catheter clearance. We estimate that this project will be substantially complete by the end of 1999 and that it was approximately 90% complete at the Redemption date. Anti-CD11a antibody -- An antibody (also known as hu1124) designed to block certain immune cells as a potential treatment of psoriasis. We are currently preparing for Phase III trials of this product, which we are developing in 24 28 GENENTECH, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) collaboration with Xoma Corporation. We estimate that this project will be substantially complete by the year 2003 and that it was approximately 50% complete at the Redemption date. Herceptin antibody -- An antibody that is an approved treatment for metastatic breast cancer. In collaboration with Hoffmann-La Roche and U.S. national cooperative groups, we are preparing for Phase III trials for adjuvant treatment of early-stage breast cancer in patients who overexpress the HER2 protein. We estimate that this project will be substantially complete by the year 2007, and that it was approximately 45% complete at the Redemption date. Thrombopoietin (TPO) -- A protein that is being studied for treatment of thrombocytopenia, a reduction in clot-inducing platelets, in cancer patients treated with chemotherapy. This molecule has been exclusively licensed to Pharmacia & Upjohn. We estimate that this project will be substantially complete by the year 2002, and that it was approximately 55% complete at the Redemption date. Anti-CD18 antibody -- An antibody designed to block certain immune cells that may impact blood flow. We are conducting Phase II clinical trials aimed at increasing blood flow in patients with acute myocardial infarction. We estimate that this project will be substantially complete by the year 2004, and that it was approximately 55% complete at the Redemption date. Anti-VEGF antibody -- An antibody developed to inhibit angiogenesis (the formation of new blood vessels) as a potential treatment for several types of solid-tumor cancers. In pre-clinical studies the anti-VEGF antibody resulted in decreased vascularization and a decline in growth and metastasis of a variety of solid tumors. Phase II studies are ongoing in prostate cancer, breast cancer, renal cell carcinoma, lung cancer and colorectal cancer. We estimate these projects will be substantially complete by the year 2003, and that these different projects were 35% to 40% complete at the Redemption date. Herceptin antibody -- An antibody that is an approved treatment for metastatic breast cancer. Herceptin will also be evaluated for broader application in other tumor types in which the HER2 protein is overexpressed. We are planning to conduct Phase II studies alone or in collaboration with Hoffmann-La Roche, the National Cancer Institute or other clinical research groups. We estimate that the initial indications on this project will be substantially complete by the year 2004. These broader applications have projects that are estimated to be 40% to 45% complete at the Redemption date. AMD Fab -- A customized fragment of an anti-VEGF antibody for the potential treatment of age-related macular degeneration (AMD). In this condition, excessive blood vessel growth in the retina of the eye can lead to blindness. We are currently preparing for Phase I clinical trials. We estimate that this project will be substantially complete by the year 2004, and that it was approximately 20% complete at the Redemption date. LDP-02 -- A monoclonal antibody for the treatment of inflammatory bowel disease. This product is licensed from and being developed in collaboration with LeukoSite, Inc. This compound is currently in Phase Ib/IIa clinical trials in Canada and the United Kingdom. We estimate that this project will be substantially complete by the year 2005, and that it was approximately 30% complete at the Redemption date. We also have identified five additional product programs that are at different stages of in-process research and development. We expect these projects to be substantially complete in years 1999 through 2004. The percent completion for these additional programs range from an estimated 35% to 90%. These projects did not receive material allocations of the purchase price. In addition, our in-process research and development includes a process technology program. The process technology program includes the research and development of ideas and techniques that should improve the bulk production of antibodies, including cell culture productivity, and streamlined and improved recovery processes, and improvements in various areas of pharmaceutical manufacturing. We estimate the process technology program to be approximately 50% complete at the Redemption date. 25 29 GENENTECH, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (i) Represents the elimination of the existing deferred tax asset valuation allowance of $62.8 million at March 31, 1999 related to the tax benefits of stock option deductions which have been realized and credited to paid-in-capital as a result of establishing deferred tax liabilities under push-down accounting. (j) Reflects the redemption of our special common stock and the issuance of new shares of common stock to Roche which will result in substantially the same number of total shares outstanding as prior to the Redemption. (k) Represents the push-down of the purchase price in excess of net book value of $2,276.9 million for 1990 through 1997 and $2,925.0 million in 1999 and $102.3 million for the remeasurement of continuing employee stock options at the remeasurement date. (l) Adjustments to retained earnings as follows:
------------------------ 1990 - 1997 1999 PURCHASES PURCHASE In millions ----------- --------- In-process research and development.................... $ (500.5) $ (752.5) Amortization of goodwill, intangibles and fair value adjustment to inventories, net of tax................. (1,192.5) -- Charge associated with the cash out of employee stock options, net of taxes................................. -- (170.7) Compensation related to the remeasurement of continuing stock options, net of taxes........................... -- (61.4) Adjustment to unrealized gains on marketable securities, net of taxes.............................. -- 17.3 --------- --------- Total adjustment to retained earnings.................. $(1,693.0) $ (967.3) ========= =========
(m) Represents the reduction to interest income at an assumed interest rate of 6% as a result of the cash outlay for the following transactions: (1) approximately $284.5 million of cash to be paid for the early cash settlement of employee stock options and (2) estimated $3.0 million in Genentech transaction costs related to this offering. (n) Represents the amortization, which occurs over a one-year period, of the fair value adjustment to inventory for the Redemption. (o) Represents the tax benefit, at a marginal tax rate of 40%, related to the amortization of other intangible assets, exclusive of goodwill, and the inventory adjustment to fair value. (p) To adjust Genentech's effective tax rate for the impact of non-deductible goodwill and the estimated impact of the provisions of the Genentech/Roche tax sharing agreement. (q) Reflects reclassification of certain as reported asset and liability balances to conform to the pro forma presentation. (r) Represents $23.0 million reclassification of long-term deferred income taxes to current tax payable in other accrued liabilities. 26 30 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with, and are qualified by reference to, "Management's Discussion and Analysis of Results of Operations and Financial Condition," the consolidated financial statements and related notes and the unaudited pro forma consolidated financial statements included elsewhere in this prospectus. The income statement data for the years ended December 31, 1998, 1997 and 1996 and the balance sheet data as of December 31, 1998 and 1997 are derived from, and qualified by reference to, our audited consolidated financial statements included elsewhere in this prospectus, and should be read in conjunction with those consolidated financial statements and related notes. The income statement data for the three months ended March 31, 1999 and 1998 and the balance sheet data as of March 31, 1999 and 1998 are derived from our unaudited consolidated financial statements which, in our opinion, have been prepared on the same basis as the audited consolidated financial statements and reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our results of operations and financial position. Results for the three months ended March 31, 1999 are not necessarily indicative of results that may be expected for the entire year.
-------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, -------------------- -------------------------------------------------------- 1999 1998 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- -------- -------- (UNAUDITED) In millions, except per share data INCOME STATEMENT DATA Total revenues................................. $ 322.3 $ 264.7 $1,150.9 $1,016.7 $ 968.7 $ 917.8 $ 795.4 Product sales................................ 234.1 164.7 717.8 584.9 582.8 635.3 601.0 Royalties.................................... 46.6 64.5 229.6 241.1 214.7 190.8 126.0 Contract and other........................... 19.2 14.9 114.8 121.6 107.0 31.2 25.6 Interest..................................... 22.4 20.6 88.7 69.1 64.2 60.5 42.8 Total costs and expenses....................... $ 285.0 $ 207.7 $ 898.3 $ 846.9 $ 820.8 $ 745.6 $ 665.8 Cost of sales................................ 45.7 33.6 138.6 102.5 104.5 97.9 95.8 Research and development..................... 90.7 98.2 396.2 470.9 471.1 363.0 314.3 Marketing, general and administrative........ 97.2 74.9 358.9 269.9 240.1 251.7 248.6 Special charge............................... 50.0 -- -- -- -- 25.0 -- Interest..................................... 1.4 1.0 4.6 3.6 5.1 8.0 7.1 Income before taxes............................ $ 37.3 $ 57.0 $ 252.6 $ 169.8 $ 147.9 $ 172.2 $ 129.6 Income tax provision........................... 22.9 16.0 70.7 40.8 29.6 25.8 5.2 Net income..................................... $ 14.4 $ 41.0 $ 181.9 $ 129.0 $ 118.3 $ 146.4 $ 124.4 Effective tax rate............................. 61% 28% 28% 24% 20% 15% 4% Earnings per share Basic........................................ $ 0.11 $ 0.33 $ 1.45 $ 1.05 $ 0.98 $ 1.24 $ 1.07 Diluted...................................... 0.11 0.32 1.40 1.02 0.95 1.20 1.03 Weighted average shares outstanding Basic........................................ 127.7 124.8 125.8 123.0 120.6 118.3 116.0 Diluted...................................... 132.5 128.8 129.9 126.4 124.0 121.7 120.2 Actual shares outstanding at period end........ 128.0 125.2 127.1 124.2 121.4 119.3 117.2 OTHER DATA Depreciation expense........................... $ 20.2 $ 16.5 $ 72.7 $ 58.9 $ 57.6 $ 53.3 $ 50.9 Amortization expense........................... 1.7 1.4 5.4 6.6 4.5 5.1 2.6 Capital expenditures........................... 18.2 21.0 88.1 154.9 141.8 70.2 82.8
The special charge in 1995 relates to the merger and agreement with Roche ($21 million) and the resignation of our prior chief executive officer ($4 million). The special charge in 1999 relates to a litigation settlement with respect to past human growth hormone promotional practices.
-------------------------------------------------------------------------------- AS OF MARCH 31, AS OF DECEMBER 31, -------------------- -------------------------------------------------------- 1999 1998 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- -------- -------- In millions (UNAUDITED) BALANCE SHEET DATA Cash and cash equivalents, short-term investments and long-term marketable securities................................... $1,662.5 $1,372.9 $1,604.6 $1,286.5 $1,159.1 $1,096.8 $ 920.9 Accounts receivable............................ 168.8 175.3 149.7 189.2 197.6 172.2 146.3 Inventories.................................... 146.7 117.7 148.6 116.0 91.9 93.6 103.2 Working capital................................ 942.6 958.9 950.6 904.4 705.1 812.0 776.6 Property, plant and equipment, net............. 698.8 688.4 700.2 683.3 586.2 503.7 485.3 Other assets................................... 197.4 165.0 196.3 177.2 149.2 105.5 61.0 Total assets................................... 2,926.1 2,573.5 2,855.4 2,507.6 2,226.4 2,011.0 1,745.1 Total current liabilities...................... 319.8 273.4 291.3 289.6 250.0 233.4 220.5 Long-term debt................................. 150.0 150.0 150.0 150.0 150.0 150.0 150.4 Total liabilities.............................. 536.4 461.6 511.6 476.4 425.3 408.9 396.3 Total stockholders' equity..................... 2,389.7 2,111.9 2,343.8 2,031.2 1,801.1 1,602.0 1,348.8 Total liabilities and stockholders' equity..... 2,926.1 2,573.5 2,855.4 2,507.6 2,226.4 2,011.0 1,745.1
27 31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OVERVIEW We are a leading biotechnology company that uses human genetic information to discover, develop, manufacture and market human pharmaceuticals for significant unmet medical needs. We manufacture and market seven products directly in the United States, including: Herceptin, Rituxan (rituximab), Activase, Protropin, Nutropin, Nutropin AQ and Pulmozyme. We receive royalties on sales of products in Canada, on sales of Pulmozyme outside of the United States and on sales of rituximab outside of the United States (excluding Japan) from Hoffmann-La Roche. We also receive royalties on sales of growth hormone products and t-PA outside of the United States and Canada through other licensees. We receive worldwide royalties on five additional licensed products that originated from our technology and are marketed by other companies. We also received royalties for Humulin(R) under an agreement that expired in August 1998. REDEMPTION OF OUR SPECIAL COMMON STOCK On June 30, 1999, we redeemed all of our outstanding special common stock held by stockholders other than Roche at a price of $82.50 per share in cash with funds deposited by Roche for that purpose. As a result, Roche currently owns 100% of our common stock. Consequently, push-down accounting is required under U.S. generally accepted accounting principles to reflect in our financial statements the amounts paid for our stock in excess of our net book value. Push-down accounting requires us to record goodwill and other intangible assets of approximately $1,706.0 million and $1,499.1 million, respectively, onto our balance sheet in the second quarter of 1999. The amortization of this goodwill and other intangible assets will have a significant negative impact on our financial results in future years. In addition, we will continuously evaluate whether events and circumstances have occurred that indicate any portion of the remaining balance of these intangible assets may not be recoverable. When factors indicate that assets should be evaluated for possible impairment, we may be required to reduce the carrying value of our intangible assets, which could have a material adverse effect on our financial condition and results of operations during the periods in which such a reduction is recognized. Also as a result of push-down accounting, we expect to record a $752.5 million charge to earnings in the quarter ended June 30, 1999 related to in-process research and development. For more information about push-down accounting, you should read "Unaudited Pro Forma Condensed Consolidated Financial Statements" above. Stock Options In connection with the redemption of our special common stock, the following changes with respect to our outstanding stock options have occurred: - Options for the purchase of approximately 6.8 million shares of special common stock have been canceled in accordance with the terms of the applicable stock option plans, and the holders are receiving cash payments in the amount of $82.50 per share, less the exercise price; - Options for the purchase of approximately 4.0 million shares of special common stock are being converted into options to purchase a like number of shares of common stock at the same exercise price; and - Options for the purchase of approximately 4.9 million shares of special common stock have been canceled, in accordance with the terms of our 1996 Stock Option/Stock Incentive Plan (the "1996 Plan"). With certain exceptions, we expect to grant new options for the purchase of 1.333 times the number of shares under the previous options with an exercise price equal to the public offering price of the shares offered in this offering. The number of shares that will be the subject of these new options, which are expected to be issued under our 1999 Stock Plan (the "1999 Plan"), will be approximately 5.0 million. Alternative arrangements were provided for certain holders of some of the unvested options under the 1996 Plan. We expect that the majority of the options to be granted prior to the effective date of this offering will be made pursuant to our 1999 Plan, which our board of directors and Roche, our sole shareholder, intend to approve prior to the effective date of this offering. Under the 1999 Plan, we intend to grant new options to purchase approximately 6.5 million shares (including the 5.0 million shares referred to above) of common stock to approximately 2,400 employees at an exercise price equal to the 28 32 public offering price in this offering, with the grant of such options to be made effective on the day prior to the effective date of this offering. In connection with these stock option transactions, we expect to record: - In the quarter ended June 30, 1999, (1) cash compensation expense of approximately $284.5 million associated with the cash-out of such stock options and (2) non-cash compensation expense of approximately $102.3 million associated with the remeasurement, for accounting purposes, of the converted options, which non-cash amount represents the difference between each applicable option exercise price and the redemption price of the special common stock; - In the quarter ending September 30, 1999, non-cash compensation expense of approximately $30.4 million associated with the remeasurement, for accounting purposes, of the converted options, which non-cash amount represents the difference between the redemption price of the special common stock and $90, the midpoint of the range of the public offering price set forth on the cover page of this prospectus; and - Over a two-year period, an aggregate of $27.4 million available to be earned by a limited number of employees who elected the alternative arrangements described above. Licensing Agreement Prior to the completion of this offering, we will amend our existing licensing and marketing agreement with Hoffmann-La Roche to provide Hoffmann-La Roche with an option to license to use and sell products in non-U.S. markets until at least 2015. You should read "Business--Relationship with F. Hoffmann-La Roche Ltd" below for further information. See "Subsequent Events (Unaudited)" note in the Notes to Consolidated Financial Statements for additional information. COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 AND 1998
----------------------------- THREE MONTHS ENDED MARCH 31, Revenues ----------------- 1999 1998 % CHANGE ------ ------ -------- In millions Revenues.................................................... $322.3 $264.7 22%
---------------------------- THREE MONTHS ENDED MARCH 31, Product Sales ---------------- 1999 1998 % CHANGE ------ ------ -------- In millions Herceptin................................................... $ 39.9 $ -- --% Rituxan..................................................... 57.1 37.7 51 Activase.................................................... 52.0 55.7 (7) Protropin, Nutropin and Nutropin AQ......................... 56.2 50.9 10 Pulmozyme................................................... 28.2 19.5 45 Actimmune................................................... 0.7 0.9 (22) ------ ------ Total product sales............................... $234.1 $164.7 42% ====== ====== % of revenues............................................... 73% 62%
Herceptin: Net sales of Herceptin, indicated for the treatment of certain patients with metastatic breast cancer whose tumors overexpress HER2 protein, were $39.9 million in the first quarter of 1999. In 1998, we recorded $30.5 million in net sales of Herceptin, which was introduced in September 1998. An increase of physician acceptance of Herceptin has contributed to this positive sales trend and the successful initial penetration of the breast cancer market. Rituxan: Net sales of Rituxan, indicated for the treatment of patients with relapsed or refractory low-grade or follicular, CD20-positive B-cell non-Hodgkins lymphoma, a cancer of the immune system, increased 51% in the first quarter of 1999 from the comparable period in 1998. This sales increase is primarily due to increased market penetration for the treatment of B-cell non-Hodgkins lymphoma. We co-developed Rituxan with IDEC, from whom we license Rituxan. 29 33 Activase: Net sales of Activase tissue plasminogen activator decreased 7% in the first quarter of 1999 from the comparable period in 1998. The decrease is due to a continued decline in the overall size of the thrombolytic therapy market due to mechanical reperfusion and continued competition from Centocor, Inc.'s Retavase(R). The decrease also resulted from a temporary decrease in the available commercial market due to patients receiving therapy through large, recently completed Phase III clinical trials. Protropin, Nutropin and Nutropin AQ: Net sales of our three growth hormone products--Protropin, Nutropin and Nutropin AQ--increased 10% in the first quarter of 1999 from the comparable period in 1998. This increase primarily reflects fluctuations in distributor ordering patterns. Pulmozyme: Net sales of Pulmozyme increased 45% in the first quarter of 1999 from the comparable period in 1998 primarily due to increased sales to Hoffmann-La Roche and increased market penetration for the management of cystic fibrosis. Actimmune: In 1998, in return for a royalty on net sales, we licensed to Connetics Corporation our U.S. marketing and development rights to Actimmune interferon gamma-lb, which is used for the treatment of chronic granulomatous disease, a rare, inherited disorder of the immune system. Thereafter, Connetics Corporation sublicensed all of its rights to InterMune Pharmaceuticals, Inc., or InterMune. After a transition period, as of January 1999, we no longer sell Actimmune. We have agreed to supply bulk materials to InterMune at cost plus a mark-up. Royalties, Contract and Other, and Interest Income
---------------------------- THREE MONTHS ENDED MARCH 31, ---------------- 1999 1998 % CHANGE ------ ------ -------- In millions Royalties................................................... $46.6 $64.5 (28)% Contract and other.......................................... 19.3 14.9 30 Interest income............................................. 22.4 20.6 9
Royalty income decreased by 28% in the first quarter of 1999 from the comparable period in 1998. The decrease primarily reflects the expiration of royalties from Eli Lilly and Company in August 1998. Contract and other revenue increased 30% in the first quarter of 1999 from the comparable period in 1998 primarily due to higher gains on the sale of biotechnology equity securities and higher revenues from strategic alliances, partly offset by lower contract revenues from Hoffmann-La Roche. Interest income increased 9% in the first quarter of 1999 from the comparable period in 1998 due to a higher portfolio balance. The total investment portfolio, consisting of cash and cash equivalents, and short- and long-term marketable securities, increased to $1,662.4 million as of March 31, 1999 from $1,372.9 million as of March 31, 1998 and from $1,604.6 million as of December 31, 1998. Costs and Expenses
--------------------------- THREE MONTHS ENDED MARCH 31, --------------- 1999 1998 % CHANGE ------ ------ -------- In millions Cost of sales............................................... $ 45.7 $ 33.6 36% Research and development.................................... 90.7 98.2 (8) Marketing, general and administrative....................... 97.2 74.9 30 Legal settlement............................................ 50.0 -- -- Interest expense............................................ 1.4 1.0 40 ------ ------ Total costs and expenses.......................... $285.0 $207.7 37% ====== ======
Cost of Sales: Cost of sales as a percent of product sales was 20% in the first quarters of 1999 and 1998. 30 34 Research and Development: Research and development expenses decreased 8% in the first quarter of 1999 from the comparable period in 1998. For the first quarter of 1999, we invested approximately 28% of revenues into research and development compared to 37% in the comparable period in 1998. This percentage decrease reflects our goal to decrease research and development spending as a percent of revenues as products progress through late-stage clinical trials and revenues increase. Marketing, General and Administrative: Marketing, general and administrative expenses increased 30% in the first quarter of 1999 from the comparable period in 1998 due to higher marketing and sales expenses in support of oncology products and higher profit sharing with IDEC related to higher sales of Rituxan. In addition to the above, in April 1999, we agreed to make a $50 million payment to settle a federal investigation relating to our past clinical, sales and marketing activities associated with human growth hormone.
---------------------------- THREE MONTHS ENDED MARCH 31, Income Taxes ---------------- 1999 1998 % CHANGE ------ ------ -------- In millions Income taxes................................................ $22.9 $16.0 43%
Our effective income tax rate for the first quarter of 1999 was 61% compared to 28% in the first quarter of 1998. The 61% tax rate of the first quarter of 1999 reflects the effect of the $50 million legal settlement expense as well as an increase in the income tax rate due to reduced benefits from both research and development tax credits and realization of foreign losses. Excluding the legal settlement expense, our effective tax rate would have been 33% for the first quarter of 1999.
---------------------------- THREE MONTHS ENDED MARCH 31, Net Income ---------------- 1999 1998 % CHANGE ------ ------ -------- In millions Net income.................................................. $14.4 $41.0 (65)% Earnings per share Basic..................................................... $0.11 $0.33 (67) Diluted................................................... 0.11 0.32 (66)
The 65% decrease in net income in the first quarter of 1999 from the comparable period in 1998 was due to the $50 million legal settlement expense. Exclusive of the legal settlement, net income in the first quarter of 1999 would have been $58.5 million, an increase of 43% over the comparable period in 1998. This increase was driven by higher product sales, primarily related to new sales of Herceptin and higher sales of Rituxan. This increase was partly offset by lower royalties, higher marketing and sales expenses and higher cost of sales. COMPARISON OF YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
-------------------------------------------------------- YEAR ENDED DECEMBER 31, ANNUAL % CHANGE Revenues ---------------------------------- ---------------- 1998 1997 1996 98/97 97/96 -------- -------- ------ ----- ----- In millions Revenues......................................... $1,150.9 $1,016.7 $968.7 13% 5%
Revenues for 1998 increased from 1997 primarily as a result of higher product sales. Revenues for 1997 increased from 1996 in all areas, but primarily from royalties and contract revenues. 31 35
---------------------------------------------------- YEAR ENDED DECEMBER 31, ANNUAL % CHANGE Product Sales ------------------------------ ---------------- 1998 1997 1996 98/97 97/96 ------ ------ ------ ----- ----- In millions Herceptin........................................... $ 30.5 -- -- -- -- Rituxan............................................. 162.6 $ 5.5 -- 2,856% -- Activase............................................ 213.0 260.7 $284.1 (18) (8)% Protropin, Nutropin and Nutropin AQ................. 214.0 223.6 218.2 (4) 2 Pulmozyme........................................... 93.8 91.6 76.0 2 21 Actimmune........................................... 3.9 3.5 4.5 11 (22) ------ ------ ------ Total product sales............................ $717.8 $584.9 $582.8 23% 0% ====== ====== ====== % of revenues....................................... 62% 58% 60%
Product sales increased in 1998 as a result of a full year of Rituxan sales and initial Herceptin sales. These increases were partly offset by lower Activase and growth hormone sales. Product sales in 1997 increased over 1996 due to increases in Pulmozyme and growth hormone sales and new sales from the introduction of Rituxan, offset by a decrease in Activase sales. Product sales to Hoffmann-La Roche in conjunction with our then existing license agreement were $28.7 million in 1998, $17.4 million in 1997 and $13.2 million in 1996. Herceptin: In September 1998, we received FDA approval to market Herceptin in the United States for use as first line therapy in combination with paclitaxel and as a single agent in second and third line therapy in patients with metastatic breast cancer who have tumors that overexpress the HER2 protein. We recorded $30.5 million of initial net sales of Herceptin in 1998. Herceptin is the first humanized monoclonal antibody for the treatment of HER2 overexpressing metastatic breast cancer and the second U.S. approval in this new class of biotherapeutic cancer drugs. The first was Rituxan, which was approved in November 1997. We have granted Hoffmann-La Roche exclusive marketing rights to Herceptin outside of the United States. Rituxan: Rituxan (rituximab) was approved for marketing by the FDA in late November 1997. We launched Rituxan on December 16, 1997, and recorded initial sales of $5.5 million for 1997. Net sales of Rituxan were $162.6 million in 1998. The increase from 1997 was the result of one full year of sales. We co-developed Rituxan with IDEC, from whom we license Rituxan. Rituxan was the first monoclonal antibody approved in the United States to treat cancer. We are jointly promoting Rituxan with IDEC in the United States and we share responsibility with IDEC for manufacturing the product. Also in 1998, our partner, Hoffmann-La Roche, received approval from the European Commission to market rituximab under the tradename MabThera(TM) in the European Union. Hoffmann-La Roche holds marketing rights for MabThera outside of the United States, excluding Japan, and has agreed to pay us royalties and a mark-up on MabThera supplied to Hoffmann-La Roche. During the first quarter of 1998, we received FDA approval for the large-scale (12,000-liter) bulk manufacture of Rituxan. Rituximab manufactured by us will supplement the Rituxan manufactured by IDEC on our behalf. IDEC has agreed to stop manufacturing Rituxan in August 1999. In December 1998, a letter was sent to physicians advising them of some deaths associated with administration of Rituxan. As a result, Genentech and IDEC are updating the warning section of the package insert to include information on infusion-related reactions and cardiovascular events. Activase: Sales of Activase in 1998 and 1997 decreased primarily due to a competitive thrombolytic agent, Centocor's Retavase. This decrease also resulted, to a lesser extent, from a decline in the size of the thrombolytic market due to increasing use of mechanical reperfusion and from a temporary decrease in the available commercial market due to patients receiving therapy through large recently completed Phase III clinical trials. In July 1998, we discontinued development of Activase for treating acute ischemic stroke in patients presenting later than three hours from symptom onset after the termination of two clinical trials, one in acute ischemic stroke patients presenting three to five hours from symptom onset, and another in acute ischemic stroke patients presenting zero to six hours from symptom onset. Neither study showed clinical benefit. Activase is approved for the treatment of acute ischemic stroke within three hours of symptom onset. Protropin, Nutropin and Nutropin AQ: Net sales of our three growth hormone products--Protropin, Nutropin and Nutropin AQ--decreased in 1998 from 1997, but increased slightly in 1997 from 1996. We experienced a small loss of market share in 1998 due to increased competition. We continue to face increased competition from five companies with growth hormone 32 36 products, although one company has been preliminarily enjoined from selling its product. In December 1997, we received approval from the FDA to market Nutropin and Nutropin AQ, respectively, in the United States for the treatment of growth hormone deficiency in adults. In December 1996 and January 1997, we received approval from the FDA to market Nutropin and Nutropin AQ, respectively, in the United States for the treatment of short stature associated with Turner syndrome. Pulmozyme: Net sales of Pulmozyme were slightly higher in 1998 compared to 1997 as a result of new patients in the mild to moderate cystic fibrosis patient population in addition to new patients from the 1998 FDA approval for a label extension to include cystic fibrosis patients under the age of five. Net sales in 1997 were higher primarily due to continued penetration in the mild to moderate cystic fibrosis patient populations as well as from variations in customer ordering patterns for U.S. sales. In February 1998, we received approval from the FDA for a label extension that includes the safety and alternative administration of Pulmozyme in children with cystic fibrosis under the age of five, adding to the product's previous approvals for patients five years of age and older. In November 1996, Pulmozyme was approved by the FDA for marketing in the United States for the management of cystic fibrosis patients with advanced disease. Actimmune: In the second quarter of 1998, in return for a royalty on net sales, we licensed U.S. marketing and development rights to interferon gamma, including Actimmune, to Connetics Corporation. Thereafter, Connetics Corporation sublicensed all of its rights to InterMune. After a transition period, as of January 1999, we no longer sell Actimmune. We have agreed to supply bulk materials to InterMune at cost plus a mark-up. Royalties, Contract and Other, and Interest Income
---------------------------------------------------- YEAR ENDED DECEMBER 31, ANNUAL % CHANGE ------------------------------ ---------------- 1998 1997 1996 98/97 97/96 ------ ------ ------ ----- ----- In millions Royalties........................................... $229.6 $241.1 $214.7 (5)% 12% Contract and other.................................. 114.8 121.6 107.0 (6) 14 Interest income..................................... 88.7 69.1 64.2 28 8
Total royalties decreased in 1998 from 1997 due to the expiration of royalties from Lilly in August 1998. Royalties in 1997 increased from 1996 primarily due to increased licensee sales from various licensees. Under a December 1994 settlement agreement with Lilly, royalties of $30.0 million per year were payable to Genentech through 1998, subject to possible offsets and contingent upon the continued marketing of Humulin in the United States. Under a prior license agreement with Lilly, we received royalties from Lilly's sales of its human insulin product until this royalty obligation expired in August 1998. Cash flows from royalty income include non-dollar denominated revenues. We currently purchase simple foreign currency put option contracts (option contracts) to hedge these royalty cash flows. All of our option contracts expire within the next two years. Contract and other revenues in 1998 decreased from 1997 as a result of higher 1997 contract payments and gains from the sale of biotechnology equity securities. Although we received significant nonrecurring payments from Hoffmann-La Roche for exclusive marketing rights outside of the United States for Herceptin and from Novo Nordisk A/S, or Novo, on the patent infringement litigation settlement, other contract revenues from Hoffmann-La Roche decreased significantly from 1997 primarily due to the discontinuation of several projects or indications in development. Contract and other revenues were higher in 1997 compared to 1996 primarily due to $30.9 million received from Sumitomo Pharmaceuticals Co., Ltd., or Sumitomo, and Pharmacia & Upjohn for strategic alliances and $11.7 million of gains from the sale of biotechnology equity securities in 1997. These increases were partly offset by higher revenues from Hoffmann-La Roche in 1996. In July 1998, we settled a lawsuit brought by us against Novo in the U.S. District Court for the Southern District of New York relating to our patents for human growth hormone and insulin and a lawsuit brought in October 1997 by Novo in the U.S. District Court for the District of New Jersey alleging infringement of a patent held by Novo relating to our manufacture, use and sale of its Nutropin human growth hormone products. Under the settlement agreement, we agreed with Novo to cross-license worldwide certain patents relating to human growth hormone. In August 1998, Novo received a worldwide license under our patents relating to insulin and we received certain payments from Novo that were recorded in contract revenues. As part of a strategic alliance with Sumitomo, we have agreed to provide Sumitomo exclusive distributorship rights in Japan for Nutropin AQ and a sustained release formulation of human growth hormone. In an agreement with Pharmacia & Upjohn, in exchange for development costs, fees and, upon regulatory approval, royalties, we agreed to provide Pharmacia & Upjohn exclusive worldwide rights for thrombopoietin, or TPO, which is in Phase II trials 33 37 for potential use in treating patients with complications of cancer chemotherapy. Pharmacia & Upjohn and Genentech are jointly developing TPO for one indication. While we are entitled to royalties and other payments, we have no marketing rights for this indication. We recorded nonrecurring contract revenues from Hoffmann-La Roche of $40.0 million in 1998 for Herceptin marketing rights outside of the United States and $44.7 million in 1998 for the exercise of its options under our former license agreement with Hoffmann-La Roche with respect to development of three products, insulin-like growth factor and nerve growth factor, which were both subsequently terminated, and Rituxan. All other contract revenue from Hoffmann-La Roche, including reimbursement for ongoing development expenses after the option exercise date, totaled $21.6 million in 1998, $67.6 million in 1997 and $50.6 million in 1996. All other revenue from Roche, Hoffmann-La Roche and their affiliates, principally royalties under previous product licensing agreements, and royalties and product sales under the licensing agreement, totaled $63.8 million in 1998, $42.8 million in 1997 and $39.5 million in 1996. Interest income increased in 1998 primarily due to an increase in the investment portfolio and, to a lesser extent, a higher average yield on the investment portfolio. The increase in 1997 from 1996 was due to an increase in the average yield on the investment portfolio and a larger investment portfolio. We enter into interest rate swaps as part of our overall strategy of managing the duration of our investment portfolio. Costs and Expenses
---------------------------------------------------- YEAR ENDED DECEMBER 31, ANNUAL % CHANGE ------------------------------ ---------------- 1998 1997 1996 98/97 97/96 ------ ------ ------ ----- ----- In millions Cost of sales....................................... $138.6 $102.5 $104.5 35% (2)% Research and development............................ 396.2 470.9 471.1 (16) 0 Marketing, general and administrative............... 358.9 269.9 240.1 33 12 Interest expense.................................... 4.6 3.6 5.1 28 (29) ------ ------ ------ Total costs and expenses.......................... $898.3 $846.9 $820.8 6 3 ====== ====== ====== % of revenues....................................... 78% 83% 85% Cost of sales as % of product sales................. 19 18 18 Research and development as % of revenues........... 34 46 49 Marketing, general and administrative as % of revenues.......................................... 31 27 25
Cost of Sales: Cost of sales as a percent of product sales increased in 1998 to 19%. This increase was primarily the result of increased sales to Hoffmann-La Roche as well as a shift in the product mix, including the first full year of Rituxan sales and the introduction of Herceptin. Cost of sales as a percent of product sales was 18% in 1997, which was comparable to 1996. The economic benefits from sales to Hoffmann-La Roche are reflected in product sales and royalties. Research and Development: Research and development expenses decreased in 1998 from 1997 primarily due to the wind-down of certain large late-stage clinical trials and lower costs to license technology from third parties. These decreases were partly offset by higher costs related to large scale development collaborations. In 1997, research and development expenses were flat compared to 1996. Research and development as a percentage of revenues decreased to 34% in 1998, from 46% in 1997 and from 49% in 1996. The decrease in this percentage from year to year reflects growing revenues and more recently in 1998 a decrease in research and development expenses. To gain additional access to potential new products and technologies, and to utilize other companies to help develop our potential new products, we have established strategic alliances with companies developing technologies that fall outside our research focus and with companies having the potential to generate new products through technology exchanges and investments. This has included our acquisition of equity and convertible debt of such companies. We have also entered into product-specific collaborations to acquire development and marketing rights for products. Marketing, General and Administrative: Marketing, general and administrative expenses increased in 1998 from 1997. The marketing and sales increases were driven by the introduction of Rituxan and the resultant profit sharing with IDEC, the launch of Herceptin and the defense of Activase and our growth hormone products against new competition and the launch of a new indication, growth hormone deficiency in adults, for Nutropin and Nutropin AQ. General and administrative expenses 34 38 were higher principally as a result of the write-down of certain biotechnology equity securities. Marketing, general and administrative expenses were also higher in 1997 compared to 1996 primarily due to increased marketing and sales expenses in the oncology area and competitive conditions with other marketed products. Interest Expense: Interest expense will fluctuate depending on the amount of capitalized interest related to the amount of construction projects. Interest expense, net of amounts capitalized, relates to interest on our 5% convertible subordinated debentures. Income Before Taxes and Income Taxes
------------------------------------------------------ YEAR ENDED DECEMBER 31, ANNUAL % CHANGE ------------------------------ ------------------ 1998 1997 1996 98/97 97/96 ------ ------ ------ ------ ------ In millions Income before taxes............................... $252.6 $169.8 $147.9 49% 15% Income tax provision.............................. 70.7 40.8 29.6 73 38 Effective tax rate................................ 28% 24% 20% 17 20
Our effective tax rate increased in 1998 over 1997 to 28%. This increase is primarily due to the decreased benefit of research and development tax credits. The tax rate for 1998 and 1997 reflected the legislative extension of research and development tax credits effective beginning in the third quarter of 1997. The increase in the effective tax rate in 1997 over 1996 was attributable to the proportionally decreased realization of previously reserved deferred tax assets. The valuation allowance for deferred tax assets was fully realized in 1996, with the exception of the portion attributable to the realization of tax benefits on stock option deductions which will be credited to additional paid-in-capital when realized. The effective tax rate in 1998, 1997 and 1996 was less than the U.S. statutory rate of 35% due in part to the research and development tax credits, tax benefit of certain realized gains on securities available for sale and realized foreign losses, except in 1997. Net Income
---------------------------------------------------- YEAR ENDED DECEMBER 31, ANNUAL % CHANGE ------------------------------ ---------------- 1998 1997 1996 98/97 97/96 ------ ------ ------ ----- ----- In millions Net income.......................................... $181.9 $129.0 $118.3 41% 9% Earnings per share Basic............................................. $ 1.45 $ 1.05 $ 0.98 38 7 Diluted........................................... 1.40 1.02 0.95 37 7
The increase in net income in 1998 from 1997 was driven primarily by sales of Rituxan and Herceptin, lower research and development expenses and higher interest income. These revenue increases and lower expenses were partly offset by higher marketing, general and administration expenses, a decrease in Activase sales, higher cost of sales and higher income taxes. Net income in 1997 increased over 1996 primarily due to higher royalties and contract and other revenues partly offset by higher marketing, general and administration expenses. 35 39 LIQUIDITY AND CAPITAL RESOURCES
------------------------------------------------------------------ AS OF MARCH 31, AS OF DECEMBER 31, ------------------------ ------------------------------------ 1999 1998 1998 1997 1996 --------- --------- -------- -------- -------- In millions Cash and cash equivalents, short-term investments and long-term marketable securities.............................. $1,662.4 $1,372.9 $1,604.6 $1,286.5 $1,159.1 Working capital........................... 942.7 958.9 950.6 904.4 705.1 Cash provided by (used in): Operating activities.................... 53.6 68.9 349.9 118.3 139.7 Investing activities.................... (156.4) (126.6) (421.1) (168.4) (141.7) Financing activities.................... 35.2 34.6 107.9 87.3 72.2 Capital expenditures (included in investing activities above)............. (18.2) (21.0) (88.1) (154.9) (141.8) Current ratio............................. 3.9 : 1 4.5 : 1 4.3 : 1 4.1 : 1 3.8 : 1
Cash and cash equivalents, short-term investments and long-term marketable securities at March 31, 1999 increased by $57.8 million compared to December 31, 1998, and working capital decreased by $7.9 million in the first quarter of 1999. Cash generated from operations, income from investments and proceeds from stock issuances were used to purchase marketable securities and make capital investments in 1998. Capital expenditures totaled $18.2 million in the first quarter of 1999 compared to $21.0 million in the comparable period in 1998. The decrease in the first quarter of 1999 was primarily due to a decrease in construction activity related to existing manufacturing facilities partly offset by an increase in equipment purchases. Capital expenditures in 1998 included improvements to existing office and laboratory facilities and equipment, and equipment purchases. In 1997, capital expenditures primarily included building improvements to existing manufacturing and office facilities and production systems. In 1996, capital expenditures primarily included building and land purchases and improvements to existing manufacturing and office facilities. The affiliation agreement with Roche will require us to establish and maintain a stock repurchase program. The dollar amounts associated with these future purchases cannot currently be estimated. We believe that our cash, cash equivalents and short-term investments, together with funds provided by operations and leasing arrangements, will be sufficient to meet our foreseeable operating cash requirements. In addition, we believe we could access additional funds from the capital and debt markets. Factors affecting our cash position include, but are not limited to, future levels of the company's product sales, royalty and contract revenues, expenses, in-licensing activities, including the timing and amount of related development funding or milestone payments, and capital expenditures. Our long-term debt consists of $150.0 million of convertible subordinated debentures, with interest payable at 5%, due in 2002. Prior to the redemption of our special common stock, the debentures were convertible, at the option of the holder, into one-half share of our special common stock and $18 in cash, for each $74 in principal amount of debenture converted. As a result of the redemption of our special common stock, upon conversion, the holder receives, for each $74 in principal amount of debenture converted, one-half of the $82.50 redemption price and $18 in cash, or $59.25 in cash. The $18 in cash is reimbursed by Roche to us. Generally, we may redeem the debentures until maturity. RESEARCH AND DEVELOPMENT We are committed to aggressive research and development investment to discover and develop new products. We currently have several products in late-stage clinical testing and anticipate that our research and development expenses will continue at a high percentage of revenues over the short-term. Over the long-term, as revenues increase, research and development as a percent of revenues is expected to decrease. INCOME TAX PROVISION As a result of the redemption of our special common stock, we are, and after this offering are expected to continue to be, included in Roche's federal consolidated income tax group. As a result, our tax liability will be included in Roche's U.S. 36 40 consolidated federal income tax group and our tax liability thus will be included in the consolidated federal income tax liability of Roche and its subsidiaries. We also will be included with Roche and/or one or more Roche subsidiaries in consolidated or combined income tax groups for certain state and local tax jurisdictions. Genentech and Roche have entered into a tax sharing agreement. Pursuant to this agreement, Genentech and Roche will make payments such that, with respect to any period, the net amount paid by us on account of consolidated or combined income taxes (including any amounts determined to be due as a result of a redetermination of the consolidated or combined income tax liability of a Roche group by reason of an audit by a taxing authority) will be determined as though we filed separate, stand-alone federal, state and local income tax returns as the common parent of an affiliated group of corporations filing consolidated or combined federal, state and local returns rather than a consolidated subsidiary of Roche. Such stand-alone tax returns will be prepared on a basis as if we were an independent taxpayer with no affiliation with Roche. For additional discussion of the tax sharing agreement, you should read "Relationship with Roche -- Tax Sharing Agreement". We expect our effective tax rate to increase in 1999 as a result of non-deductible goodwill amortization and a charge for in-process research and development and beyond 1999 for goodwill amortization. YEAR 2000 We use and rely on a wide variety of information technologies, computer systems and scientific and manufacturing equipment containing computer related components (such as programmable logic controllers and other embedded systems). Some of our older computer software programs and equipment are unable to distinguish between the year 1900 and the year 2000. As a result, time-sensitive functions of those software programs and equipment may misinterpret dates after January 1, 2000, to refer to the twentieth century rather than the twenty-first century. This could cause system or equipment shutdowns, failures or miscalculations resulting in inaccuracies in computer output or disruptions of operations, including, among other things, inaccurate processing of financial information and/or temporary inabilities to process transactions, manufacture products, or engage in similar normal business activities. We have a Year 2000 Project in place to address the potential exposures related to the impact on its computer systems and scientific and manufacturing equipment containing computer related components for the Year 2000 and beyond. Approximately half of our Year 2000 scheduled work is complete. The remaining work is scheduled to be completed by the end of the third quarter of 1999. The Year 2000 Project phases include: (1) inventorying and prioritizing business critical systems; (2) Year 2000 compliance analysis; (3) remediation activities including repairing or replacing identified systems; (4) testing; and (5) developing contingency plans. An inventory of business critical financial, informational and operational systems, including manufacturing control systems, has been essentially completed. Compliance analysis is approximately 90% complete for these systems. Remediation activities vary by department, however, on the average, remediation activities are approximately 60% complete. Testing of our information technology infrastructure is approximately 60% complete. Testing of business critical application programs is approximately 25% complete and is scheduled to be completed by the end of the third quarter of 1999. Contingency planning for business critical processes, which will include provisions such as identifying alternate sources for materials and services and if necessary reverting to non-computerized systems for processing information, was initiated in March 1999, is approximately 40% complete and is scheduled for completion in September 1999. We believe that with the completed modifications, the Year 2000 issue will not pose significant operational problems for our computer systems and equipment. However, if such modifications and conversions are not made, or are not completed in a timely fashion, Year 2000-related problems could have a material impact on our operations, the precise degree of which cannot be known at this time. In addition to risks associated with our own computer systems and equipment, we have relationships with, and are to varying degrees dependent upon, a large number of third parties that provide us with information, goods and services. These include financial institutions, suppliers, vendors, research and business partners, governmental entities and customers. If significant numbers of these third parties experience failures in their computer systems or equipment due to Year 2000 noncompliance, it could affect our ability to process transactions, manufacture products, or engage in similar normal business activities. While some of these risks are outside our control, we have instituted programs, including internal records review and use of external questionnaires, to identify key third parties, assess their level of Year 2000 compliance, update contracts and address any noncompliance issues. 37 41 The total cost of the Year 2000 systems assessments and conversions is funded through operating cash flows and we are expensing these costs as they are incurred. We have created a mechanism to trace costs directly related to the Year 2000 issue and have budgeted funds to address the issues of assessment and conversion. The financial impact of making the required systems changes cannot be known precisely at this time, but it is currently expected to be less than $10.0 million. The actual financial impact could, however, exceed this estimate. MARKET RISK We are exposed to market risk, including changes to interest rates, foreign currency exchange rates and equity investment prices. To reduce the volatility relating to these exposures, we enter into various derivative investment transactions pursuant to our investment and risk management policies and procedures in areas such as hedging and counterparty exposure practices. We do not use derivatives for speculative purposes. A discussion of our accounting policies for financial instruments and further disclosures relating to financial instruments is included in the "Description of Business and Significant Accounting Policies" and the "Financial Instruments" notes in the Notes to Consolidated Financial Statements. We maintain risk management control systems to monitor the risks associated with interest rates, foreign currency exchange rates and equity investment price changes, and its derivative and financial instrument positions. The risk management control systems use analytical techniques, including sensitivity analysis and market values. Though we intend for our risk management control systems to be comprehensive, there are inherent risks that may only be partially offset by our hedging programs should there be unfavorable movements in interest rates, foreign currency exchange rates or equity investment prices. The estimated exposures discussed below are intended to measure the maximum amount we could lose from adverse market movements in interest rates, foreign currency exchange rates and equity investment prices, given a specified confidence level, over a given period of time. Loss is defined in the value at risk estimation as fair market value loss. The exposures to interest rate, foreign currency exchange rate and equity investment price changes are calculated based on proprietary modeling techniques from a Monte Carlo simulation value at risk model using a 30-day holding period and a 95% confidence level. The value at risk model assumes non-linear financial returns and generates potential paths various market prices could take and tracks the hypothetical performance of a portfolio under each scenario to approximate its financial return. The value at risk model takes into account correlations and diversification across market factors, including interest rates, foreign currencies and equity prices. Market volatilities and correlations are based on J.P. Morgan Riskmetrics(TM) dataset as of December 31, 1998. INTEREST RATES Our interest income is sensitive to changes in the general level of interest rates, primarily U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest earned on our cash equivalents, short-term investments, convertible preferred stock investments, convertible loans and long-term investments. To mitigate the impact of fluctuations in U.S. interest rates, we may enter into swap transactions, which involve the receipt of fixed rate interest and the payment of floating rate interest without the exchange of the underlying principal. By investing our cash in an amount equal to the notional amount of the swap contract, with a maturity date equal to the maturity date of the floating rate obligation, we hedge ourselves from any potential earnings impact due to changes in interest rates. Based on our overall interest rate exposure at December 31, 1998, including derivative and other interest rate sensitive instruments, a near-term change in interest rates, within a 95% confidence level based on historical interest rate movements, would not materially affect the fair value of interest rate sensitive instruments. FOREIGN CURRENCY EXCHANGE RATES We receive royalty revenues from licensees selling products in countries throughout the world. As a result, our financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which our licensed products are sold. We are exposed to changes in exchange rates in Europe, Asia (primarily Japan) and Canada. Our exposure to foreign exchange rates primarily exists with the euro. When the U.S. dollar strengthens against the currencies in these countries, the U.S. dollar value of non-U.S. dollar-based revenue decreases; when the U.S. dollar weakens, the U.S. dollar value of the non-U.S. dollar-based revenues increases. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, may adversely affect our royalty revenues as expressed in 38 42 U.S. dollars. In addition, as part of its overall investment strategy, a portion of our portfolio is primarily in non-dollar denominated investments. As a result, we are exposed to changes in the exchange rates of the countries in which these non-dollar denominated investments are made. To mitigate this risk, we hedge certain of our anticipated revenues by purchasing option contracts with expiration dates and amounts of currency that are based on 25% to 90% of probable future revenues so that the potential adverse impact of movements in currency exchange rates on the non-dollar denominated revenues will be at least partly offset by an associated increase in the value of the option. Currently, the duration of these options is generally one to four years. We may also enter into foreign currency forward contracts to lock in the dollar value of a portion of these anticipated revenues. The duration of these forward contracts is generally less than one year. Also, to hedge the non-dollar denominated investments in the portfolio, we also enter into forward contracts. Based on our overall currency rate exposure at December 31, 1998, including derivative and other foreign currency sensitive instruments, a near-term change in currency rates within a 95% confidence level based on historical currency rate movements, would not materially affect the fair value of foreign currency sensitive instruments. EQUITY INVESTMENT SECURITIES As part of our strategic alliance efforts, we invest in equity instruments of biotechnology companies that are subject to fluctuations from market value changes in stock prices. To mitigate this risk, certain equity securities are hedged with costless collars. A costless collar is a purchased put option and a written call option in which the cost of the purchased put and the proceeds of the written call offset each other; therefore, there is no initial cost or cash outflow for these instruments at the time of purchase. The purchased put protects us from a decline in the market value of the security below a certain minimum level (the put "strike" level); while the call effectively limits our potential to benefit from an increase in the market value of the security above a certain maximum level (the call "strike" level). In addition, as part of our strategic alliance efforts, we hold dividend bearing convertible preferred stock and have made interest bearing loans that are convertible into the equity securities of the debtor. Based on our overall exposure to fluctuations from market value changes in marketable equity prices at December 31, 1998, a near-term change in equity prices within a 95% confidence level based on historic volatilities could result in a potential loss in fair value of the equity securities portfolio of $10.6 million. NEW ACCOUNTING STANDARD In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("FAS") 133, "Accounting for Derivative Instruments and Hedging Activities," effective beginning in the first quarter of 2000. FAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires companies to recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for, depending on the use of the derivative and whether it qualifies for hedge accounting under FAS 133. Based on the requirements of FAS 133, there may be changes to the balance sheet and reported assets and liabilities. We are currently evaluating the impact of FAS 133 on our financial position and results of operations. 39 43 BUSINESS Genentech is a leading biotechnology company that uses human genetic information to discover, develop, manufacture and market human pharmaceuticals for significant unmet medical needs. Twelve of the approved products of biotechnology stem from our science. We manufacture and market seven products directly in the United States. Science at Genentech focuses primarily on two areas of medicine: cardiovascular and oncology. We also pursue projects where there exists a significant opportunity to fill a therapeutic void in other important areas of medicine, such as our growth hormone products. PRODUCTS We have developed seven products, co-developed one product and manufactured and marketed eight of our products (see also the Actimmune section below) in the United States: - Herceptin (trastuzumab) antibody as a single agent for the treatment of patients with metastatic breast cancer whose tumors overexpress the HER2 protein and who have received one or more chemotherapy regimens. Herceptin, in combination with Taxol(R), is indicated for the treatment of patients with metastatic breast cancer whose tumors overexpress the HER2 protein and who have not received chemotherapy for their metastatic disease; - Rituxan (rituximab) antibody for the treatment of patients with relapsed or refractory low-grade or follicular, CD20-positive B-cell non-Hodgkin's lymphoma, a cancer of the immune system; - Activase (alteplase, recombinant) t-PA for the treatment of heart attack, acute ischemic stroke within three hours of the onset of symptoms, and acute massive pulmonary embolism; - Protropin (somatrem for injection) growth hormone for the treatment of growth hormone deficiency in children; - Nutropin (somatropin (rDNA origin) for injection) growth hormone for the treatment of growth hormone deficiency in children and adults, growth failure associated with chronic renal insufficiency prior to kidney transplantation and short stature associated with Turner syndrome; - Nutropin AQ (somatropin (rDNA origin)) liquid formulation growth hormone for the same indications as Nutropin; and - Pulmozyme (dornase alfa, recombinant) inhalation solution for the management of cystic fibrosis, in conjunction with standard therapies to improve lung function and reduce the relative risk of respiratory tract infections requiring parenteral antibiotics. In 1998, in return for a royalty on net sales, we licensed to Connetics Corporation our marketing and development rights to Actimmune interferon gamma-lb, which is used for the treatment of chronic granulomatous disease, a rare, inherited disorder of the immune system. After a transition period, as of January 1999, we no longer sell Actimmune. We receive royalties on sales of our products in Canada, on sales of Pulmozyme outside of the United States and on sales of rituximab outside of the United States (excluding Japan) from Hoffmann-La Roche. We receive royalties on sales of growth hormone products and t-PA outside of the United States and Canada through other licensees. We also receive worldwide royalties on five additional licensed products that originated from our technology and are marketed by other companies. Herceptin In September 1998, we received FDA approval to market Herceptin in the United States for use as first line therapy in combination with Taxol and as a single agent in second and third line therapy in patients with metastatic breast cancer who have tumors that overexpress the HER2 protein. Herceptin is the first humanized monoclonal antibody for the treatment of HER2 overexpressing metastatic breast cancer and the second U.S. approval in this new class of monoclonal antibody biotherapeutic cancer drugs. The first was Rituxan, which was approved in November 1997. We have granted Hoffmann-La Roche exclusive marketing rights to Herceptin outside of the United States. 40 44 Rituxan Rituxan is marketed in the United States for the treatment of relapsed or refractory low-grade or follicular, CD20-positive B-cell non-Hodgkin's lymphoma, a cancer of the immune system. In November 1997, Rituxan was cleared for marketing in the United States by the FDA. B-cell non-Hodgkin's lymphoma affects approximately 250,000 people in the United States, of which one-half are follicular or low-grade lymphoma patients. A portion of these patients will have multiple relapses and may be eligible for Rituxan therapy. Rituxan was co-developed with IDEC, from whom we license Rituxan. Rituxan was the first monoclonal antibody approved in the United States to treat cancer. We are jointly promoting Rituxan with IDEC in the United States and share responsibility with IDEC for manufacturing the product. Hoffmann-La Roche is responsible for marketing MabThera (rituximab) in the rest of the world, excluding Japan. In December 1998, a letter was sent to physicians advising them of some deaths associated with administration of Rituxan. As a result, Genentech and IDEC are updating the warning section of the package insert to include information on infusion-related reactions and cardiovascular events. Activase Tissue plasminogen activator, or t-PA, is an enzyme that is produced naturally by the body to dissolve blood clots. However, when a blood clot obstructs blood flow in the coronary artery and causes a heart attack, the body is unable to produce enough t-PA to dissolve the clot rapidly enough to prevent damage to the heart. Through recombinant DNA technology, we produce Activase, a recombinant form of t-PA, in sufficient quantity for therapeutic use. The FDA approved Activase for marketing in the United States in 1987 for the treatment of acute myocardial infarction (heart attack); in 1990 for use in the treatment of acute pulmonary embolism (blood clots in the lungs); and in June 1996 for the treatment of acute ischemic stroke or brain attack (blood clots in the brain) within three hours of symptom onset. In exchange for royalty payments, we have licensed marketing rights to a recombinant t-PA in Japan to Kyowa Hakko Kogyo, Ltd., or Kyowa, and Mitsubishi Kasei Corporation, or Mitsubishi. Kyowa and Mitsubishi are marketing forms of a recombinant t-PA under the trademarks Activacin(R) and GRTPA(R), respectively. In a number of countries outside of the United States, Canada and Japan, we have licensed t-PA marketing and manufacturing rights to Boehringer Ingelheim International GmbH, or Boehringer. We have also licensed certain rights to Boehringer regarding future sales of a second generation t-PA, TNK. We have completed enrollment in Phase III clinical trials for TNK in patients with acute myocardial infarction and are currently preparing FDA regulatory filings. Boehringer markets a recombinant t-PA under the trademark Actilyse(R). In July 1998, we discontinued development of Activase for treating acute ischemic stroke in patients presenting later than three hours from symptom onset after the termination of two clinical trials, one in patients with acute ischemic stroke presenting three to five hours from symptom onset, and another in patients with acute ischemic stroke presenting zero to six hours from symptom onset. Neither study showed clinical benefit. Activase is approved for the treatment of acute ischemic stroke within three hours of symptom onset. We are currently preparing to conduct Phase III clinical trials to test the use of Activase for intravenous catheter clearance. Protropin Human growth hormone is a naturally occurring human protein produced in the pituitary gland that regulates metabolism and is responsible for growth in children. We developed a recombinant growth hormone product, Protropin, that was approved by the FDA in 1985 for marketing in the United States for the treatment of growth hormone inadequacy in children. In exchange for royalty payments, we licensed rights to recombinant growth hormone outside the United States and Canada to Pharmacia & Upjohn, which manufactures and markets recombinant growth hormone under the trademarks Somatonorm(TM) and Genotropin(TM). Under the terms of the agreement with Pharmacia & Upjohn, commencing in late 1995, we have the right to sell growth hormone in most European countries and Japan and Pharmacia & Upjohn has the right to sell its own growth hormone in the United States and Canada. Nutropin Nutropin is a human growth hormone similar to Protropin; however, it does not have the additional N-terminal amino acid, methionine, found in the Protropin chemical structure. Nutropin was approved in November 1993 and launched in January 41 45 1994 for marketing in the United States for the treatment of growth failure in children associated with chronic renal insufficiency up to the time of renal transplantation. Chronic renal insufficiency causes irreversible damage to the kidneys and a variety of other medical problems. The condition affects an estimated 3,000 children in the United States. Nutropin has been designated as a U.S. Orphan Drug for treatment of growth failure in children with chronic renal insufficiency. Nutropin was approved by the FDA in March 1994 for marketing for the treatment of growth hormone inadequacy in children. In December 1996, the FDA approved Nutropin for the treatment of short stature associated with Turner syndrome. In December 1997, we received FDA approval to market Nutropin for the treatment of growth hormone deficiency in adults. Nutropin AQ In December 1995, we received regulatory approval to market Nutropin AQ, a liquid formulation of Nutropin, aimed at providing improved convenience in administration. Nutropin AQ is the first and only liquid (aqueous) recombinant human growth hormone product available in the United States. Nutropin AQ was approved for the treatment of growth hormone inadequacy in children, growth hormone failure in children associated with chronic renal insufficiency to the time of renal transplantation and short stature associated with Turner syndrome. In December 1997, we received FDA approval to market Nutropin AQ for the treatment of growth hormone deficiency in adults. As part of the strategic alliance formed with Sumitomo in December 1997, we have agreed to provide Sumitomo exclusive rights to develop, import and distribute in Japan, Nutropin AQ and a sustained release formulation of human growth hormone. For more information about this product see "Products in Development" below. During the first quarter of 1999, we entered into an agreement with Schwarz Pharma AG for the development and distribution of Nutropin AQ and the sustained-release Nutropin Depot (somatropin (rDNA origin) for depot suspension) for the treatment of certain pediatric and adult growth disorders in Europe and certain other countries outside of the United States, Canada and Japan. With our partner Alkermes Controlled Therapeutics, Inc., or Alkermes, we will manufacture these products for sale by Schwarz Pharma. On June 25, 1999, Genentech made U.S. regulatory filings seeking marketing approval for Nutropin Depot, and we are currently awaiting regulatory clearance. As a result of our filing, we are due a payment under the terms of our agreement with Schwarz Pharma. The agreement also entitles us to receive additional benchmark payments upon Schwarz Pharma's achievement of certain product development milestones. Pulmozyme Pulmozyme is marketed in the United States for the management of cystic fibrosis, for which it has U.S. Orphan Drug designation and was first approved for use in 1993. In November 1996, Pulmozyme was cleared for marketing by the FDA for the management of cystic fibrosis patients with advanced disease. In February 1998, we received approval from the FDA for a label extension that includes the safety and alternative administration of Pulmozyme in children with cystic fibrosis under the age of five, adding to the product's previous approvals for patients five years of age and older. Actimmune Actimmune interferon gamma-lb is approved in the United States for the treatment of chronic granulomatous disease, a rare, inherited disorder of the immune system that affects an estimated 250 to 400 Americans. Actimmune received designation by the FDA in 1990 as a U.S. Orphan Drug for the treatment of chronic granulomatous disease. During the quarter ended June 30, 1998, we licensed U.S. marketing and development rights to interferon gamma, including Actimmune, to Connetics Corporation in return for a royalty on net sales. Thereafter, Connetics Corporation sublicensed all of its rights to InterMune. After a transition period, as of January 1999, we no longer sell Actimmune. We have agreed to supply bulk materials to InterMune at cost plus a mark-up. We receive royalty payment from Boehringer from the sale of interferon gamma in certain countries outside of the United States, Canada and Japan and The People's Republic of China. LICENSED PRODUCTS In addition to the royalties mentioned above, Genentech also receives royalties on the following products:
PRODUCT TRADEMARK COMPANY ------- --------- ------- Human growth hormone Humatrope Eli Lilly and Company Recombinant interferon alpha Roferon-A Hoffmann-La Roche Hepatitis B vaccine Recombivax Merck and Company, Inc.
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PRODUCT TRADEMARK COMPANY ------- --------- ------- Hepatitis B vaccine Engerix-B SmithKline Beecham Biologicals S.A. Factor VIII Kogenate Bayer Corporation Bovine growth hormone Posilac Monsanto Company
Under a December 1994 settlement agreement with Lilly regarding certain of our patents, royalties of $30.0 million per year were payable to us through August 28, 1998, subject to possible offsets and contingent upon the continued marketing of Humulin in the United States. These royalty obligations have now expired. Under a prior license agreement with Lilly, we received royalties from Lilly's sales of Humulin. These royalty payments on Humulin sales expired in August 1998. PRODUCTS IN DEVELOPMENT A number of other products are in various stages of research and development. Our product development efforts cover a wide range of medical conditions, including cancer, respiratory disorders, cardiovascular diseases, endocrine disorders and inflammatory and immune problems. Below is a summary of products in clinical development:
PRODUCT DESCRIPTION ------- ----------- Awaiting Regulatory Approval Nutropin Depot sustained- A sustained release version of human growth hormone based on release growth hormone Alkermes' ProLease sustained release drug delivery system, which is designed to deliver human growth hormone by monthly or semi-monthly injections. This product is being developed in collaboration with Alkermes. On June 25, 1999, Genentech made U.S. regulatory filings seeking marketing approval for Nutropin Depot, and we are currently awaiting regulatory clearance. Preparing Regulatory Filings TNK-tPA A second generation t-PA that is a selectively mutated version of a wild-type t-PA. This t-PA version may be faster acting and easier to administer, and may restore blood flow faster. We have completed enrollment in Phase III clinical trials in patients with acute myocardial infarction and are currently preparing FDA regulatory filings. This product is being developed in collaboration with Boehringer. Phase III Anti-IgE antibody An anti-IgE monoclonal antibody designed to interfere early in the process that leads to symptoms of allergic asthma and seasonal allergic rhinitis. This product is being developed in collaboration with Tanox, Inc. and Novartis Pharmaceuticals Corporation. Phase III trials are ongoing in patients with allergic asthma. Phase III trials have been completed in patients with seasonal allergic rhinitis and the results have been analyzed. Pulmozyme inhalation solution A recombinant human protein that is an approved treatment for the management of cystic fibrosis. We are conducting a trial to determine the effect of Pulmozyme on pulmonary function in patients with early-stage cystic fibrosis. Rituxan antibody A monoclonal antibody approved for the treatment of relapsed or refractory low-grade or follicular, CD20-positive B-cell non-Hodgkin's lymphoma, a cancer of the immune system. Genentech is in Phase III clinical trials for the treatment of intermediate- and high-grade non-Hodgkin's lymphoma. This product is being developed in collaboration with IDEC. Xubix(TM) (sibrafiban) oral An orally administered inhibitor of platelet aggregation IIb/IIIa antagonist that may be useful in the prevention of unwanted clotting in certain cardiovascular conditions, including acute coronary syndrome. Hoffmann-La Roche is conducting global development of this molecule, and we retain certain opt-in rights with respect to the United States.
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PRODUCT DESCRIPTION ------- ----------- Preparing for Phase III trials Activase t-PA A protein that is an approved treatment for heart attack, acute ischemic stroke within three hours of symptom onset, and acute massive pulmonary embolism. We are preparing for Phase III trials of this product for intravenous catheter clearance. Anti-CD11a (hu1124) antibody An antibody designed to block certain immune cells as a potential treatment for psoriasis. We are currently preparing for Phase III trials of this product, which we are developing in collaboration with Xoma Corporation. Herceptin antibody An antibody that is an approved treatment for metastatic breast cancer. In collaboration with Hoffmann-La Roche and U.S. national cooperative groups, we are preparing for Phase III trials for adjuvant treatment of early-stage breast cancer in patients who overexpress the HER2 protein. Thrombopoietin (TPO) A protein that is being studied for treatment of thrombocytopenia, a reduction in clot-inducing platelets, in cancer patients treated with chemotherapy. This molecule has been exclusively licensed to Pharmacia & Upjohn. Phase II Anti-CD18 antibody An antibody designed to block certain immune cells that may impact blood flow. We are conducting Phase II clinical trials aimed at increasing blood flow in patients with acute myocardial infarction. Anti-VEGF antibody An antibody developed to inhibit angiogenesis (the formation of new blood vessels) as a potential treatment for several types of solid-tumor cancers. In pre-clinical studies the anti-VEGF antibody resulted in decreased vascularization and a decline in growth and metastasis of a variety of solid tumors. Phase II studies are ongoing in prostate cancer, breast cancer, renal cell carcinoma, lung cancer and colorectal cancer. Herceptin antibody An antibody that is an approved treatment for metastatic breast cancer. Herceptin will also be evaluated for broader application in other tumor types in which the HER2 protein is overexpressed. We are planning to conduct Phase II studies alone or in collaboration with Hoffmann-La Roche, the National Cancer Institute or other clinical research groups. VEGF A protein that ischemic tissues (tissues lacking in oxygen) secrete, VEGF binds to receptors on nearby blood vessels and causes angiogenesis, the formation of new blood vessels. A recently completed Phase II clinical trial of VEGF in patients with coronary artery disease did not meet its primary objectives. We are currently deciding on next steps for this program. Phase I AMD Fab A customized fragment of an anti-VEGF antibody for the potential treatment of age-related macular degeneration (AMD). In this condition, excessive blood vessel growth in the retina of the eye can lead to blindness. We are currently preparing for Phase I clinical trials. LDP-02 A monoclonal antibody for the treatment of inflammatory bowel diseases. This product is licensed from and being developed in collaboration with LeukoSite, Inc. This compound is currently in Phase Ib/IIa clinical trials in Canada and the United Kingdom. Pulmozyme inhalation solution A recombinant human protein used for the management of with Aradigm's delivery system cystic fibrosis. We are preparing to begin Phase I clinical testing of Pulmozyme delivery via Aradigm Corp.'s AERx(TM) delivery system.
In addition to the products described above, we are working on additional products and new indications for currently marketed products. Also, we retain certain rights to gp120, a recombinant form of the gp120 envelope glycoprotein of human 44 48 immunodeficiency virus, which may serve as the basis for the development of a prophylactic HIV/AIDS vaccine. Under a license agreement entered into with VaxGen Inc., we are responsible for supplying specified amounts of clinical quantities of gp120 and we have an option to supply additional clinical supplies. VaxGen is responsible for conducting all clinical trials necessary for worldwide product approvals. Currently, VaxGen is conducting Phase III trials with gp120. Genentech has separate options for worldwide marketing rights and commercial supply of gp120 in the event that gp120 is approved as an AIDS vaccine. In general, with respect to our products, Hoffmann-La Roche pays us a royalty on aggregate sales outside of the United States. In addition, Hoffmann-La Roche has rights to, and pays us royalties on, Canadian sales of Activase, Protropin, Nutropin, Pulmozyme and Actimmune, sales of Pulmozyme outside of the United States and sales of Rituxan outside of the United States, excluding Japan. Genentech supplies its products to Hoffmann-La Roche, and has agreed to supply its products for which Hoffmann-La Roche has exercised its option, for sales outside of the United States. In addition, on July 6, 1998, we entered into an agreement with Hoffmann-La Roche to provide Hoffmann-La Roche exclusive marketing rights outside of the United States for Herceptin. In December 1997, Genentech and Alteon Inc. entered into a collaborative agreement to develop and market pimagedine, an advanced glycosylation end-product formation inhibitor to treat kidney disease in diabetic patients. Under the terms of the agreement, we licensed pimagedine and second generation compounds from Alteon and we have made investments in Alteon stock of $37.5 million. In 1998, as a result of unsuccessful clinical trials with pimagedine and the decline in the value of our investment in Alteon, we wrote down $24.2 million of its marketable and nonmarketable equity investments in Alteon. The agreement was terminated in June 1999. Genentech and CuraGen Corporation entered into a research collaborative agreement in November 1997, whereby we invested $5.0 million in equity of CuraGen and we agreed to provide a convertible equity loan to CuraGen of up to $26.0 million. As of the date of this prospectus, no loan amounts have been funded to CuraGen. Also, in December 1997, Genentech and LeukoSite entered into a collaboration agreement to develop and commercialize LeukoSite's LDP-02, a humanized monoclonal antibody for the potential treatment of inflammatory bowel diseases. Under the terms of the agreement, we made a $4.0 million equity investment in LeukoSite and we agreed to provide a convertible equity loan for approximately $15.0 million to fund Phase II development costs. Upon successful completion of Phase II, if LeukoSite agrees to fund 25% of Phase III development costs, we have agreed to provide a second loan to LeukoSite for such funding. As of the date of this prospectus, no loan amounts have been funded to LeukoSite. In May 1999, we entered into a collaboration agreement with Immunex Corporation, or Immunex, to develop and commercialize TRAIL/APO2 Ligand, also known as tumor necrosis factor-related apoptosis-inducing ligand, for the potential treatment of cancer. Under the terms of the agreement, the two companies have agreed to allocate clinical, manufacturing and marketing responsibilities, and to share all development and commercialization costs. The companies have agreed to co-promote TRAIL/APO2L worldwide, and to share profits from the worldwide sales of the product. TRAIL/APO2L is designed to cause tumor cells, but not normal cells, to undergo programmed cell death, or apoptosis. In May 1999, we entered into a license agreement with Immunex whereby we granted to Immunex a worldwide, co-exclusive license under our immunoadhesin patents to make, use and sell Enbrel(R), Immunex' product to treat moderately to severely active rheumatoid arthritis. Immunex paid us an initial license fee and has agreed to pay royalties on sales of Enbrel from November 6, 1998, which was the date of product launch, through the life of our patents. DISTRIBUTION We have a U.S.-based pharmaceutical marketing, sales and distribution organization. Our sales efforts are focused on specialist physicians based at major medical centers in the United States. In general, our products are sold to distributors or directly to hospital pharmacies or medical centers. We utilize common pharmaceutical company marketing techniques, including advertisements, professional symposia, direct mail, public relations and other methods. Our products are available at no charge to qualified patients under our uninsured patient programs in the United States. We have established the Genentech Endowment for Cystic Fibrosis so qualified cystic fibrosis patients in the United States who need Pulmozyme can gain assistance in obtaining it. 45 49 During 1998, we provided certain marketing programs relating to Activase, including comprehensive wastage replacement and expired product programs for Activase that, subject to specific conditions, provides customers the right to return Activase to us for replacement related to both patient-related product wastage and product expiration. We maintain the right to renew, modify or discontinue the above programs. Hoffmann-La Roche contributed approximately 11% of our total revenues in 1998, 11% in 1997 and 14% in 1996. Three other major customers, Caremark, Inc., Bergen Brunswig, and Cardinal Distribution, Inc., each contributed 10% or more of our total revenues in at least one of the last three years. Caremark, Inc., a national distributor, which accounted for 10%, 14% and 15% of total revenues in 1998, 1997 and 1996, respectively, distributes our growth hormone products, Pulmozyme and Actimmune, through its extensive branch network and is then reimbursed through a variety of sources. Bergen Brunswig, a national wholesale distributor of all of our products, contributed 11% of our total revenues in 1998 and 10% in 1997 and 1996. Cardinal Distribution, Inc., a national wholesaler distributor of all our products, contributed 11% of our total revenues in 1998. LICENSING AGREEMENTS WITH F. HOFFMANN-LA ROCHE LTD We currently have two major licensing agreements with Hoffmann-La Roche. Herceptin Licensing Agreement On July 6, 1998, we entered into an agreement with Hoffmann-La Roche to provide Hoffmann-La Roche exclusive marketing rights outside of the United States for Herceptin. Under the agreement, Hoffmann-La Roche paid $40.0 million to us and has agreed to pay cash milestones tied to future product development activities, to contribute equally with us up to a maximum of $40.0 million on global development costs and to make royalty payments of 20% on aggregate net product sales outside the United States up to $500 million in each calendar year and 22.5% on such sales in excess of $500 million in each calendar year. Amended and Restated Licensing Agreement Summary of Key Changes: Under an agreement dated October 25, 1995, we granted to Hoffmann-La Roche an option for ten years for licenses to use and sell some of our products in non-U.S. markets. In connection with this offering, we will amend this licensing agreement with Hoffmann-La Roche by extending until at least 2015 Hoffmann-La Roche's option to license to use and sell products in non-U.S. markets. Other key changes to the license agreement are summarized as follows: - Hoffmann-La Roche may choose to exercise its option at the end of a Phase III trial, if it pays a $10 million fee to us to extend its option on the product; - if Hoffmann-La Roche exercises its option after the completion of a Phase III trial, Hoffmann-La Roche will reimburse us for 75% of our development costs incurred after the completion of the Phase II trial through the completion of the Phase III trial, and 50% of our development costs incurred before completion of the Phase II trial. Subsequent development costs for other indications will be shared 75%/25% by Hoffmann-La Roche and Genentech; - on each Genentech Product for which Hoffmann-La Roche exercises its option after completion of the Phase III trials, we will receive a royalty of 15% on all sales until the later in each country of the expiration of our relevant patent or 25 years from the first commercial introduction; however, $5 million of any option extension fee paid by Hoffmann-La Roche shall be credited against royalties payable to us in the first calendar year of sales by Hoffmann-La Roche in which aggregate sales of that product exceeds $100 million; - Hoffmann-La Roche will have the right to manufacture our products itself if it can demonstrate that it is able to manufacture products at a lower price than our supply price, if we are not able to supply Hoffmann-La Roche's commercial requirements or if we intend to have a third party manufacture the product; - Hoffmann-La Roche will have the right to terminate a license for a product upon 30 days notice; - if Hoffmann-La Roche terminates its license based on a good faith determination, after consultation with appropriate regulatory authorities in the relevant country, that the product cannot be approved for sale in one or more major European countries because of safety issues, Hoffmann-La Roche will be liable for all obligations incurred primarily to support registration outside the United States of that product for up to six months after the termination is given; and 46 50 - if Hoffmann-La Roche terminates its license for other than safety reasons, Hoffmann-La Roche shall be liable for all of its obligations regarding the product for up to twelve months after the notice of termination. General: Pursuant to our amended and restated licensing agreement with Hoffmann-La Roche, we have agreed to grant to Hoffmann-La Roche an exclusive patent, know-how and trademark license to use, sell and, under certain conditions, make in Canada (collectively, the "Canada Products"): - Activase tissue plasminogen activator; - Protropin and Nutropin human growth hormone; - Actimmune interferon gamma-1b; and - Pulmozyme inhalation solution. We have also agreed to grant to Hoffmann-La Roche an exclusive patent, know-how and trademark license to use, sell and, under certain conditions, make Pulmozyme outside the United States (the "Roche Territory"). Except as noted below with respect to certain "in-licensed" products, the licensing agreement provides that we will grant to Hoffmann-La Roche an option for an exclusive patent, know-how and trademark license in the Roche Territory on a product-by-product basis to use, sell and, under certain circumstances, make other products for which we have rights or for which we have subsequently acquired rights ("Genentech Products"). We granted to Hoffmann-La Roche an option for an exclusive patent and know-how license outside the United States to use, sell and, under certain conditions, make products in-licensed from IDEC (such products being referred to as "IDEC Product"). Hoffmann-La Roche exercised its option with regard to Rituxan. In Canada, Hoffmann-La Roche's rights with respect to IDEC Product are subject to our preexisting co-promotion obligation for this product. Subject to the terms and conditions of any relevant license agreements and Hoffmann-La Roche's acceptance of those terms and conditions, we will grant to Hoffmann-La Roche an option for an exclusive patent and know-how license in the Roche Territory on a product-by-product basis to use, sell and, under certain circumstances, make other human pharmaceutical products for which we have acquired rights in the Roche Territory by means of a patent and/or know-how license from a third party ("In-Licensed Product"). Hoffmann-La Roche may exercise its option to license our products upon the occurrence of any of the following: - our decision to file an IND with the FDA for a product; - at completion of a Phase II trial for a product with results sufficient to support the undertaking of a Phase III trial; or - if Hoffmann-La Roche paid a fee of $10 million at completion of the Phase II trial to extend its option for that product, at completion of a Phase III trial for that product with results sufficient to support the filing of a BLA or NDA. We must notify Hoffmann-La Roche and supply to Hoffmann-La Roche a reasonable summary of available information regarding a product, including data from any Phase II or Phase III trials, upon each of these events. Hoffmann-La Roche then has 60 days to exercise its option. Within 30 days of this notification, the joint commercialization committee described below must meet to review the results of any Phase II or Phase III trials and other relevant data. Within 60 days of this notification and receipt by Hoffmann-La Roche of the information regarding the product, Hoffmann-La Roche must either exercise its option for the product or irrevocably waive it for that particular option period. If Hoffmann-La Roche waives its option, we are permitted to develop and sell the product ourselves or with another party. Prior to our decision to file an IND exemption application with the FDA for a product, we retain authority to discontinue sole development of that product and, subject to the provisions of our affiliation agreement with Roche, to license that product to a third party. See "Relationship with Roche -- Arrangements between Genentech and Roche -- Licensing and Marketing Arrangements" below. The options granted in the licensing agreement terminate on October 25, 2015, except for the following: - if Hoffmann-La Roche has paid to extend its option on a product, Hoffmann-La Roche will retain an option on that product upon completion of Phase III trials; - for a product for which we have decided to file an IND with the FDA but which has not yet reached completion of Phase II trials, Hoffmann-La Roche may exercise its option upon completion of Phase II trials; and - for a product for which a 60-day option exercise period had begun, Hoffmann-La Roche may exercise its option up until the end of that 60-day period. 47 51 We have the sole right outside the Roche Territory, and Hoffmann-La Roche has the sole right in the Roche Territory, to register, use, sell and market such products arising from our current collaborations with Hoffmann-La Roche on IIb/IIIa antagonists, other than Xubix, and ras farnesyltransferase inhibitors. All research efforts on these products will continue to be shared in an equal manner; no royalties on sales shall be due from either party to the other. The costs for development of certain products will be shared as described below under "--Development and Marketing." The licensing agreement grants us an option to participate and share in the development and commercialization of Xubix within 30 days after approval of an NDA by the FDA. If exercised, we would reimburse Hoffmann-La Roche for 50% of its development costs (including Phase III development costs) incurred by Hoffmann-La Roche from and after May 1, 1997 through the date we exercised our option and for Phase III development costs incurred prior to May 1, 1997 and would pay an additional $25 million. If we exercise our option, we and Hoffmann-La Roche will negotiate and enter into a more detailed commercialization and development agreement. We would have co-exclusive rights with Hoffmann-La Roche in the United States to register, use, sell and market the products resulting from our collaboration on Xubix. Hoffmann-La Roche would have exclusive rights on Xubix in the Roche Territory. Commercialization Committees: To manage our collaborations with Hoffmann-La Roche, the licensing agreement provides for the establishment of four committees: a joint commercialization committee to provide a forum for the exchange of information about Genentech Products; a development committee to coordinate development efforts between us and Hoffmann-La Roche; a management committee to review annually the development and commercialization of all products covered by the licensing agreement; and a joint finance committee to discuss financial activities relating to the licensing agreement. We and Hoffmann-La Roche will review the committee structure within six months after effectiveness of the licensing agreement to consider simplifying the committee system. Development and Marketing: Under the licensing agreement, we will have sole responsibility and full autonomy for the development and marketing of our products outside the Roche Territory, and also in the Roche Territory with respect to products for which Hoffmann-La Roche does not exercise its option for a license. Hoffmann-La Roche will have sole responsibility for the development and marketing of products in the Roche Territory for which it has been granted a license or exercised its option for a license. Under the licensing agreement, Hoffmann-La Roche will, in general, reimburse us for 50% of our development costs, depending on the payment mechanism described below, incurred in connection with a product for which Hoffmann-La Roche has exercised its option for a license except that if Hoffmann-La Roche exercises its option to license a new product after receiving notice of the completion of a Phase III trial for that product, Hoffmann-La Roche will reimburse us for 75% of our development costs incurred between the time we gave notice of completion of Phase II trials and the exercise of its option, in addition to reimbursing us for 50% of our development costs incurred prior to notice of completion of Phase II trials. However, $5 million of any option extension fee paid by Hoffmann-La Roche will be credited against our development costs to be reimbursed by Hoffmann-La Roche for that product. The mechanism for reimbursement of our development costs incurred up to the date of Hoffmann-La Roche's exercise of its option for a product shall be, at our election and with Hoffmann-La Roche's consent, either of the following: - upon Hoffmann-La Roche's exercise of its option by payment in full of the appropriate percentage of the previously incurred development costs for that product or - by quarterly payments equal to 150% of prospective development costs for that product until the appropriate percentage of all previously incurred development costs for that product have been reimbursed. If the option was exercised prior to completion of the product's Phase II trials, 50% of the global development costs incurred after Hoffmann-La Roche's exercise of its option shall be reimbursed by Hoffmann-La Roche on an ongoing basis. If the option was exercised after completion of the product's Phase II trials, 75% of the global development costs incurred after Hoffmann-La Roche's exercise of its option shall be reimbursed by Hoffmann-La Roche on an ongoing basis. Once Hoffmann-La Roche has exercised an option to license a product, we will share the subsequent global development costs of that product equally, except as follows: - Hoffmann-La Roche will bear 10% of the global development costs incurred in connection with Canada Products on or after the date on which Hoffmann-La Roche exercises its option for a license on the product; 48 52 - Hoffmann-La Roche will bear 60% of the global development costs incurred in connection with IGF-1 products for any diabetes indication on or after the date on which Hoffmann-La Roche exercises its option for a license on the product; - Hoffmann-La Roche will bear 60% of the global development costs incurred in connection with any NGF products on or after the date on which Hoffmann-La Roche exercises its option for a license on the product; - for any additional indications, new formulations or new dosing schedules of a product, we and Hoffmann-La Roche will share equally the subsequent global development costs, unless Hoffmann-La Roche exercised its option after completion of the Phase III trials, in which case Hoffmann-La Roche will bear 75% and we will bear 25% of the subsequent global development costs; and - if Hoffmann-La Roche exercises its option after completion of the Phase III trials, each company will bear its own subsequent global development costs for clinical development and registration for the indication that is the subject of these Phase III trials. Production and Supply: Pursuant to the licensing agreement, we or our subsidiaries, as applicable, will manufacture and supply to Hoffmann-La Roche its clinical requirements of Genentech Products at cost and its commercial requirements at cost plus a margin of 20% on such cost. If Hoffmann-La Roche exercises its option with respect to any synthetic molecules other than proteins and peptides ("Small Molecule Products"), Hoffmann-La Roche will manufacture and supply to us clinical requirements of Small Molecule Products at cost and commercial requirements at cost plus a margin of 20% on such cost. In-Licensed Products will be manufactured and supplied to Hoffmann-La Roche, whether by us, the licensor or a third party, in a manner consistent with the license agreement for that product. Hoffmann-La Roche will bear the same percentage of costs associated with developing a manufacturing process for products licensed by Hoffmann-La Roche as Hoffmann-La Roche is required to bear with respect to the development of the product. We will pay that proportion of Hoffmann-La Roche's costs associated with developing a manufacturing process for a Small Molecule Product licensed by Hoffmann-La Roche that Genentech's expected revenues for sales of that product in the United States bears to expected worldwide sales of that product. Hoffmann-La Roche will have the right to manufacture Genentech Products itself, in bulk form or in vial form, under any of the following circumstances: - if Hoffmann-La Roche can demonstrate that it is able to manufacture products in either of these forms at a lower price than our supply price; - if we are not able to, or it is foreseeable that we will not be in a position to, supply Hoffmann-La Roche's commercial requirements in the Roche Territory; or - if we intend to have a third party manufacture a product in these forms. Under any of these circumstances, at Hoffmann-La Roche's request, we will provide Hoffmann-La Roche with all information and any support, at Hoffmann-La Roche's expense, needed to enable Hoffmann-La Roche to manufacture a product in these forms for use and sale in the Roche Territory, and we shall grant Hoffmann-La Roche any necessary licenses to do so. Royalties and Other Payments: We will receive the following royalties on product sales from Hoffmann-La Roche: - On Pulmozyme, (x) a royalty of 20% on sales in countries that are or will become members of the European Union or the European Free Trade Association and in Canada and (y) in all other countries which are part of the Roche Territory, a royalty of 12.5% on the first $100 million in aggregate sales and thereafter a royalty of 15% on aggregate sales in excess of $100 million until the later in each country of the expiration of our last relevant patent or 25 years from first commercial introduction; - On Canada Products, a royalty of 20% on sales of each such product until the later of the expiration of our relevant patent in Canada or 25 years from October 25, 1995 (with respect to Activase, Hoffmann-La Roche will pay an additional 10% royalty on sales in each year that exceed 110% of 1994 Activase sales up to a total payment of $27 million); - On each Genentech Product for which Hoffmann-La Roche exercises its option upon either a decision to file an IND with the FDA or completion of the Phase II trials, a royalty of 12.5% on the first $100 million in aggregate sales and thereafter a royalty of 15% on aggregate sales in excess of $100 million until the later in each country of the expiration of our last relevant patent or 25 years from first commercial introduction; 49 53 - On each Genentech Product for which Hoffmann-La Roche exercises its option after completion of the Phase III trials, a royalty of 15% on all sales until the later in each country of the expiration of our relevant patent or 25 years from the first commercial introduction; however, $5 million of any option extension fee paid by Hoffmann-La Roche shall be credited against royalties payable to us in the first calendar year of sales by Hoffmann-La Roche in which aggregate sales of that product exceeds $100 million; - On IDEC Product, a royalty of 20% on sales for so long as we are paying royalties to IDEC on sales of IDEC Product and thereafter a royalty of 10% for aggregate annual sales of $75 million or less and 8% for aggregate annual sales in excess of $75 million until the later in each country of the expiration of our last relevant patent or 25 years from first commercial introduction; - On In-Licensed Products, a mutually agreeable royalty to be negotiated for each such product; and - On the expiration of any of the foregoing royalties, on a product for which Hoffmann-La Roche continues to use our trademark, a royalty of 2% on sales for so long as the trademark is used. With respect to IDEC Product, Hoffmann-La Roche paid us $10 million and reimbursed us for 50% of some of our development costs and for certain one-time milestone payments that we were obligated to pay upon the occurrence of such milestones to IDEC. Any of the foregoing royalties shall be renegotiated in good faith to make that royalty or rate significantly more economically viable for Hoffmann-La Roche if (i) there exists a generically equivalent product competing with the product for which Hoffmann-La Roche pays royalties to us and (ii) the equivalent product has at least 25% of the market share for those products in that country. Any of the foregoing royalties are subject to reductions in the event that Hoffmann-La Roche, together with its affiliates, hold less than 50% of our outstanding common stock. Term and Termination: The licensing agreement expires for any individual product when royalties are no longer payable by Hoffmann-La Roche to us on sales of that product unless we and Hoffmann-La Roche agree to extend the licensing agreement for such product. Provisions for termination by Hoffmann-La Roche include the following: - Hoffmann-La Roche has the right to terminate a license for a product upon thirty days notice; - if Hoffmann-La Roche terminates its license based on a good faith determination, after consultation with appropriate regulatory authorities in the relevant country, that the product cannot be approved for sale in one or more major countries that either are or become members of the European Union or the European Free Trade Association because of safety issues, Hoffmann-La Roche shall be liable for all obligations incurred primarily to support registration in the Roche Territory of that product for up to six months after Hoffmann-La Roche terminates its license; - if Hoffmann-La Roche terminates its license for other than safety reasons, Hoffmann-La Roche shall be liable for all of its obligations regarding the product for up to twelve months after the termination notice is given or if Hoffmann-La Roche terminates its license after at least one Phase III clinical trial has been completed and the results of that trial are unable to support the registration of that product, or the results of other trials establish that further development would not provide data sufficient to support registration, Hoffmann-La Roche shall be liable for all of its obligations regarding the product for up to six months after the termination notice is given; and - if Hoffmann-La Roche terminates its license, all rights to the product revert to us. If Hoffmann-La Roche fails to use its best efforts to commercialize a product in a country and fails to take adequate remedial measures within six months of notice, we may - terminate the agreement with respect to that product in that country if a registration has not been initiated; or - convert the exclusive license for that product in that country to a nonexclusive one if registration has been initiated. We may terminate our development or commercialization at any time for any product which has been licensed to Hoffmann-La Roche, and such product will then be subject to the provisions of our affiliation agreement with Roche described under "Relationship with Roche--Arrangements between Genentech and Roche--Licensing and Marketing Arrangements," provided that if such termination is for reasons other than safety concerns, we will have an obligation for up to two years to provide 50 54 Hoffmann-La Roche's clinical and commercial supply requirements. Either party may terminate the licensing agreement for the breach of a material obligation of the other. We may terminate Hoffmann-La Roche's option for a license for products if the equity ownership of Hoffmann-La Roche and its affiliates in our company is less than 50% at any time. If we terminate the license agreement for any product for any reason, Hoffmann-La Roche will have a royalty-free right and license to produce and supply all of its clinical and commercial supply requirements and we will be obligated to transfer to Hoffmann-La Roche all manufacturing technology with respect to that product. If Hoffmann-La Roche terminates its development or commercialization of a Small Molecule Product at any time, we will have a royalty-free right and license to produce and supply all of our clinical and commercial supply requirements and Hoffmann-La Roche will be obligated to transfer to us all manufacturing technology with respect to that product. RAW MATERIALS Raw materials and supplies required for the production of our principal products are generally available in quantities adequate to meet our needs. PROPRIETARY TECHNOLOGY -- PATENTS AND TRADE SECRETS We seek patents on inventions arising from our ongoing research and development activities. Patents issued or applied for cover inventions ranging from basic recombinant DNA techniques to processes relating to specific products and to the products themselves. We have either been granted patents or have patent applications pending that relate to a number of current and potential products including products licensed to others. We consider that in the aggregate our patent applications, patents and licenses under patents owned by third-parties are of material importance to our operations. Important legal issues remain to be resolved as to the extent and scope of available patent protection for biotechnology products and processes in the United States and other important markets outside of the United States. We expect that litigation will likely be necessary to determine the validity and scope of certain of our proprietary rights. We are currently involved in a number of patent lawsuits, as either a plaintiff or defendant, and administrative proceedings relating to the scope of protection of our patents and those of others. These lawsuits and proceedings may result in a significant commitment of our resources in the future. We cannot assure you that the patents we obtain or the unpatented proprietary technology we hold will afford us significant commercial protection. In general, we have obtained licenses from various parties that we deem to be necessary or desirable for the manufacture, use or sale of our products. These licenses (both exclusive and non-exclusive) generally require us to pay royalties to the parties on product sales. Our trademarks, Actimmune, Activase, Herceptin, Nutropin, Nutropin AQ, Nutropin Depot, Protropin, Pulmozyme and Rituxan, in the aggregate are considered to be of material importance, and all are registered in the U.S. Patent and Trademark Office and in other countries, other than Nutropin Depot, for which an application is pending with the U.S. Patent and Trademark Office. Our royalty income during 1998, 1997 and 1996 for patent licenses, know-how and other related rights amounted to $229.6 million, $241.1 million and $214.7 million, respectively. Royalty expenses for 1998, 1997 and 1996 were $66.3 million, $58.9 million and $58.9 million, respectively. COMPETITION We face competition, and believe significant long-term competition can be expected, from large pharmaceutical companies and pharmaceutical divisions of chemical companies as well as biotechnology companies. This competition can be expected to become more intense as commercial applications for biotechnology products increase. Some competitors, primarily large pharmaceutical companies, have greater clinical, regulatory and marketing resources and experience than we do. Many of these companies have commercial arrangements with other companies in the biotechnology industry to supplement their own research capabilities. The introduction of new products or the development of new processes by competitors or new information about existing products may result in price reductions or product replacements, even for products protected by patents. However, we believe our competitive position is enhanced by our commitment to research leading to the discovery and development of new products and manufacturing methods. Other factors that should help us meet competition include ancillary services provided to support 51 55 our products, customer service, and dissemination of technical information to prescribers of our products and to the health care community, including payers. Over the longer term, our and our collaborators' ability to successfully market current products, expand their usage and bring new products to the marketplace will depend on many factors, including but not limited to the effectiveness and safety of the products, FDA and foreign regulatory agencies' approvals for new indications, the degree of patent protection afforded to particular products, and the effect of managed care as an important purchaser of pharmaceutical products. Herceptin Herceptin is the first humanized monoclonal antibody for the treatment of HER2 overexpressing metastatic breast cancer and the second United States approval in this new class of monoclonal antibody biotherapeutic cancer drugs. The first was Rituxan. We are aware of other potentially competitive biologic therapies in development. Rituxan Rituxan received designation as a U.S. Orphan Drug by the FDA in 1994 for the treatment of relapsed or refracting low grade or follicular, CD20-positive B-cell non-Hodgkin's lymphoma. We are aware of other potentially competitive biologic therapies in development. Coulter recently filed a BLA with respect to one such product for a similar indication for which Rituxan is approved. Activase We continue to face competition from Retavase(R), a thrombolytic agent. Retavase received FDA approval in October 1996 for the treatment of acute myocardial infarction. We believe Retavase infringes on our patents and we have filed a patent infringement action against Boehringer Mannheim. In 1998, Centocor, Inc. purchased the United States and Canadian rights to Retavase from Boehringer Mannheim. In addition, the market for thrombolytic therapy has declined as there is an increasing use of mechanical reperfusion in lieu of thrombolytic therapy for the treatment of acute myocardial infarction. In April 1995, the FDA approved for marketing an accelerated dosage of Activase. In June 1996, we received clearance from the FDA to market Activase for the treatment of acute ischemic stroke within three hours of symptom onset. Activase is the first therapy to be indicated for the acute treatment of stroke. In addition, we have concluded Phase III clinical trials on a second generation of t-PA, TNK-tPA, and are currently preparing FDA regulatory filings. In March 1998, we received two new patents related to variant forms of t-PA. Based on these patents, we filed an infringement action against Centocor Inc. in the Northern District of California which alleges that Centocor's sale, offer for sale, use in, and importation into, the United States of Retavase (reteplase, recombinant), a t-PA, infringes these two new patents. In connection with the acquisition by Roche of Corange Limited in 1998, Roche entered into a consent decree with the Federal Trade Commission. Pursuant to the consent decree, if Roche acquires 100% of our stock or if our former governance agreement allows Roche to control us, Roche shall cause us to dismiss, with prejudice, all pending litigation we have against Centocor regarding the rights for the research, development, manufacture or sale of Centocor's Retavase product, and we shall refrain from instituting any new litigation against Centocor challenging or seeking to render invalid any of the patents divested or licensed to Centocor pursuant to the terms of the decree. Roche has requested that we proceed with dismissing such litigations as required under the consent decree, and we are in the process of discussing and resolving with Roche and Centocor how to implement those dismissals. We are aware of other companies actively pursuing the development for the U.S. market of nonrecombinant or recombinant t-PA or t-PA variants, and additional companies or combinations of companies pursuing the development of other types of potentially competitive thrombolytic agents. Protropin, Nutropin, Nutropin AQ and Nutropin Depot Lilly received FDA approval in 1987 to market its growth hormone product for treatment of growth hormone inadequacy in children. Three other companies--BioTechnology General, Novo Nordisk A/S and Pharmacia & Upjohn--received FDA approval in 1995 to market their growth hormone products in the United States, although BioTechnology General has been preliminarily enjoined from selling its product in the United States. A fifth competitor, Serono Laboratories, Inc., received FDA approval in October 1996 to market its growth hormone product. In the first quarter of 1997, Serono, Novo and Pharmacia & 52 56 Upjohn began selling their growth hormone products in the United States. On July 12, 1999, Novo announced the filing of an NDA for Norditropin(R) SimpleXx(TM), a liquid form of its recombinant somatropin product, seeking approval for the long-term treatment of children who have growth hormone failure due to inadequate secretion of endogenous growth hormone. In addition, three of our competitors have received approval to market their existing human growth hormone products in the United States for additional indications. In June 1999, we made U.S. regulatory filings seeking marketing approval for Nutropin Depot, and we are currently awaiting regulatory approval. We are not aware of any competing sustained release formulations of human growth hormone in clinical development. Pulmozyme Sales of Pulmozyme for the management of cystic fibrosis in the United States, Canada and some countries in Europe began in early 1994. In November 1996, Pulmozyme was cleared for marketing by the FDA for the management of cystic fibrosis patients with advanced disease; a condition that affects approximately 500 patients in the United States. In February 1998, we received approval from the FDA for a label extension that includes the safety and alternative administration of Pulmozyme in children under the age of five with cystic fibrosis. In accordance with our then existing licensing agreement with Roche, in the fourth quarter of 1995, Hoffmann-La Roche obtained exclusive rights to sell Pulmozyme outside of the United States, and we receive a royalty on such sales. We are not aware of any directly competing products in development. GOVERNMENT REGULATION Regulation by governmental authorities in the United States and other countries is a significant factor in the manufacture and marketing of our products and in ongoing research and product development activities. All of our products will require regulatory approval by governmental agencies prior to commercialization. In particular, our products are subject to rigorous preclinical and clinical testing and other premarket approval requirements by the FDA and regulatory authorities in other countries. Various statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of such products. The lengthy process of seeking these approvals, and the subsequent compliance with applicable statutes and regulations, require the expenditure of substantial resources. We believe that we are currently in compliance with such statutes and regulations. Any failure by us to obtain, or any delay in obtaining, regulatory approvals could materially adversely affect our business. The activities required before a pharmaceutical product may be marketed in the United States begin with preclinical testing. Preclinical tests include laboratory evaluation of product chemistry and animal studies to assess the potential safety and efficacy of the product and its formulations. The results of these studies must be submitted to the FDA as part of an IND application, which must be reviewed by the FDA before proposed clinical testing can begin. Typically, clinical testing involves a three-phase process. In Phase I, clinical trials are conducted with a small number of subjects to determine the early safety profile and the pattern of drug distribution and metabolism. In Phase II, clinical trials are conducted with groups of patients afflicted with a specified disease in order to provide enough data to statistically evaluate the preliminary efficacy, optimal dosages and expanded evidence of safety. In Phase III, large scale, multicenter, comparative clinical trials are conducted with patients afflicted with a target disease in order to provide enough data to statistically evaluate the efficacy and safety of the product, as required by the FDA. The results of the preclinical and clinical testing of a chemical pharmaceutical product are then submitted to the FDA in the form of an NDA, or for a biological pharmaceutical product in the form of BLA, for approval to commence commercial sales. In responding to an NDA or a BLA, the FDA may grant marketing approval, request additional information or deny the application if it determines that the application does not provide an adequate basis for approval. We can not assure you that any approval required by the FDA will be obtained on a timely basis, if at all. Among the conditions for NDA or BLA approval is the requirement that the prospective manufacturer's quality control and manufacturing procedures conform on an ongoing basis with Good Manufacturing Practices, or GMP. Before approval of the BLA, the FDA will perform a prelicensing inspection of the facility to determine its compliance with GMP and other rules and regulations. In complying with GMP, manufacturers must continue to expend time, money and effort in the area of production and quality control to ensure full compliance. After the establishment is licensed for the manufacture of any product, manufacturers are subject to periodic inspections by the FDA. The requirements that we must satisfy to obtain regulatory approval by governmental agencies in other countries prior to commercialization of our products in such countries can be as rigorous, costly and uncertain. 53 57 We are also subject to various laws and regulations relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with our research. We believe we are currently in compliance with all these laws and regulations. The extent of governmental regulation that might result from any legislative or administrative action cannot be accurately predicted. The levels of revenues and profitability of biopharmaceutical companies may be affected by the continuing efforts of government and third party payers to contain or reduce the costs of health care through various means. For example, in certain foreign markets pricing or profitability of therapeutic and other pharmaceutical products is subject to governmental control. In the United States there have been, and we expect that there will continue to be, a number of federal and state proposals to implement similar governmental control. While we cannot predict whether any such legislative or regulatory proposals will be adopted, the adoption of such proposals could have a material adverse effect on our business, financial condition and profitability. In addition, in both the United States and elsewhere, sales of therapeutic and other pharmaceutical products are dependent in part on the availability of reimbursement to the consumer from third party payers, such as government and private insurance plans. Third party payers are increasingly challenging the prices charged for medical products and services. We cannot assure you that any of our products will be considered cost effective and that reimbursement to the consumer will be available or will be sufficient to allow us to sell our products on a competitive and profitable basis. RESEARCH AND DEVELOPMENT A major portion of our operating expenses to date have been related to the research and development of products either on our own behalf or under contracts. During 1998, 1997 and 1996, our research and development expenses were $396.2 million, $470.9 million and $471.1 million, respectively. During the three months ended March 31, 1999, our research and development expenses were $90.7 million. Our research and development efforts have been the primary source of our products. We intend to maintain our strong commitment to research and development as an essential component of our product development effort. Licensed technology developed by outside parties is an additional source of potential products. HUMAN RESOURCES As of June 30, 1999, we had 3,551 employees. ENVIRONMENT We seek to comply with all applicable statutory and administrative requirements concerning environmental quality. We have made, and will continue to make, expenditures for environmental compliance and protection. Expenditures for compliance with environmental laws have not had and are not expected to have a material effect on our capital expenditures, results of operation, financial position or competitive position. PROPERTIES Our primary facilities are located in a research and industrial park in South San Francisco, California in both leased and owned properties. We currently occupy twenty-two buildings for our research and development, manufacturing, marketing and administrative activities. Fourteen of the buildings are owned property and eight are leased. We have made and continue to make improvements to these properties to accommodate our growth. In addition, we own approximately 17 acres adjacent to our current facilities that may be used for future expansion. In 1995, we began development of a new manufacturing facility of approximately 300,000 square feet in Vacaville, California under an operating lease arrangement. The facility is expected to be operational in the fourth quarter of 1999, with licensure expected thereafter. We also have leases for certain additional office facilities in several locations in the United States. We believe our facilities are in good operating condition and that the real property owned or leased, combined with the new Vacaville site, currently conducted start-up and validation checks, are adequate for all present and near term uses although additional manufacturing capacity may be added on the Vacaville site dependent on the success of products in clinical trials. We believe any additional facilities could be obtained or constructed with our capital resources. 54 58 LEGAL PROCEEDINGS We are a party to various legal proceedings, including patent infringement cases involving human growth hormone products and Activase and other matters. In July 1997, an action was filed in the U.S. District Court for the Northern District of California alleging that our manufacture, use and sale of Nutropin human growth hormone products infringes a patent known as the "Goodman Patent", owned by the Regents of the University of California, or UC. This action is substantially the same as a previous action filed in 1990 against us by UC alleging that our manufacture, use and sale of Protropin recombinant human growth hormone infringes the Goodman Patent. The 1997 case had been stayed until recently, as described below. In May 1999, the 1990 case was submitted to the jury and, on June 2, 1999, the jury announced its findings. While the jury found that the Goodman Patent was valid, the jurors could not agree among themselves whether our manufacture, use or sale of Protropin infringed the Goodman Patent, although the jury publicly reported that it voted 8-1 in favor of UC. Because the jury could not reach a unanimous decision, no finding of infringement was made and there is no current legal basis for us to be held liable to UC for any claim of damages. On June 22, 1999, the judge held a hearing known as a status conference to discuss further proceedings relating to the 1990 and 1997 cases. At that time, Genentech renewed its request that the judge hold a non-jury trial and decide whether UC defrauded the U.S. Patent and Trademark Office when obtaining the Goodman Patent. The judge has previously denied a request by UC that this defense be thrown out of the case for lack of merit. A favorable ruling by the judge in any such trial would render the Goodman Patent unenforceable. On July 1, 1999, the judge issued a written decision setting the schedule for further proceedings. The judge consolidated the 1990 and 1997 cases for a jury trial to begin on January 3, 2000. The issues of infringement and willfulness will be tried to the jury first, and only if the jury finds liability would the issue of damages be tried. Pursuant to the judge's decision, that jury trial is to be followed immediately by a court trial of Genentech's fraud (inequitable conduct) claim against UC. In addition, UC has made a motion for entry of a judgment as a matter of law that Genentech's manufacture, use or sale of Protropin infringes the Goodman Patent notwithstanding the lack of unanimous jury verdict on that issue. The judge scheduled a hearing for July 23, 1999 to discuss that motion. The judge has previously denied two similar motions made by UC while the trial was in progress. On May 28, 1999, Glaxo Wellcome Inc. filed a patent infringement lawsuit against us in the U.S. District Court in Delaware. That suit asserts that we infringe four U.S. patents owned by Glaxo Wellcome. Two of the patents relate to the use of specific kinds of monoclonal antibodies for the treatment of human disease, including cancer. The other two patents asserted against us relate to preparations of specific kinds of monoclonal antibodies which are made more stable and the methods by which such preparations are made. We have been served with the complaint. The complaint fails to specify which of our products or methods of manufacture are allegedly infringing the four patents at issue. However, we believe that the suit relates to the manufacture, use and sale of our Herceptin and Rituxan antibody products. We are assessing the suit, the merits of Glaxo Wellcome's claims and the strength of the patents. Based upon the nature of the claims made and the information available to date to us and our counsel through investigations and otherwise, we believe the outcome of these actions is not likely to have a material adverse effect on our financial position, result of operations or cash flows. However, were an unfavorable ruling to occur in any quarterly period, there exists the possibility of a material impact on the net income of that period. In addition to the above, in April 1999, we agreed to make a $50 million payment to settle a federal investigation relating to our past clinical, sales and marketing activities associated with human growth hormone. 55 59 MANAGEMENT Upon consummation of this offering, our board will consist of two Roche directors, Dr. Humer and Dr. Knowles, three independent directors to be nominated by a nominating committee currently controlled by Roche, one of whom will be Herbert W. Boyer, and one Genentech employee, Dr. Levinson, who will be the chairman of the board. However, Roche has the right at any time to obtain proportional representation on our board. See "Risk Factors--Roche, Our Controlling Stockholder, May Have Interests That Are Adverse to Yours." The executive officers and directors of Genentech after the offering and their respective ages and positions with Genentech are as follows:
- ----------------------------------------------------------------------------------------------------------- NAME AGE POSITION - ----------------------------------------------------------------------------------------------------------- Arthur D. Levinson, Ph.D. ............... President, Chief Executive Officer and Chairman of the 49 Board William D. Young......................... 54 Chief Operating Officer Louis J. Lavigne, Jr. ................... 51 Executive Vice President and Chief Financial Officer Susan D. Desmond-Hellmann, M.D., Senior Vice President--Development and Chief Medical M.P.H. ................................ 41 Officer Dennis J. Henner, Ph.D. ................. 48 Senior Vice President--Research Judith A. Heyboer........................ 49 Senior Vice President--Human Resources Stephen G. Juelsgaard.................... 50 Senior Vice President--General Counsel and Secretary W. Robert Arathoon, Ph.D. ............... 47 Vice President--Process Sciences Joffre B. Baker, Ph.D. .................. 51 Vice President--Research Discovery J. Joseph Barta.......................... 52 Vice President--Quality Stephen G. Dilly, M.D., Ph.D. ........... 40 Vice President--Medical Affairs David Ebersman........................... 29 Vice President--Product Development Robert L. Garnick, Ph.D. ................ 49 Vice President--Regulatory Affairs Bradford S. Goodwin...................... 44 Vice President--Finance Paula M. Jardieu, Ph.D. ................. 48 Vice President--Pharmacological Sciences Edmon R. Jennings........................ 52 Vice President--Corporate Development Sean A. Johnston, Ph.D................... 40 Vice President--Intellectual Property Cynthia J. Ladd.......................... 44 Vice President--Corporate Law and Assistant Secretary Walter K. Moore.......................... 47 Vice President--Government Affairs James P. Panek........................... 46 Vice President--Manufacturing, Engineering and Facilities Diane L. Parks........................... 46 Vice President--Marketing Kimberly J. Popovits..................... 40 Vice President--Sales Nicholas J. Simon........................ 45 Vice President--Business and Corporate Development David C. Stump, M.D. .................... 49 Vice President--Clinical Research and Genentech Fellow John M. Whiting.......................... 44 Controller and Chief Accounting Officer Franz B. Humer, Ph.D. ................... 52 Director of Genentech Jonathan K.C. Knowles, Ph.D. ............ 51 Director of Genentech Herbert W. Boyer, Ph.D. ................. 62 Director Nominee
All officers are elected annually by the Board of Directors. Dr. Levinson, Mr. Young, Mr. Lavigne, Dr. Desmond-Hellmann, Dr. Henner, Ms. Heyboer and Mr. Juelsgaard are members of our management executive committee. ARTHUR D. LEVINSON, PH.D. was appointed Chairman of the Board in June 1999 and President and Chief Executive Officer of Genentech in July 1995. He had previously served as Senior Vice President of Genentech since January 1993. Dr. Levinson has held a number of other positions, including Vice President, Research, Vice President, Research Technology, Director, Cell Genetics Department and Staff Scientist subsequent to joining Genentech in May 1980 as a Senior Scientist. WILLIAM D. YOUNG was appointed Chief Operating Officer of Genentech in April 1997. He previously served as Executive Vice President of Genentech from January 1996 to April 1997, as Senior Vice President from September 1988 to January 1996 56 60 and as Vice President, Manufacturing and Process Sciences from April 1983 to September 1988. Mr. Young joined Genentech in September 1980 as Director, Manufacturing from Eli Lilly and Company. LOUIS J. LAVIGNE, JR. was appointed Executive Vice President of Genentech in March 1997 and Chief Financial Officer in August 1988. He previously served as Senior Vice President from July 1994 to March 1997 and as Vice President from July 1986 to July 1994. Mr. Lavigne joined Genentech in July 1982 from Pennwalt Corporation and became Controller in May 1983 and an officer of Genentech in February 1984. SUSAN D. DESMOND-HELLMANN, M.D., M.P.H. was appointed Senior Vice President, Development in December 1997 and Chief Medical Officer in December 1996. She joined Genentech in March 1995 as Clinical Scientist and subsequently held the positions of Associate Director from August 1995 to January 1996, Senior Director from January 1996 to March 1996 and Vice President, Medical Affairs from March 1996 to November 1997. Prior to joining Genentech, she held the positions of Associate Director at Bristol-Myers Squibb from February 1993 to February 1995 and Medical Oncologist at Lexington Oncology Associates from June 1992 to February 1993. DENNIS J. HENNER, PH.D. was appointed Senior Vice President, Research in May 1998. He had served as Vice President, Research from April 1996 to May 1998, Vice President, Research Technology from July 1994 to April 1996, and as Senior Director, Research Technology from December 1990 to July 1994. From May 1990 to December 1990, Dr. Henner was Director and Senior Scientist, Cell Genetics Department. Dr. Henner joined Genentech in 1981 as a Scientist in Research. Prior to joining Genentech, he was at the Scripps Clinic and Research Foundation. JUDITH A. HEYBOER joined Genentech as Senior Vice President, Human Resources in August 1996. Prior to joining Genentech, she held the positions of Vice President, Employee Relations and later Senior Vice President at Acuson Corporation from October 1983 to July 1996. STEPHEN G. JUELSGAARD was appointed Senior Vice President in April 1998, Vice President and General Counsel in July 1994 and Secretary in April 1997. He joined Genentech in July 1985 as Corporate Counsel and subsequently served as Senior Corporate Counsel from 1988 to 1990, Chief Corporate Counsel from 1990 to 1993, Vice President, Corporate Law from 1993 to 1994, and Assistant Secretary from 1994 to 1997. W. ROBERT ARATHOON, PH.D. was appointed Vice President, Process Sciences in April 1996. Since joining Genentech in 1983 from The Wellcome Foundation, Dr. Arathoon has held a series of positions of increasing responsibility, most recently as Senior Director, Process Sciences from November 1994 to April 1996. JOFFRE B. BAKER, PH.D. was appointed Vice President, Research Discovery in February 1997. He previously held the positions of Senior Director, Research Discovery from March 1993 to February 1997 and Director, Cardiovascular Research Development from September 1990 to September 1993. He has also been a member of the Research Review Committee (RRC) since March 1993. J. JOSEPH BARTA was appointed Vice President, Quality in October 1998. He previously held the positions of Senior Director, Quality from March to October 1998, Senior Director, Quality Assurance from January 1994 to February 1998, Senior Director, Pharmaceutical Manufacturing from September to December 1993, Director, Pharmaceutical Manufacturing from September 1989 to August 1993, and Associate Director, Validation and Technical Services from June to September 1989. He joined Genentech in March 1988 as Manager, Validation. Prior to joining Genentech, he held positions of Director, Quality Assurance and Quality Control at Codon from May 1986 to March 1988 and Group Validation Manager at Miles Laboratories, Inc. from September 1979 to March 1986. STEPHEN G. DILLY, M.D., PH.D. joined Genentech as Vice President, Medical Affairs in December 1998. Prior to joining Genentech he held various positions with SmithKline Beecham Pharmaceuticals from August 1988, including Director and Vice President Neurosciences Therapeutic Unit from December 1996 to December 1998, Director and Vice President CardioPulmonary Therapeutic Team from December 1994 to December 1996 and Group Director Neurosciences Therapeutic Unit from April 1993 to December 1994. DAVID EBERSMAN was appointed Vice President, Product Development in February 1999. He joined Genentech in February 1994 as a Business Development Analyst and subsequently held the positions of Manager, Business Development from February 1995 to February 1996, Director, Business Development from February 1996 to March 1998 and Senior Director, Product Development from March 1998 to February 1999. Prior to joining Genentech, he held the position of Research Analyst at Oppenheimer & Company, Inc. beginning in 1991. 57 61 ROBERT L. GARNICK, PH.D. was appointed Vice President, Regulatory Affairs in February 1998. He had previously served as Vice President, Quality since April 1994 and was Senior Director, Quality Control from 1990 to 1994 and Director, Quality Control from 1988 to 1990. Dr. Garnick joined Genentech in August 1984 from Armour Pharmaceutical, where he worked from 1980. Prior to that, he was Manager of Analytical Development at Merrell National Labs from 1977 to 1980. BRADFORD S. GOODWIN was appointed Vice President, Finance in October 1997. He had served as Vice President, Finance and Controller since December 1996. He has been a Vice President of Genentech since July 1993 and served as Controller from June 1989 to October 1997. He has also held the positions of Director, Financial Planning and Analysis, the Assistant Controller and the General Auditor. Before joining Genentech in April 1987, Mr. Goodwin worked for Price Waterhouse, a public accounting firm. PAULA M. JARDIEU, PH.D. was appointed Vice President, Pharmacological Sciences in February 1997. She previously held the positions of Senior Director, Pharmacological Sciences from 1996 to February 1997, Staff Scientist from 1992 to 1996, Senior Scientist from 1989 to 1992 and Scientist from 1986 to 1989. EDMON R. JENNINGS was appointed Vice President, Corporate Development in December 1995. He was Vice President, Sales and Marketing from January 1994 to December 1995, and had served as Vice President, Sales since January 1991. He joined Genentech in September 1985 as Western Area Sales Manager. Prior to joining Genentech, Mr. Jennings was Western Region Sales Manager of Bristol-Myers' Oncology Division. SEAN A. JOHNSTON, PH.D. was appointed Vice President, Intellectual Property in June 1998. He joined Genentech in October 1990 as Patent Counsel and subsequently held the positions of Senior Patent Counsel from October 1993 to October 1995, Senior Patent Counsel and Manager of Patent Litigation from October 1995 to April 1998, and Associate General Counsel, Patent Law from April 1998 to June 1998. Prior to joining Genentech, he served as a Law Clerk at the United States District Court for the Central District of California from September 1989 to September 1990 and was a Research Scientist at International Genetic Engineering, Inc. from December 1984 to August 1986. CYNTHIA J. LADD was appointed Vice President, Corporate Law in February 1996 and Assistant Secretary in April 1997. She joined Genentech in 1989 as Corporate Counsel and subsequently held the positions of Senior Corporate Counsel from November 1990 to June 1993 and Chief Corporate Counsel from June 1993 to February 1996. WALTER K. MOORE was appointed Vice President, Government Affairs in May 1998. He joined Genentech in September 1993 as Senior Director of Government Affairs. Prior to joining Genentech, Mr. Moore served as Manager of Governmental Relations at Eli Lilly and Company. JAMES P. PANEK was appointed Vice President, Manufacturing, Engineering and Facilities in July 1997. He joined Genentech in September 1982 and subsequently held the positions of Director, Engineering and Facilities since May 1988, Senior Director, Engineering and Facilities since July 1991, and Vice President, Engineering and Facilities since July 1993. DIANE L. PARKS joined Genentech as Vice President, Marketing in June 1999. Prior to joining Genentech, she held various positions with Marion Laboratories (formerly, Marion Merrell Dow and Hoeschst Marion Roussel) from 1982, most recently including Vice President, Marketing from March 1998 to June 1999, Group Product Director, Respiratory and Metabolism from November 1994 to March 1998 and Director, U.S. Commercial Development from July 1993 to November 1994. KIMBERLY J. POPOVITS was elected Vice President, Sales in October 1994. She was Director, Field Sales from January 1993 to October 1994 and Regional Manager, Northeast Region from October 1989 to January 1993. Ms. Popovits was at American Critical Care, a Division of American Hospital Supply Corporation, for six years prior to joining Genentech in November 1987 as Division Manager, Southeast Region. NICHOLAS J. SIMON was appointed Vice President of Business and Corporate Development in December 1995. He had been Vice President of Business Development from December 1994 to December 1995, and was Senior Director of Business Development from December 1993 to December 1994. He joined Genentech in 1989 as Director of Business Development from Xoma Corporation. DAVID C. STUMP, M.D. was appointed Genentech Fellow in January 1996, in addition to his responsibilities as Vice President, Clinical Research, a position he has held since July 1995. He joined Genentech in July 1989 as Director, Clinical Research and was appointed Senior Director, Clinical Research in August 1991. Prior to joining Genentech, Dr. Stump was Associate Professor of Medicine and Biochemistry at the University of Vermont. 58 62 JOHN M. WHITING was appointed Controller and Chief Accounting Officer in October 1997. He previously held the positions of Director, Financial Planning and Analysis from January 1997 to October 1997; Director, Operations, Financial Planning and Analysis from December 1996 to January 1997; Associate Director, Operations, Financial Planning and Analysis from March 1996 to December 1996; Plant Controller from April 1993 to March 1996; and Group Controller from July 1991 to April 1993. FRANZ B. HUMER, PH.D. joined The Roche Group in the spring of 1995 as the Head of its Pharmaceuticals Division and became Chief Executive Officer of The Roche Group in January 1998. He is also a member of the Board of Directors and Chairman of the Executive Committee of The Roche Group. Prior to joining The Roche Group, Dr. Humer was an Executive Director and Chief Operating Officer of Glaxo Holdings, a United Kingdom public limited company. Dr. Humer also serves as a director of Cadbury Schweppes p.l.c. Pursuant to the amended governance agreement, Dr. Humer is a designee of Roche. JONATHAN K.C. KNOWLES, PH.D. joined The Roche Group as President of Global Research in September 1997. In January 1998, he became a member of the Executive Committee of The Roche Group. Prior to joining The Roche Group, Dr. Knowles served as the Director of Research for Europe of Glaxo from 1995 and served as the Director of the Geneva Institute of Glaxo from 1989 to 1995. Pursuant to the amended governance agreement, Dr. Knowles is a designee of Roche. HERBERT W. BOYER, PH.D., a founder of Genentech, had been a director of Genentech since 1976 and is a consultant to Genentech. He served as a Vice President of Genentech from 1976 to 1991. Dr. Boyer, a Professor of Biochemistry at the University of California at San Francisco from 1976 to 1991, demonstrated the usefulness of recombinant DNA technology to produce medicines economically, which laid the groundwork for Genentech's development. In 1993, Dr. Boyer received the 1993 Helmut Horten Research Award. He also received the National Medal of Science from President Bush in 1990, the National Medal of Technology in 1989 and the Albert Lasker Basic Medical Research Award in 1980. He is an elected member of the National Academy of Sciences and a Fellow in the American Academy of Arts and Sciences. In addition, Dr. Boyer serves as Chairman of the Board of Directors of Allergan, Inc. COMPENSATION OF DIRECTORS In 1998, each of our directors, except Dr. Levinson and J. Richard Munro, Chairman of the Board of Directors at that time, were paid an annual retainer of $30,000. Mr. Munro, as Chairman of the Board of Directors, was paid an annual retainer of $50,000. Dr. Levinson was not paid for his services as a director. In addition, the directors, with the exception of Dr. Levinson, received a total of $1,500 for each board and committee meeting at which the director was present in person and a total of $500 for each board and committee meeting at which the director was present by telephone. All directors were reimbursed for expenses incurred in connection with their service on the board. In 1998, Dr. Boyer and John T. Potts, M.D., one of our directors at that time, also served as our consultants and received compensation for their services. In 1998, Drs. Boyer and Potts received $24,000 and $25,000, respectively, in consideration for their consulting services. During 1998, no directors exercised options granted under any of our stock option plans other than Donald L. Murfin, one of our directors at that time, who exercised options to purchase 4,125 shares for a gain of $233,578. In 1992, we established a Directors' Charitable Award Program (the "Award Program") to acknowledge the service of our directors and enhance indirectly our ability to attract and retain directors of the highest caliber. All members of the board on or after May 1, 1992 are eligible for the Award Program, subject to vesting requirements. The Award Program is funded by life insurance policies purchased by us that provide for a $1 million death benefit on participating directors. Upon the death of a participating director, Genentech may donate $200,000 per year for five years to up to four educational institutions or nonprofit organizations recommended by the director, provided that any such institution or organization is approved by us in the year of the donation. Individual directors derive no financial benefit from the Award Program since all available insurance proceeds and tax deductions accrue solely to Genentech. Except as set forth below, in connection with the redemption of our special common stock, any vested options held by any director that were outstanding on June 30, 1999 were automatically cashed out and any unvested options or any unvested portion of options held by any director were canceled. In addition, all vested and unvested options held by the Roche directors were canceled. 59 63 COMPENSATION OF EXECUTIVE OFFICERS Summary of Compensation The following table shows for the fiscal years ended December 31, 1998, 1997 and 1996, certain compensation paid by us to our Chief Executive Officer and our four other most highly compensated executive officers (the "Named Executive Officers"), including salary, bonuses, stock options and certain other compensation:
------------------------------------------------------------------------------- LONG TERM ANNUAL COMPENSATION COMPENSATION --------------------------------------------- AWARDS OTHER SECURITIES ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS COMPENSATION(2) OPTIONS(#)(3) COMPENSATION(4) --------------------------- ---- --------- -------- --------------- ------------- --------------- Arthur D. Levinson, Ph.D.............. 1998 $650,000 $950,000 -- 350,000 $41,600 President and Chief Executive Officer 1997 $650,000 $390,000 -- -- $37,000 1996 $525,000 $275,000 -- 200,000 $31,000 William D. Young...................... 1998 $430,000 $400,000 -- 200,000 $25,400 Chief Operating Officer 1997 $430,000 $205,000 -- -- $24,800 1996 $390,000 $190,000 -- 125,000 $23,000 Louis J. Lavigne, Jr.................. 1998 $350,000 $310,000 -- 150,000 $21,400 Executive Vice President and Chief 1997 $350,000 $185,000 -- -- $20,400 Financial Officer 1996 $320,000 $160,000 -- 90,000 $19,000 Susan D. Desmond-Hellmann, M.D., M.P.H. ............................. 1998 $310,000 $310,000 -- 150,000 $18,400 Senior Vice President--Development 1997 $275,000 $150,000 -- 50,000 $15,800 and Chief Medical Officer 1996 $233,750 $120,077 -- 75,000 $10,950 Dennis J. Henner, Ph.D. .............. 1998 $271,979 $200,000 -- 120,000 $16,079 Senior Vice President--Research 1997 $262,500 $130,000 -- -- $15,300 1996 $233,959 $120,000 -- 75,000 $12,958
- --------------- (1) Includes amounts earned but deferred at the election of the executive, such as salary deferrals under our Tax Reduction Investment Plan (the "401(k) Plan") established under Section 401(k) of the Internal Revenue Code of 1986, as amended. (2) As permitted by rules promulgated by the Securities and Exchange Commission, no amounts are shown with respect to certain "perquisites" (such as imputed interest on loans at below market value rates), where such amounts do not exceed the lesser of (i) 10% of the sum of the amounts of salary and bonus for the Named Executive Officer, or (ii) $50,000. (3) We have awarded no stock appreciation rights ("SARs"). (4) Consists of our matching payments under the 401(k) Plan for 1998, 1997 and 1996 and our matching payments under the Supplemental Plan for 1998, 1997 and 1996. Each of the Named Executive Officers received $6,400 in matching payments under the 401(k) Plan for 1998, and under the Supplemental Plan, Dr. Levinson, Messrs. Young and Lavigne, and Drs. Desmond-Hellmann and Henner received matching payments of $35,200, $19,000, $15,000, $12,000 and $9,679, respectively, for 1998. Each of the Named Executive Officers received $6,333 in matching payments under the 401(k) Plan for 1997, and under the Supplemental Plan, Dr. Levinson, Messrs. Young and Lavigne, and Drs. Desmond-Hellmann and Henner received matching payments of $30,667, $18,467, $14,067, $9,467, and $8,967 respectively, for 1997. Each of the Named Executive Officers received $6,000 in matching payments under the 401(k) Plan for 1996, and under the Supplemental Plan, Dr. Levinson, Messrs. Young and Lavigne, and Drs. Desmond-Hellmann and Henner received matching payments of $25,000, $17,000, $13,000, $4,950 and $6,958, respectively, for 1996. Treatment of Options in Connection with the Redemption of the Special Common Stock and the Issuance of Options prior to this Offering Prior to the redemption, options were outstanding under our 1984 Non-Qualified Stock Option Plan (the "1984 Plan"), our 1990 Stock Option/Stock Incentive Plan (the "1990 Plan"), our 1994 Stock Option Plan (the "1994 Plan") and our 1996 Stock Option/Stock Incentive Plan (the "1996 Plan"). In general, all options outstanding on the redemption date that were granted under the 1984 Plan and 1990 Plan, whether vested or not, and unvested options granted under the 1994 Plan were canceled on the redemption date, and we paid the holder of each option in cash a per share amount equal to the redemption price, 60 64 $82.50, less the exercise price per share of the option. A small number of outstanding unvested options granted under the 1990 Plan held by employees hired between January 1, 1997 and the redemption date are being converted, at the election of the holders of such options, into options to purchase shares of our common stock, exercisable for the same number of shares and at the same exercise price per share as the options prior to such conversion. Certain vested options granted under the 1994 and 1996 Plans outstanding as of the redemption date are being converted into options (converted options) to purchase shares of common stock, and, at the election of the holders of such options, certain vested options granted under the 1994 and 1996 Plans were canceled in exchange for cash. The converted options to purchase shares of our common stock are exercisable for the same number of shares and at the same exercise price per share as the options prior to such conversion. All outstanding unvested options granted under the 1996 Plan were canceled as provided by the terms of the 1996 Plan on the redemption date. With certain exceptions as described below, the former holder of each canceled option from the 1996 Plan who remains an employee of Genentech will receive a new option prior to this offering that will vest over a three-year period and will entitle the holder to purchase shares of common stock at the same price as public offering price in this offering. The number of shares of common stock for which each new option may be exercised will be 1.333 times the number of shares covered by the applicable canceled option, subject to any adjustments necessary to reflect any capital contributions by Roche. In connection with the redemption of our special common stock, and as a result of the treatment of options described above, the following changes with respect to stock options outstanding have occurred: - Options for the purchase of approximately 6.8 million shares of special common stock have been canceled in accordance with the terms of the applicable stock option plans, and the holders are receiving cash payments in the amount of $82.50 per share, less the exercise price; - Options for the purchase of approximately 4.0 million shares of special common stock are being converted into options to purchase a like number of shares of common stock at exercise prices ranging from $48.125 per share to $87.50 per share; and - Options for the purchase of approximately 4.9 million shares of special common stock have been canceled, in accordance with the terms of the 1996 Plan. With certain exceptions, we expect to grant new options for the purchase of 1.333 times the number of shares under the previous options with an exercise price equal to the public offering price of the shares offered in this offering. The number of shares that will be the subject of these new options, which are expected to be issued under our 1999 Plan, will be approximately 5.0 million. Alternative arrangements were provided for certain holders of some of the unvested options under the 1996 Plan. Of the approximately 4.0 million shares of converted options, options with respect to approximately 3.8 million shares are currently exercisable, and options with respect to approximately 230,000 shares are currently not exercisable. These options are held by approximately 2,200 employees; no directors hold these options. We expect that the majority of the options to be granted prior to the effective date of the offering hereunder will be made pursuant to our 1999 Plan, which our board of directors and Roche, our sole shareholder, intend to approve prior to the effective date of this offering. Under the 1999 Plan, we intend to grant new options to purchase approximately 6.5 million shares (including the 5.0 million shares referred to above) to approximately 2,400 employees at an exercise price equal to the public offering price in this offering, with the grant of such options to be made effective on the day prior to the effective date of this offering. 61 65 Treatment of Options of and Issuance of Options to the Named Executive Officers The following tables set forth, with respect to each of the Named Executive Officers, (i) the amount of cash received for options canceled in connection with the redemption of our special common stock, (ii) certain information with respect to the number and value of options converted, in connection with the redemption of our special common stock, into options to purchase a like number of shares of common stock and (iii) certain information with respect to options we intend to grant immediately prior to the effective time of this offering. TREATMENT OF OPTIONS IN CONNECTION WITH THE REDEMPTION
-------------------------------------------------------------------------------------------- NUMBER OF SECURITIES PERCENT OF UNDERLYING TOTAL CONVERTED CONVERTED NUMBER/ OPTIONS OPTIONS EXERCISE CASH-OUT EXERCISABLE/ HELD BY PRICE EXPIRATION PRESENT NAME OF OPTIONS NONEXERCISABLE(1) EMPLOYEES(2) ($/SHARE)(3) DATE(S)(4) VALUE(5) ---- ------------- ----------------- ------------ ------------ ---------- ------------- (IN MILLIONS) (IN MILLIONS) Arthur D. Levinson, Ph.D. .......... $15.4 300,000/0 7.3% 112,500@ 2/6/06 - $9.6 $50.125 4/26/14 100,000@ $54.25 87,500@ $68.375 William D. Young.................... $ 8.3 206,250/0 5.0% 93,750@ 2/6/06 - $6.5 $50.125 4/26/14 62,500@ $54.25 50,000@ $68.375 Louis J. Lavigne, Jr................ $10.3 112,500/0 2.7% 30,000@ 2/6/06 - $3.7 $50.125 4/26/14 45,000@ $54.25 37,500@ $68.375 Susan D. Desmond-Hellmann, M.D., $ 2.1 37,500/0 0.9% 37,500@ 6/17/08 $1.4 M.P.H. ........................... $68.375 Dennis J. Henner, Ph.D. ............ $ 4.5 101,250/0 2.5% 33,750@ 2/6/06 - $3.2 $50.125 4/26/14 37,500@ $54.25 30,000@ $68.375
- --------------- (1) These options were granted pursuant to the 1994 Plan and 1996 Plan and are nonstatutory options. (2) Based on a total of approximately 4.0 million converted options held by employees, including the Named Executive Officers. (3) The exercise price per share of options granted represented the fair market value of the underlying shares of special common stock as based on the closing selling price per share of our special common stock on the trading day prior to the date of grant. (4) The options granted have a term of ten to twenty years, as applicable, subject to earlier termination upon the occurrence of certain events related to termination of employment. (5) Present value was determined under the Black-Scholes option pricing model based on the following assumptions: expected volatility of 45% (representing the annual variance in the monthly change in the price of selected top-tier biotechnology 62 66 companies over the prior 10 year period; used as a proxy for the expected monthly volatility of the Genentech stock); a risk free rate of 6.01% determined by the remaining life of each option. Each option is valued at its exercise price, which is assumed to be equivalent to the market price at the date of grant. This valuation model was not adjusted for the vesting restrictions or the risk of forfeiture of the options. Under SFAS 123, forfeitures may be estimated or assumed to be zero; in this model, the forfeiture rate was assumed to be zero. Our use of this model in accordance with rules adopted by the Securities and Exchange Commission does not constitute an endorsement of the model nor an acknowledgment that such model can accurately determine the value of options. The valuation calculations do not necessarily represent the fair market value of individual options, and are not intended to forecast possible future appreciation, if any, of the price of our common stock on the date of exercise as compared to the exercise price of the option. OPTION GRANTS IMMEDIATELY PRIOR TO THIS OFFERING
-------------------------------------------------------------------------- PERCENT OF NUMBER OF TOTAL OPTIONS GRANT SECURITIES EXPECTED TO EXERCISE OR DATE UNDERLYING BE GRANTED TO BASE PRICE EXPIRATION PRESENT NAME OPTIONS(1) EMPLOYEES(2) ($/SHARE)(3) DATE(4) VALUE(5) ---- ---------- ------------- ------------ ---------- ------------- (IN MILLIONS) Arthur D. Levinson, Ph.D. ............... 483,213 7.4% $24.4 William D. Young......................... 283,263 4.4% $14.3 Louis J. Lavigne, Jr..................... 209,948 3.2% $10.6 Susan D. Desmond-Hellmann, M.D., M.P.H... 233,275 3.6% $11.8 Dennis J. Henner, Ph.D. ................. 169,958 2.6% $ 8.6
- --------------- (1) We intend to grant these options pursuant to the 1999 Plan. It is anticipated that these options will vest ratably on a monthly basis during the 36 month period following the grant date. (2) Based on a total of approximately 6.5 million options we currently plan to grant to employees, including the Named Executive Officers. (3) It is anticipated that the exercise price per share of options to be granted will be the public offering price in this offering. (4) It is anticipated that the options to be granted would have a term of ten years subject to earlier termination upon the occurrence of certain events related to termination of employment. (5) Present value was determined under the Black-Scholes option pricing model based on the following assumptions: expected volatility of 45% (representing the annual variance in the monthly change in the price of selected top-tier biotechnology companies over the prior 10 year period; used as a proxy for the expected monthly volatility of the Genentech stock); a risk free rate of 6.01% determined by the remaining life of each option. Each option is valued at its exercise price, which is assumed to be equivalent to the market price at the date of grant. This valuation model was not adjusted for the vesting restrictions or the risk of forfeiture of the options. Under SFAS 123, forfeitures may be estimated or assumed to be zero; in this model, the forfeiture rate was assumed to be zero. Our use of this model in accordance with rules adopted by the Securities and Exchange Commission does not constitute an endorsement of the model nor an acknowledgment that such model can accurately determine the value of options. The valuation calculations do not necessarily represent the fair market value of individual options, and are not intended to forecast possible future appreciation, if any, of the price of our common stock on the date of exercise as compared to the exercise price of the option. The 1999 Plan We expect to recommend the adoption of the 1999 Plan prior to the effective time of this offering. It is expected that the 1999 Plan will provide for the grant of non-statutory options and incentive stock options. It is expected that an aggregate of 7.5 million shares will be available for issuance pursuant to the terms of such plan. It is expected that the exercise price of the options granted under the 1999 Plan will be not less than 100% of fair market value of the shares of common stock, which in connection with the options granted immediately prior to the effective time of this offering, will be the public offering price in this offering. It is anticipated that options granted under the 1999 Plan will have a term of ten years. Under the 1999 Plan, we intend to grant new options to purchase approximately 6.5 million shares of common stock to approximately 2,400 63 67 employees at an exercise price equal to the public offering price in this offering, with the grant of such options to be made effective on the day prior to the effective date of this offering. Committees of the Board of Directors Upon completion of this offering, we will appoint four standing committees: an executive committee of the board (the "Executive Committee"), an audit committee of the board (the "Audit Committee"), a compensation committee of the board (the "Compensation Committee") and a nominating committee of the board (the "Nominating Committee"). We expect that, so long as Roche owns a majority of our outstanding common stock, the majority of the members of the Executive Committee, the Compensation Committee and the Nominating Committee will be directors who are nominees of Roche. The Executive Committee will be authorized to exercise, between meetings of our board, all of the powers and authority of the board in the direction and management of Genentech, except as prohibited by applicable law or our certificate of incorporation and except to the extent another committee shall have been accorded authority over the matter. The Audit Committee will select the independent public accountants to audit our annual financial statements and will establish the scope and oversee the annual audit. The Nominating Committee is responsible for the nomination of nominees for our board. The Compensation Committee will determine the compensation for employee directors and, after receiving and considering the recommendation of our President and Chief Executive Officer, all our officers and any other employee that the Compensation Committee may designate from time to time and will approve and administer employee benefit plans. Our board may establish other committees from time to time to facilitate the management of the business and affairs of our company. For more information, see "Relationship with Roche--Arrangements between Genentech and Roche." 64 68 RELATIONSHIP WITH ROCHE HISTORY OF OWNERSHIP On September 7, 1990, a wholly owned subsidiary of Roche was merged with and into Genentech. Pursuant to the 1990 merger agreement, Genentech and Roche entered into a governance agreement that contained terms relating to the corporate governance of Genentech after the 1990 merger. Pursuant to the 1990 governance agreement, Genentech's board of directors elected two nominees of Roche to serve on the Genentech board. On October 25, 1995, a second wholly owned subsidiary of Roche was merged with and into Genentech, and Genentech and Roche amended the 1990 governance agreement. In the 1995 merger, for Genentech stockholders other than Roche, each share of common stock was converted into one share of Genentech's special common stock. Roche maintained the same percentage ownership of Genentech's equity as prior to the 1995 merger and continued to have the right to nominate only two directors to Genentech's board of directors under the amended governance agreement. The purpose of the conversion of the common stock into special common stock was (i) to establish a four-year period during which the publicly traded stock of Genentech could be redeemed by Genentech at Roche's option at specified prices per share ranging from $62.50 during the quarter ending December 31, 1995 to $82.50 during the quarter ending June 30, 1999 and (ii) to afford the holders of special common stock the right to require the purchase of all or a portion at the option of the holder of their shares of such stock at a price of $60.00 per share exercisable during the 30-business day period following June 30, 1999. REDEMPTION OF THE SPECIAL COMMON STOCK On June 30, 1999, we redeemed all of our common stock held by stockholders other than Roche Holdings, Inc. at $82.50 per share in cash and retired all of the shares of special common stock including those held by Roche Holdings, Inc. As a result, Roche's percentage ownership of our outstanding common stock increased from approximately 65% to 100% and our then existing governance agreement terminated, except for provisions relating to indemnification and stock options, warrants and convertible securities. In connection with this offering, we will amend our certificate of incorporation and bylaws and enter into an affiliation agreement with Roche, described below. Upon completion of this offering, Roche's percentage ownership of our outstanding common stock will be reduced from 100% to approximately 84.3%. ARRANGEMENTS BETWEEN GENENTECH AND ROCHE As a result of the redemption of the special common stock, the then existing governance agreement between Genentech and Roche terminated, except for provisions relating to indemnification and stock options, warrants and convertible securities. We will enter into an affiliation agreement with Roche that is designed to enable the current management of Genentech to conduct our business and operations as we have done in the past while at the same time reflecting Roche's interests as an 84.3% stockholder. Our certificate of incorporation provides that the provisions in our bylaws described below under "--Composition of Board of Directors," "--Roche's Right to Proportional Representation," "--Membership of Committees" and "--Nomination of Directors" may be repealed or amended only by a 60% vote of our stockholders, except for Roche's right to nominate a number of directors proportional to Roche's ownership interest rounded down to the next whole number until Roche's ownership interest is less than 5%, which may be repealed or amended only by a 90% vote of our shareholders. The provisions of the affiliation agreement described below under "--Roche Approval Required for Certain Actions" and "--Licensing and Marketing Arrangements" terminate upon Roche owning less than 40% of our stock. For purposes of the following provisions, an independent director is a director who is not - one of our officers or - an employee, director, principal stockholder or partner of Roche or any affiliate of Roche or an entity that was dependent upon Roche for more than 10% of its revenues or earnings in its most recent fiscal year. Composition of Board of Directors Genentech and Roche have agreed that our board will consist of six members: two nominees of Roche, one executive officer of Genentech who is nominated by the nominating committee of the board and up to three independent directors nominated by 65 69 the nominating committee. Directors will be elected to serve one year terms or until their successors are elected and qualified. Our board will at all times include at least two independent directors and one executive officer of Genentech. Roche's Right to Proportional Representation We have agreed that upon Roche's request Roche will be immediately entitled to representation on our board proportional to its ownership interest in our common stock. Roche will be entitled to have the number of Roche designated directors equal to the percentage of our common stock owned by Roche times the total number of directors, rounded up to the next whole number if Roche's ownership interest is greater than 50% and rounded down if Roche's ownership percentage is less than or equal to 50%. Upon Roche's request, we will immediately take action to cause the size of our board to be increased and to cause our board to fill the vacancies by electing Roche nominees in order to achieve Roche's proportional representation. If Roche's ownership interest of our common stock drops below 40%, Roche will cause its directors to resign to the extent its representation is in excess of its proportional ownership interest. The number of directors who are required to resign upon such event shall be rounded up to the next whole number. Roche shall thereafter be entitled to nominate a number of directors which is proportional to Roche's ownership interest rounded down to the next whole number, until Roche's ownership interest is less than 5%. Membership of Committees We will have four standing committees of the board: a nominating committee, an executive committee, an audit committee and a compensation committee. Each committee will have at least one director designated by Roche. Roche will be entitled upon request to its proportional representation on each committee. Roche's committee members may designate another Roche director to serve as their alternates on any committee. The nominating committee shall at all times have three members. At any time that Roche owns 80% or more of the total voting power of our stock, the nominating committee shall include two nominees of Roche and one of the independent directors. At any time that Roche owns less than 80% of the total voting power of our stock, the nominating committee shall (1) include a number of nominees of Roche that is equal to the percentage owned by Roche of the total voting power of our common stock times three, rounded up to the next whole number if Roche's total voting power is greater than 50% and rounded down to the next whole number if Roche's total voting power is less than or equal to 50% provided that Roche shall at no time have more than two nominees and, provided further that if the reason for Roche owning less than 80% of the total voting power is as result of a breach of our obligations described under "--Tax Matters" below, the nominating committee shall include two nominees of Roche and (2) include a number of independent directors equal to three minus the number of nominees of Roche as determined pursuant to clause (1) above. Nomination of Directors The nomination of any person for director requires the approval of a majority of the members of the nominating committee. Roche Approval Required for Certain Actions Without the prior approval of the directors designated by Roche, we have agreed not to approve: - any acquisition that would constitute a substantial portion of our business or assets, - any sale, lease, license, transfer or other disposal of all or a substantial portion of our business or assets other than in the ordinary course of our business, - any issuance of capital stock except (1) issuances of capital stock pursuant to employee incentive plans not exceeding 5% of our voting stock, (2) issuances of capital stock upon the exercise, conversion or exchange of any of our outstanding capital stock, and (3) other issuances of capital stock not exceeding 5% of our voting stock in any 24 month period, and - any repurchase or redemption of our capital stock other than redemption required by the terms of any security and purchases made at fair market value in connection with any of our deferred compensation plans. For purposes of the first and second bullet points in this paragraph, unless a majority of the board of directors have made a contrary determination in good faith, a "substantial portion of our business or assets" shall mean a portion of our business or assets accounting for 10% or more of our and our consolidated subsidiaries' consolidated total assets, contribution to net income or revenues. 66 70 Following a request by Roche for proportional representation on the board, until the Roche designees take office as directors we may not take any action other than in the ordinary course of business without the consent of Roche. Licensing and Marketing Arrangements Except as otherwise provided in the marketing and licensing agreement with Hoffmann-La Roche described under "Business -- Licensing Agreements with F. Hoffmann-La Roche Ltd," we have agreed that we will not enter into any material licensing or marketing agreement with respect to any products, processes, inventions or developments subject to that agreement unless we first negotiate in good faith with Roche for a reasonable period of not less than three months and not more than six months with a view towards reaching a mutually beneficial licensing or marketing agreement. Registration Rights We have agreed that, upon Roche's request, we will file one or more registration statements under the Securities Act in order to permit Roche to offer and sell shares of our common stock. We have agreed to use our best efforts to facilitate the registration and offering of those shares designated for sale by Roche. We have the right to postpone the filing or effectiveness of a registration statement for a period of up to 60 days in any 12-month period if: - in the reasonable good faith judgment of our board, fulfillment of our obligations would require us to make disclosures that would be detrimental to Genentech and premature, or - we have filed a registration statement with respect to securities to be distributed in an underwritten public offering and we have been advised by the lead or managing underwriter that an offering by Roche would materially and adversely affect the distribution of our securities. Generally, all expenses incident to the performance by us of our obligations with respect to the registration of Roche's shares of our common stock will be paid by us except that Roche has agreed to pay any registration or filing fees payable under any federal or state securities or Blue Sky laws and certain expenses to be directly incurred by Roche, including underwriting fees, discounts and commissions and counsel fees. In addition, we are only required to pay for two registrations within a 12-month period. We and Roche each have agreed to customary indemnification and contribution provisions with respect to liability incurred in connection with these registrations. Dispositions by Roche If Roche and its affiliates sell their majority ownership of shares of our common stock to a successor, Roche has agreed that it will cause the successor to purchase all shares of our common stock not held by Roche - if the consideration is composed entirely of either cash or equity traded on a U.S. national securities exchange, with consideration in the same form and amounts per share as received by Roche and its affiliates; and - in any other case, with consideration either in the same form and amounts per share as received by Roche and its affiliates or with consideration that has a value per share not less than the weighted average value per share received by Roche and its affiliates as determined by an investment bank of nationally recognized standing appointed by a committee of independent directors. Roche has agreed to cause the buyer to agree to be bound by the obligations described in the preceding paragraph as well as the obligations described under "--Business Combinations with Roche" and "--Compulsory Acquisitions" below. We have agreed that the buyer shall be entitled to succeed to Roche's rights described under "--Roche's Right to Proportional Representation." Business Combinations with Roche Roche has agreed that as a condition to any merger of Genentech with Roche or its affiliates or the sale of substantially all of our assets to Roche or its affiliates, that either - the merger or sale must be authorized by the favorable vote of a majority of the shares of common stock voting at any meeting not owned by Roche, provided that no person or group shall be entitled to cast more than 5% of the votes cast at the meeting; or 67 71 - in the event such a favorable vote is not obtained, the value of the consideration to be received by the holders of our common stock, other than Roche, shall be equal to or greater than the average of the means of the ranges of fair values for the common stock as determined by two investment banks of nationally recognized standing appointed by a committee of independent directors. Roche has agreed that it will not sell any shares of our common stock in the 90 days immediately preceding any proposal by Roche for a merger with us. Roche has also agreed that in the event of any merger of Genentech with Roche or its affiliates or sale of substantially all of our assets to Roche or its affiliates, each unvested option then outstanding under our stock option plans will - be accelerated so that each option shall become exercisable immediately prior to the consummation of the transaction for the full number of shares of common stock covered by the option; - become exchangeable upon the consummation of the transaction for deferred cash compensation, which vests on the same schedule as the shares of common stock covered by the option, having a value equal to the product of (A) the number of shares covered by the option and (B) the amount which Roche, in its reasonable judgment, considers to be equivalent in value to the consideration per share received by holders of shares of common stock other than Roche in the transaction, minus the exercise price per share under the option; or - be canceled in exchange for a replacement option to purchase stock of the surviving corporation in the transaction with the terms of the option to provide value equivalent, as determined by Roche in its reasonable discretion, to that of the canceled option. Compulsory Acquisitions If Roche owns more than 90% of our common stock for more than two months, Roche has agreed to, as soon as reasonably practicable, effect a merger of Genentech with Roche or an affiliate of Roche. The merger shall be conditioned on the vote or the valuation described under the first two bullets of "--Business Combinations with Roche" above. If such merger occurs, each unvested option outstanding under our stock option plans shall be treated as set forth under "--Business Combinations by Roche" above. ROCHE'S RIGHT TO MAINTAIN ITS PERCENTAGE OWNERSHIP INTEREST IN OUR STOCK As discussed below under "Tax Sharing Agreement," we are now and expect to continue to be a member of Roche's U.S. consolidated federal income tax group (as well as certain consolidated or combined state and local income tax groups). In order to preserve our status as a member of these consolidated or combined groups, the affiliation agreement contains provisions designed to limit the circumstances in which Roche's proportional ownership of Genentech can be diluted. Under these provisions, we will be required to establish as soon as practicable (but not more than 60 days after this offering) a program to repurchase shares of our common stock from our public stockholders. We will be required to repurchase a sufficient number of shares pursuant to this program to ensure that, with respect to any issuance of common stock by us in the future, the percentage of our common stock owned by Roche immediately after such issuance will be no lower than Roche's lowest percentage ownership of our common stock at any time after the offering of common stock described in this prospectus and prior to the time of such issuance. We are required to provide information to Roche each month, or more frequently if requested, regarding the status of the repurchase program and previous and expected future issuances of common stock by us, and we also will be obligated to notify Roche the day after the number of shares of common stock issued in a month equals or exceeds 500,000. Our obligations with respect to this stock repurchase program will terminate upon Roche owning less than 40% of our stock. Furthermore, Roche will have (i) a continuing option (which will be assignable by Roche to any of its affiliates) to buy from us, prior to the occurrence of any event that could result in a decrease in the percentage of common stock owned by Roche and its affiliates, a sufficient amount of common stock to ensure that Roche and its affiliates maintain the percentage ownership of our common stock owned by them, and (ii) a continuing option (which will be assignable by Roche to any of its affiliates) to buy from us 80% of any class of stock issued by us other than common stock, in each case with a price per share equal to either the average of the last sale price on each of the five immediately preceding trading days on a U.S. national securities 68 72 exchange on which the shares are traded or, if the sale prices are unavailable, the value of the shares determined in accordance with procedures reasonably satisfactory to Roche and us. These provisions of the affiliation agreement may have the effect of limiting our ability to use our capital stock as consideration for acquisitions. TAX SHARING AGREEMENT We have been since the redemption of our special common stock, and after this offering are expected to continue to be, included in Roche's U.S. consolidated federal income tax group and our tax liability thus will be included in the consolidated federal income tax liability of Roche and its subsidiaries. We also will be included with Roche and/or one or more Roche subsidiaries in consolidated or combined income tax groups for certain state and local tax jurisdictions. Genentech and Roche will enter into a tax sharing agreement. Pursuant to this agreement, Genentech and Roche will make payments such that, with respect to any period, the net amount paid by us on account of consolidated or combined income taxes (including any amounts determined to be due as a result of a redetermination of the consolidated or combined income tax liability of a Roche group by reason of an audit) will be determined as if we filed separate, stand-alone federal, state and local income tax returns as the common parent of an affiliated group of corporations filing consolidated or combined federal, state and local returns rather than a consolidated subsidiary of Roche. Such stand-alone tax returns will be prepared on a basis as if we were an independent taxpayer with no affiliation with Roche. Under applicable law, Roche will continue to have all of the rights and obligations of a parent of a consolidated federal income tax group (and similar rights provided for by applicable state and local law with respect to a parent of a consolidated or combined group), including: sole and exclusive responsibility for the preparation and filing of consolidated federal and consolidated or combined state and local income tax returns (or amended returns); the power, in Roche's sole discretion, to contest or compromise any asserted consolidated or combined tax adjustment or deficiency and to file, litigate or compromise any claim for refund of a consolidated or combined tax on behalf of us; and the authority to act as the sole and exclusive agent for us in any and all other matters relating to consolidated or combined tax liabilities. However, Roche and Genentech have agreed to cooperate under the tax sharing agreement to assist in the defense of claims relating to us. In general, we will be included in Roche's consolidated group for federal income tax purposes for so long as Roche beneficially owns at least 80% of the total voting power and value of our outstanding stock. Each member of a consolidated group is severally liable for the federal income tax liability of the group. Accordingly, although the tax sharing agreement determines tax liabilities between Genentech and Roche, during the period in which we are included in Roche's consolidated federal income tax group, we could be liable in the event that any federal tax liability is incurred by the consolidated group but is not discharged by Roche or its other subsidiaries. Similarly, we could be liable in the event that a state or local tax liability is incurred by a Roche consolidated or combined state or local tax group but is not discharged by Roche or its other subsidiaries. Roche is required, under the terms of the tax sharing agreement, to indemnify us for any tax liability of a Roche consolidated or combined group that we must pay to a taxing authority, except to the extent that such tax liability is attributable (as determined under the principles described above relating to the computation of tax sharing payments by us to Roche) to us and we have not yet made a corresponding tax sharing payment to Roche. THE FUTURE OF GENENTECH Roche acquired a 60% equity interest in us in 1990 because Roche believed that the acquisition presented Roche with an opportunity to expand its investment in biotechnology with a leading biotechnology enterprise--Genentech. It continues to be the view of the board of directors of Roche that its investment in Genentech is a worthwhile, long-term investment. The board of directors of Roche also believes that its contractual agreements with us provide an opportunity for both Roche and us to benefit from enhanced development and marketing of our products outside the United States and that our innovative products can increasingly benefit from Roche's global marketing, development and sales resources. Roche intends to continue to allow our current management to conduct our business and operations as we have done in the past. However, there can be no assurance that Roche will not institute a new business plan in the future. See "Risk Factors--Roche, Our Controlling Stockholder, May Have Interests That Are Adverse to Yours." 69 73 SELLING STOCKHOLDER AND PRINCIPAL STOCKHOLDERS The following table sets forth certain information as of July 16, 1999 regarding the beneficial ownership of common stock by Roche, currently our sole stockholder.
---------------------------------------------------------------------- SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED PRIOR TO OFFERING AFTER OFFERING ------------------------- ------------------------- NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENTAGE NUMBER PERCENTAGE CLASS ------------------------------------ ----------- ---------- ----------- ---------- ------------ Roche Holdings, Inc. ................. 127,298,588 100.00% 107,298,588 84.29% Common Stock One Commerce Center, Suite 1050 Wilmington, DE 19801
In addition, Roche has granted the underwriters an option to purchase an additional 2,000,000 shares of common stock to cover over-allotments. If the underwriters exercise this option in full, Roche will own approximately 82.72% of our outstanding stock after this offering. The following table sets forth the beneficial ownership of shares of common stock as of July 1, 1999, unless otherwise noted, of (i) each director and the director nominee of Genentech, (ii) each of the Named Executive Officers, and (iii) all directors, the director nominee and all executive officers of Genentech as a group. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities and options that are exercisable within 60 days. Except as indicated by footnotes and subject to community property laws, where applicable, the persons named below have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. All of the shares owned by the following persons are shares underlying currently exercisable stock options.
------------------------- COMMON STOCK ------------------------- PERCENT NAME OF BENEFICIAL OWNER SHARES OF CLASS ------------------------ --------- -------- Herbert W. Boyer, Ph.D. .................................... -- -- Susan D. Desmond-Hellmann, M.D., M.P.H. .................... 37,500(1) * Dennis J. Henner, Ph.D. .................................... 101,250(2) * Franz B. Humer, Ph.D. ...................................... -- -- Jonathan K. C. Knowles, Ph.D. .............................. -- -- Louis J. Lavigne, Jr. ...................................... 112,500(3) * Arthur D. Levinson, Ph.D. .................................. 300,000(4) * William D. Young............................................ 206,250(5) * All directors, the director nominee and all executive officers as a group (28 persons).......................... 1,494,043(6) 1.16%
- --------------- * The amount beneficially owned is less than one percent (1%) of the outstanding shares of common stock. (1) Does not include 233,275 stock options we expect to grant under our proposed 1999 Plan to replace shares canceled under the 1996 Plan, of which options to purchase 6,480 shares of common stock would be exercisable at August 31, 1999. (2) Does not include 169,958 stock options we expect to grant under our proposed 1999 Plan to replace shares canceled under the 1996 Plan, of which options to purchase 4,721 shares of common stock would be exercisable at August 31, 1999. (3) Does not include 209,948 stock options we expect to grant under our proposed 1999 Plan to replace shares canceled under the 1996 Plan, of which options to purchase 5,832 shares of common stock would be exercisable at August 31, 1999. (4) Does not include 483,213 stock options we expect to grant under our proposed 1999 Plan to replace shares canceled under the 1996 Plan, of which options to purchase 13,423 shares of common stock would be exercisable at August 31, 1999. (5) Does not include 283,263 stock options we expect to grant under our proposed 1999 Plan to replace shares canceled under the 1996 Plan, of which options to purchase 7,868 shares of common stock would be exercisable at August 31, 1999. (6) Does not include 2,181,568 stock options we expect to grant under our proposed 1999 Plan to replace shares canceled under the 1996 Plan, of which options to purchase 60,599 shares of common stock would be exercisable at August 31, 1999. 70 74 DESCRIPTION OF CAPITAL STOCK GENERAL Prior to the redemption of our special common stock, the authorized capital stock of Genentech consisted of 200,000,000 shares of common stock, 100,000,000 shares of callable putable (special) common stock and 100,000,000 shares of preferred stock. On June 30, 1999, we redeemed and retired all of our outstanding special common stock. Our authorized capital stock consists of 300,000,000 shares of common stock and 100,000,000 shares of preferred stock. COMMON STOCK As of July , 1999, there were 127,298,588 shares of common stock outstanding, all of which were held of record by Roche. The holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Subject to preferences that may be applicable to any outstanding preferred stock, the holders of common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the board of directors out of funds legally available therefor. See "Dividend Policy." In the event of our liquidation, dissolution or winding up, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding. The common stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are fully paid and non-assessable, and the shares of common stock to be issued upon completion of this offering will be fully paid and non-assessable. PREFERRED STOCK The board of directors has the authority to issue the preferred stock in one or more series and to fix or alter the dividend rights, dividend rate, conversion rights, voting rights, rights and terms of redemption (including sinking fund payments), redemption price or prices, and the liquidation preference of any wholly unissued series of preferred stock and the number of shares constituting any series or the designation of such series or any of them; and to increase or decrease the number of shares of any series subsequent to the issue of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. If Roche did not own its current position in Genentech, the authorized but unissued shares of preferred stock could be used by our board to make a change in control of Genentech more difficult, or to discourage an attempt to acquire control of Genentech. For example, our board could, subject to certain limitations, authorize and issue a class of preferred stock which is entitled to vote as a class with respect to mergers or other extraordinary transactions. Our board has no current intention of using the authorized and unissued shares of Preferred Stock for any such purposes. DELAWARE TAKEOVER STATUTE We have elected not to be governed by Section 203 of the Delaware General Corporation Law. This section requires the vote of at least 66 2/3% of the outstanding voting stock of a company not owned by an interested stockholder to approve certain business combinations. Section 203 defines interested stockholder as any entity or person owning 15% or more of the outstanding voting stock of the company and any entity or person affiliated with, controlling or controlled by such entity or person. As a result, if we decide to enter into any such proposed business combination, we will only need the approval of a majority of our outstanding voting stock except as described in "Relationship with Roche -- Arrangements between Genentech and Roche -- Business Combinations with Roche." ARRANGEMENTS BETWEEN GENENTECH AND ROCHE Prior to the completion of this offering, we will amend our certificate of incorporation and bylaws and enter into a new affiliation agreement with Roche. For a description of these provisions see "Relationship with Roche -- Arrangements between Genentech and Roche." 71 75 CERTAIN PROVISIONS OF GENENTECH'S CERTIFICATE OF INCORPORATION AND BYLAWS Our certificate of incorporation provides that any person purchasing or acquiring an interest in shares of our capital stock is deemed to have consented to the following provisions relating to intercompany agreements and to transactions with interested parties and corporate opportunities. The following provisions of our certificate of incorporation may only be repealed or amended by a 90% vote of our stockholders. For purposes of the foregoing, Genentech includes all corporations and other entities in which Genentech owns fifty percent or more of the outstanding voting interests, and Roche includes all corporations and other entities that are "affiliates" of Roche within the meaning of Rule 12b-2 under Exchange Act. Transactions with Roche Our certificate of incorporation provides that no contract, agreement, arrangement or transaction between us and Roche or any related entity will be void or voidable solely because Roche is a party thereto or solely because any of our directors or officers who are affiliated with Roche are present at or vote with respect to the authorization of the contract, agreement, arrangement or transaction. Our certificate of incorporation also provides that Roche and the officers or directors of Roche will not be presumed liable to us or our stockholders for: - breach of any fiduciary duty or duty of loyalty, - failure to act in the best interests of Genentech, or - receipt of any improper personal benefit, simply because Roche or any director or officer of Roche, in good faith, takes any action, exercises any right or gives or withholds any consent with respect to any agreement or contract between Roche and Genentech. Competition by Roche with Us; Corporate Opportunities Our certificate of incorporation provides that Roche has no duty to refrain from engaging in the same or similar activities or lines of business as Genentech and that neither Roche nor any of its directors or officers will be liable to us or our stockholders for breach of any fiduciary duty due to any of these activities. If Roche learns of a potential matter that may be a corporate opportunity for both Roche and Genentech, Roche has no duty to communicate or offer this opportunity to us. In addition, Roche will not be liable to us or our stockholders for breach of any fiduciary duty if Roche pursues or acquires the corporate opportunity or does not communicate it to us. If a director, officer or employee of Genentech who is also a director, officer or employee of Roche knows of a potential transaction or matter that may be a corporate opportunity both for Genentech and Roche, the director, officer or employee is entitled to offer the corporate opportunity to us or Roche as the director, officer or employee deems appropriate under the circumstances in his sole discretion, and no such director, officer or employee will be liable to us or our stockholders for breach of any fiduciary duty or duty of loyalty or failure to act in our best interests or the derivation of any improper personal benefit by reason of the fact that - such director, officer or employee offered such corporate opportunity to Roche (rather than to us) or did not communicate information regarding such corporate opportunity to us, or - Roche pursues or acquires such corporate opportunity for itself or directs such corporate opportunity to another person or does not communicate the corporate opportunity to us. While these provisions of our certificate of incorporation eliminate certain rights that might have been available to stockholders under Delaware law, the enforceability of such provisions has not been established under Delaware corporate law. Certain of the foregoing provisions of our certificate of incorporation expire on the date that Roche ceases to own at least 5% of our outstanding shares of common stock and no person who is a director or officer of Genentech is also a director or officer of Roche or its affiliates. 72 76 Limitation on Directors' Liabilities Our certificate of incorporation limits, to the fullest extent permitted by Delaware corporate law, the personal liability of directors for monetary damages for breach of their fiduciary duties. Section 145 of the General Corporation Law of the State of Delaware permits us to indemnify officers, directors or employees against expenses (including attorney's fees), judgments, fines and amounts paid in settlement in connection with legal proceedings "if [as to any officer, director or employee] he acted in good faith and in a manner he reasonably believed to be in, or not opposed to the best interests of the corporation, and, with respect to any criminal act or proceeding, had no reasonable cause to believe his conduct was unlawful," provided that with respect to actions by, or in the right of the corporation against, such individuals, indemnification is not permitted as to any matter as to which such person "shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the corporation, unless, and only to the extent that, the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability, but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as the court shall deem proper." Individuals who are successful in the defense of such action are entitled to indemnification against expenses reasonably incurred in connection therewith. Our board of directors may provide similar indemnification to our officers, employees and agents as they deem appropriate and as authorized by Delaware law. We may purchase insurance on behalf of any director, officer, employee or agent against any expense incurred by such person in his or her capacity. LISTING Our common stock has been approved for listing on the New York Stock Exchange under the symbol "DNA", subject to official notice of issuance. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the common stock is EquiServe, Boston EquiServe Division, Stockholder Services, P. O. Box 8040, Boston, MA 02266-8040. 73 77 MATERIAL U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF COMMON STOCK The following is a general discussion of the material United States federal income and estate tax consequences of the ownership and disposition of our common stock by a beneficial owner thereof that is a "Non-U.S. Holder." A "Non-U.S. Holder" is a person or entity that, for U.S. federal income tax purposes, is a non-resident alien individual, a foreign corporation, a foreign partnership, or a foreign estate or trust. This discussion is based on the Internal Revenue Code of 1986, as amended, and administrative interpretations as of the date of this prospectus, all of which are subject to change, including changes with retroactive effect. This discussion does not address all aspects of United States federal income and estate taxation that may be relevant to Non-U.S. Holders in light of their particular circumstances and does not address any tax consequences arising under the laws of any state, local or foreign jurisdiction. Prospective holders should consult their tax advisors with respect to the particular tax consequences to them of owning and disposing of our common stock, including the consequences under the laws of any state, local or foreign jurisdiction. DIVIDENDS Subject to the discussion below, dividends, if any, paid to a Non-U.S. Holder of our common stock generally will be subject to withholding tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. For purposes of determining whether tax is to be withheld at a 30% rate or at a reduced rate as specified by an income tax treaty, Genentech ordinarily will presume that dividends paid on or before December 31, 2000 to an address in a foreign country are paid to a resident of such country absent knowledge that such presumption is not warranted. Under United States Treasury Regulations applicable to dividends paid after December 31, 2000, to obtain a reduced rate of withholding under a treaty, a Non-U.S. Holder generally will be required to provide an Internal Revenue Service Form W-8 BEN certifying such Non-U.S. Holder's entitlement to benefits under a treaty. The regulations also provide special rules to determine whether, for purposes of determining the applicability of a tax treaty, dividends paid to a Non-U.S. Holder that is an entity should be treated as paid to the entity or those holding an interest in that entity. There will be no withholding tax on dividends paid to a Non-U.S. Holder that are effectively connected with the Non-U.S. Holder's conduct of a trade or business within the United States if a Form 4224 or, after December 31, 2000, a Form W-8 ECI, stating that the dividends are so connected is filed with Genentech. Instead, the effectively connected dividends will be subject to regular United States income tax in the same manner as if the Non-U.S. Holder were a United States resident. A non-U.S. corporation receiving effectively connected dividends may also be subject to an additional "branch profits tax" which is imposed, under certain circumstances, at a rate of 30% (or such lower rate as may be specified by an applicable treaty) of the non-U.S. corporation's effectively connected earnings and profits, subject to certain adjustments. Generally, Genentech must report to the United States Internal Revenue Service the amount of dividends paid, the name and address of the recipient, and the amount, if any, of tax withheld. A similar report is sent to the holder. Pursuant to tax treaties or certain other agreements, the United States Internal Revenue Service may make its reports available to tax authorities in the recipient's country of residence. Dividends paid to a Non-U.S. Holder at an address within the United States may be subject to backup withholding imposed at a rate of 31% if the Non-U.S. Holder fails to establish that it is entitled to an exemption or to provide a correct taxpayer identification number and certain other information to Genentech. Under current United States federal income tax law, backup withholding generally does not apply to dividends paid on or before December 31, 2000 to a Non-U.S. Holder at an address outside the United States, unless the payer has knowledge that the payee is a U.S. person. Under the regulations described above, however, a Non-U.S. Holder will be subject to backup withholding unless applicable certification requirements are met. GAIN ON DISPOSITION OF COMMON STOCK A Non-U.S. Holder generally will not be subject to United States federal income tax with respect to gain realized on a sale or other disposition of our common stock unless (i) the gain is effectively connected with a trade or business of such holder in the 74 78 United States, (ii) in the case of certain Non-U.S. Holders who are non-resident alien individuals and hold our common stock as a capital asset, such individuals are present in the United States for 183 or more days in the taxable year of the disposition, (iii) the Non-U.S. Holder is subject to tax pursuant to the provisions of the Code regarding the taxation of U.S. expatriates, or (iv) Genentech is or has been a "U.S. real property holding corporation" within the meaning of Section 897(c)(2) of the Code at any time within the shorter of the five-year period preceding such disposition or such holder's holding period. Genentech believes that it is not, and does not anticipate becoming, a U.S. real property holding corporation. INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING ON DISPOSITION OF COMMON STOCK Under current United States federal income tax law, information reporting and backup withholding imposed at a rate of 31% will apply to the proceeds of a disposition of our common stock effected by or through a United States office of a broker unless the disposing holder certifies as to its non-U.S. status or otherwise establishes an exemption. Generally, United States information reporting and backup withholding will not apply to a payment of disposition proceeds where the transaction is effected outside the United States through a non-U.S. office of a non-U.S. broker. However, U.S. information reporting requirements will apply to a payment of disposition proceeds where the transaction is effected outside the United States by or through an office outside the United States of a broker that fails to maintain documentary evidence that the holder is a Non-U.S. Holder and that certain conditions are met, or that the holder otherwise is entitled to an exemption, and the broker is (i) a U.S. person, (ii) a foreign person which derives 50% or more of its gross income for certain periods from the conduct of a trade or business in the United States, (iii) a "controlled foreign corporation" for U.S. federal income tax purposes, or (iv) effective after December 31, 2000, a foreign partnership (A) at least 50% of the capital or profits interest in which is owned by U.S. persons, or (B) that is engaged in a U.S. trade or business. Effective after December 31, 2000, backup withholding will apply to a payment of those disposition proceeds if the broker has actual knowledge that the holder is a U.S. person. Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained, provided that the required information is furnished to the U.S. Internal Revenue Service. FEDERAL ESTATE TAX An individual Non-U.S. Holder who is treated as the owner of, or has made certain lifetime transfers of, an interest in our common stock will be required to include the value thereof in his gross estate for U.S. federal estate tax purposes, and may be subject to U.S. federal estate tax unless an applicable estate tax treaty provides otherwise. 75 79 SHARES ELIGIBLE FOR FUTURE SALE The 20,000,000 shares of our common stock sold in this offering will be freely tradable without restriction under the Securities Act of 1933 except for any such shares which may be acquired by an affiliate of Genentech as that term is defined in Rule 144 promulgated under the Securities Act of 1933, which shares will remain subject to the resale limitations of Rule 144. The shares of our common stock that will continue to be held by Roche after the offering constitute "restricted securities" within the meaning of Rule 144, and will be eligible for sale by Roche in the open market after this offering, subject to certain contractual lockup provisions and the applicable requirements of Rule 144, both of which are described below. Generally, Rule 144 provides that a person who has beneficially owned "restricted" shares for at least one year will be entitled to sell on the open market in brokers' transactions within any three month period a number of shares that does not exceed the greater of: - 1% of the then outstanding shares of common stock; and - the average weekly trading volume in the common stock on the open market during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain post-sale notice requirements and the availability of current public information about us. In the event that any person other than Roche who is deemed to be our affiliate purchases shares of our common stock pursuant to this offering or acquires shares of our common stock pursuant to one of our employee benefit plans, the shares held by such person are required under Rule 144 to be sold in brokers' transactions, subject to the volume limitations described above. Shares properly sold in reliance upon Rule 144 to persons who are not our affiliates are thereafter freely tradable without restriction. Sales of substantial amounts of our common stock in the open market, or the availability of such shares for sale, could adversely affect the price of our common stock. Subject to the lock-up agreement discussed in the next paragraph, any shares sold in this offering will be eligible for immediate resale in the public market without restrictions by persons other than our affiliates. Our affiliates would be subject to the restrictions of Rule 144 described above. We, Roche and our directors and our management executive committee members have agreed that, without the prior written consent of J.P. Morgan Securities Inc. on behalf of the underwriters, none of us will, during the period ending 90 days after the date of this prospectus, sell or otherwise dispose of any shares of our common stock, subject to certain exceptions. See "Underwriting." We have agreed that, upon Roche's request, we will file one or more registration statements under the Securities Act in order to permit Roche to offer and sell shares of our common stock. For a description of Roche's registration rights see "Relationship with Roche--Arrangements between Genentech and Roche--Registration Rights." It is expected that an aggregate of 7.5 million shares of our common stock will be available for issuance under the 1999 Plan. We intend to file a registration statement on Form S-8 covering the issuance of shares of our common stock pursuant to the 1999 Plan. Accordingly, the shares issued pursuant to the 1999 Plan will be freely tradable, subject to the restrictions on resale by affiliates under Rule 144 and the lock-up agreement discussed above. 76 80 UNDERWRITING The underwriters named below, for whom J.P. Morgan Securities Inc., Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Warburg Dillon Read LLC and BancBoston Robertson Stephens Inc. are acting as representatives, have severally agreed, subject to the terms and conditions set forth in the underwriting agreement among them, the selling stockholder and us, to purchase from the selling stockholder, and the selling stockholder has agreed to sell to the underwriters, the respective number of shares of common stock set forth opposite their names below:
---------- NUMBER UNDERWRITERS OF SHARES ------------ ---------- J.P. Morgan Securities Inc.................................. Goldman, Sachs & Co......................................... Merrill Lynch, Pierce, Fenner & Smith Incorporated.................................... Warburg Dillon Read LLC..................................... BancBoston Robertson Stephens Inc. ......................... ---------- Total............................................. 20,000,000 ==========
The nature of the underwriters' obligations under the underwriting agreement is such that all of the common stock being offered, excluding shares covered by the over-allotment option granted to the underwriters, must be purchased if any are purchased. The representatives of the underwriters have advised us that the several underwriters propose to offer the common stock to the public at the initial public offering price set forth on the cover page of this prospectus and may offer the common stock to selected dealers at such price less a concession not to exceed $ per share. The underwriters may allow, and such dealers may reallow, a concession to other dealers not to exceed $ per share. After the initial public offering of the common stock, the public offering price and other selling terms may be changed by the representatives. The selling stockholder has granted the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to 2,000,000 additional shares of common stock at the same price per share to be paid by the underwriters for the other shares offered hereby. If the underwriters purchase any such additional shares pursuant to the option, each of the underwriters will be committed to purchase such additional shares in approximately the same proportion as set forth in the above table. The underwriters may exercise the option only to cover over-allotments, if any, made in connection with the distribution of the common stock offered hereby. The following table shows the per share and total underwriting discounts to be paid to the underwriters by the selling stockholder, assuming both no exercise and full exercise of the underwriters' over-allotment option.
---------------------------- NO EXERCISE FULL EXERCISE ----------- ------------- Per share................................................. $ $ Total..................................................... $ $
We and the selling stockholder have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect thereof. We estimate that the total expenses of this offering, excluding underwriting discounts, will be $3 million. We are responsible for all expenses except that Roche has agreed to pay the registration and filing fees payable under any federal or state securities or Blue Sky laws in addition to certain expenses to be directly incurred by Roche, including underwriting, discounts and its counsel fees. In connection with this offering, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may overallot this offering, creating a syndicate short position. In 77 81 addition, the underwriters may bid for, and purchase, shares of common stock in the open market to cover syndicate shorts or to stabilize the price of the common stock. Finally, the underwriting syndicate may reclaim selling concessions allowed for distributing shares of common stock in this offering, if the syndicate repurchases previously distributed common stock in syndicate covering transactions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the shares of common stock above independent market levels. The underwriters are not required to engage in these activities, and may end any of these activities at any time. We and our directors and our management executive committee members and the selling stockholder have agreed, with limited exceptions, that, during the period beginning from the date of this prospectus and continuing and including the date 90 days after the date of this prospectus, none of us will, directly or indirectly, offer, sell, offer to sell, contract to sell or otherwise dispose of any shares of common stock or any of our securities which are substantially similar to the common stock, including but not limited to any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or any such substantially similar securities or enter into any swap, option, future, forward or other agreement that transfers, in whole or in part, the economic consequences of ownership of common stock or any securities substantially similar to the common stock, other than pursuant to employee stock option and restricted stock plans existing on the date of this prospectus, without the prior written consent of J.P. Morgan Securities Inc. At our request, the underwriters have reserved shares of common stock for sale to employees, including officers, and former non-institutional stockholders of Genentech who have expressed an interest in participating in this offering. We expect these persons to purchase no more than % of the common stock offered in this offering. The number of shares available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. It is expected that delivery of the shares will be made to investors on or about , 1999. Immediately prior to this offering, there was no public market for the common stock. The selling stockholder and the underwriters will negotiate the initial public offering price. In determining the price, the selling stockholder and the underwriters expect to consider a number of factors in addition to prevailing market conditions, including: - the history of and prospects for the biotechnology industry; - an assessment of our management; - our present operations; - our historical results of operations; and - our earnings prospects. The selling stockholder and the underwriters will consider these and other relevant factors in relation to the price of similar securities of generally comparable companies. Neither we, the selling stockholder nor the underwriters can assure investors that an active trading market will develop for the common stock, or that the common stock will trade in the public market at or above the initial public offering price. Our common stock has been approved for listing on the New York Stock Exchange under the symbol "DNA", subject to official notice of issuance. The underwriters have undertaken to sell shares of the common stock to a minimum of 2,000 beneficial holders in lots of 100 or more shares so as to meet the distribution requirements for listing on the New York Stock Exchange. From time to time in the ordinary course of their respective businesses, certain of the underwriters and their affiliates have engaged in and may in the future engage in commercial and/or investment banking transactions with us, Roche and our affiliates. 78 82 LEGAL MATTERS Certain legal matters relating to the shares of common stock offered hereby will be passed upon for Roche and Genentech by Davis Polk & Wardwell, New York, New York. Legal matters in connection with this offering will be passed upon for the underwriters by Cahill Gordon & Reindel, a partnership including a professional corporation, New York, New York. EXPERTS The consolidated financial statements of Genentech as of December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, included in this prospectus and in the registration statement have been audited by Ernst & Young LLP, independent auditors, as stated in their report appearing herein and in the registration statement, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly and current reports, proxy statements and other information with the SEC. We have also filed with the SEC a registration statement on Form S-3 to register the shares of common stock being offered in this prospectus. This prospectus, which forms part of the registration statement, does not contain all of the information included in the registration statement. For further information about us and the shares of common stock offered in this prospectus, you should refer to the registration statement and its exhibits and our other SEC filings. You may read and copy any document we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. We file our SEC materials electronically with the SEC, so you can also review our filings by accessing the website maintained by the SEC at http://www.sec.gov. This website contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The SEC allows us to "incorporate by reference" the information we file with it, which means we can disclose important information to you by referring you to those documents. The information included in the following documents is incorporated by reference and is considered to be a part of this prospectus. The most recent information that we file with the SEC automatically updates and supersedes more dated information. We have previously filed the following documents with the SEC and incorporate them by reference into this prospectus: 1. Our annual report on Form 10-K for the year ended December 31, 1998; 2. Our quarterly report on Form 10-Q for the quarter ended March 31, 1999; and 3. Our current report on Form 8-K dated June 28, 1999. We also incorporate by reference all documents subsequently filed by us pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act until all of the shares being offered in this prospectus are sold. We will provide without charge to each person to whom a prospectus is delivered, including any beneficial owner, a copy of any or all of the information that has been incorporated by reference in this prospectus. If you would like to obtain this information from us, please direct your request, either in writing or by telephone, to Genentech, Inc., 1 DNA Way, South San Francisco, California 94080, Attention Investor Relations (650) 225-1260. 79 83 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Ernst & Young LLP, Independent Auditors........... F-2 Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996.......................... F-3 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996.......................... F-4 Consolidated Balance Sheets as of December 31, 1998 and 1997...................................................... F-5 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996.............. F-6 Notes to Consolidated Financial Statements.................. F-7 Independent Accountants' Review Report...................... F-24 Unaudited Condensed Consolidated Statements of Income for the Three Months Ended March 31, 1999 and 1998............ F-25 Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998........ F-26 Unaudited Condensed Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998............................ F-27 Notes to Unaudited Condensed Consolidated Financial Statements................................................ F-28
F-1 84 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders of Genentech, Inc. We have audited the accompanying consolidated balance sheets of Genentech, Inc. as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Genentech, Inc. at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /S/ ERNST & YOUNG LLP San Jose, California January 20, 1999 F-2 85 GENENTECH, INC. CONSOLIDATED STATEMENTS OF INCOME
------------------------------------ YEAR ENDED DECEMBER 31, ------------------------------------ 1998 1997 1996 ---------- ---------- -------- In thousands, except per share data Revenues Product sales (including amounts from related parties: 1998--$28,738; 1997--$17,396; 1996--$13,216).......................... $ 717,795 $ 584,889 $582,829 Royalties (including amounts from related parties: 1998--$35,028; 1997--$25,362; 1996--$26,240).......................... 229,589 241,112 214,702 Contract and other (including amounts from related parties: 1998--$61,583; 1997--$67,596; 1996--$95,299)......................................... 114,795 121,587 107,037 Interest.................................................. 88,764 69,160 64,110 ---------- ---------- -------- Total revenues.................................... 1,150,943 1,016,748 968,678 Costs and expenses Cost of sales (including amounts from related parties: 1998--$23,155; 1997--$14,348; 1996--$10,900).......................... 138,623 102,536 104,527 Research and development (including contract related: 1998--$27,660; 1997--$67,596; 1996--$50,586).......................... 396,186 470,923 471,143 Marketing, general and administrative..................... 358,931 269,852 240,063 Interest.................................................. 4,552 3,642 5,010 ---------- ---------- -------- Total costs and expenses.......................... 898,292 846,953 820,743 Income before taxes......................................... 252,651 169,795 147,935 Income tax provision........................................ 70,742 40,751 29,587 ---------- ---------- -------- Net income.................................................. $ 181,909 $ 129,044 $118,348 ========== ========== ======== Earnings per share Basic..................................................... $ 1.45 $ 1.05 $ 0.98 Diluted................................................... 1.40 1.02 0.95 Weighted average shares used to compute diluted earnings per share..................................................... 129,872 126,397 123,969
See Notes to Consolidated Financial Statements. F-3 86 GENENTECH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
----------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------- 1998 1997 1996 --------- --------- --------- In thousands CASH FLOWS FROM OPERATING ACTIVITIES Net income................................................ $ 181,909 $ 129,044 $ 118,348 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization............................. 78,101 65,533 62,124 Deferred income taxes..................................... 29,792 19,660 (34,021) Gain on sales of securities available-for-sale............ (9,542) (13,203) (1,010) Loss on sales of securities available-for-sale............ 1,809 2,096 663 Write-down of nonmarketable securities.................... 16,689 -- -- Write-down of securities available-for-sale............... 20,249 4,000 -- Loss on fixed asset dispositions.......................... 1,015 318 5,309 Changes in assets and liabilities Net cash flow from trading securities..................... 12,725 (109,132) (8,184) Receivables and other current assets...................... 33,767 11,194 (30,416) Inventories............................................... (32,600) (24,083) 1,705 Accounts payable, other current liabilities and other long-term liabilities.................................. 15,937 32,897 25,153 --------- --------- --------- Net cash provided by operating activities................. 349,851 118,324 139,671 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of securities held-to-maturity.................. (327,690) (304,932) (634,124) Proceeds from maturities of securities held-to-maturity... 410,729 455,317 772,922 Purchases of securities available-for-sale................ (800,788) (512,727) (304,806) Proceeds from sales of securities available-for-sale...... 430,936 410,395 182,564 Purchases of nonmarketable equity securities.............. (29,044) -- (9,323) Capital expenditures...................................... (88,088) (154,902) (141,837) Change in other assets.................................... (17,151) (61,529) (7,046) --------- --------- --------- Net cash used in investing activities..................... (421,096) (168,378) (141,650) CASH FLOWS FROM FINANCING ACTIVITIES Stock issuances........................................... 107,938 87,259 72,558 Reduction in long-term debt, including current portion.... -- -- (358) --------- --------- --------- Net cash provided by financing activities................. 107,938 87,259 72,200 --------- --------- --------- Increase in cash and cash equivalents....................... 36,693 37,205 70,221 Cash and cash equivalents at beginning of year.............. 244,469 207,264 137,043 --------- --------- --------- Cash and cash equivalents at end of year.................... $ 281,162 $ 244,469 $ 207,264 ========= ========= ========= SUPPLEMENTAL CASH FLOW DATA Cash paid during the year for: Interest, net of portion capitalized................... $ 4,552 $ 3,642 $ 5,010 Income taxes........................................... 26,189 15,474 52,243
See Notes to Consolidated Financial Statements. F-4 87 GENENTECH, INC. CONSOLIDATED BALANCE SHEETS
------------------------ DECEMBER 31, ------------------------ 1998 1997 ---------- ---------- In thousands, except par value ASSETS Current assets Cash and cash equivalents................................. $ 281,162 $ 244,469 Short-term investments.................................... 606,544 588,853 Accounts receivable--trade (net of allowances of: 1998--$14,661; 1997--$8,826)........................... 79,411 71,415 Accounts receivable--other (net of allowances of: 1998--$2,757; 1997--$5,709)............................ 47,480 73,444 Accounts receivable--related party........................ 22,850 44,386 Inventories............................................... 148,626 116,026 Prepaid expenses and other current assets................. 55,885 55,325 ---------- ---------- Total current assets.............................. 1,241,958 1,193,918 Long-term marketable securities............................. 716,888 453,188 Property, plant and equipment, net.......................... 700,249 683,304 Other assets................................................ 196,307 177,202 ---------- ---------- Total assets...................................... $2,855,402 $2,507,612 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable.......................................... $ 40,895 $ 48,992 Income taxes payable...................................... 46,447 40,293 Accrued liabilities--related party........................ 10,945 15,427 Other accrued liabilities................................. 193,040 184,845 ---------- ---------- Total current liabilities......................... 291,327 289,557 Long-term debt.............................................. 149,990 150,000 Other long-term liabilities................................. 70,240 36,830 ---------- ---------- Total liabilities................................. 511,557 476,387 Commitments and contingencies Stockholders' equity Preferred stock, $0.02 par value; authorized: 100,000,000 shares; none issued.................................... -- -- Special Common Stock, $0.02 par value; authorized: 100,000,000 shares; outstanding: 1998--50,493,631; 1997--47,606,785....................................... 1,010 952 Common stock, $0.02 par value; authorized: 200,000,000 shares; outstanding: 1998 and 1997--76,621,009......... 1,532 1,532 Additional paid-in capital................................ 1,588,990 1,463,768 Retained earnings......................................... 693,050 511,141 Accumulated other comprehensive income.................... 59,263 53,832 ---------- ---------- Total stockholders' equity........................ 2,343,845 2,031,225 ---------- ---------- Total liabilities and stockholders' equity........ $2,855,402 $2,507,612 ========== ==========
See Notes to Consolidated Financial Statements. F-5 88 GENENTECH, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
---------------------------------------------------------------------------------------- SHARES ---------------- ACCUMULATED SPECIAL SPECIAL ADDITIONAL OTHER COMMON COMMON COMMON COMMON PAID-IN RETAINED COMPREHENSIVE STOCK STOCK STOCK STOCK CAPITAL EARNINGS INCOME TOTAL ------- ------ ------- ------ ---------- -------- ------------- ---------- In thousands Balance December 31, 1995........ 42,647 76,621 $ 853 $1,532 $1,281,640 $263,749 $54,273 $1,602,047 Comprehensive income Net income..................... 118,348 118,348 Net unrealized (loss) on securities available-for-sale........... (324) (324) ---------- Comprehensive income............. 118,024 ---------- Issuance of stock upon exercise of options and warrants........ 1,738 35 55,103 55,138 Issuance of stock under employee stock plan..................... 421 8 17,412 17,420 Income tax benefits realized from employee stock option exercises...................... 8,430 8,430 ------ ------ ------ ------ ---------- -------- ------- ---------- Balance December 31, 1996........ 44,806 76,621 $ 896 $1,532 $1,362,585 $382,097 $53,949 $1,801,059 ------ ------ ------ ------ ---------- -------- ------- ---------- Comprehensive income Net income..................... 129,044 129,044 Net unrealized (loss) on securities available-for-sale........... (117) (117) ---------- Comprehensive income............. 128,927 ---------- Issuance of stock upon exercise of options and warrants........ 2,350 47 68,346 68,393 Issuance of stock under employee stock plan..................... 451 9 18,857 18,866 Income tax benefits realized from employee stock option exercises...................... 13,980 13,980 ------ ------ ------ ------ ---------- -------- ------- ---------- Balance December 31, 1997........ 47,607 76,621 $ 952 $1,532 $1,463,768 $511,141 $53,832 $2,031,225 ------ ------ ------ ------ ---------- -------- ------- ---------- Comprehensive income Net income..................... 181,909 181,909 Net unrealized gain on securities available-for-sale........... 5,431 5,431 ---------- Comprehensive income............. 187,340 ---------- Issuance of stock upon exercise of options and warrants........ 2,460 49 86,835 86,884 Issuance of stock under employee stock plan..................... 427 9 21,055 21,064 Income tax benefits realized from employee stock option exercises...................... 17,332 17,332 ------ ------ ------ ------ ---------- -------- ------- ---------- Balance December 31, 1998........ 50,494 76,621 $1,010 $1,532 $1,588,990 $693,050 $59,263 $2,343,845 ====== ====== ====== ====== ========== ======== ======= ==========
See Notes to Consolidated Financial Statements. F-6 89 GENENTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Genentech, Inc. (the "Company") is a biotechnology company that uses human genetic information to discover, develop, manufacture and market human pharmaceuticals for significant unmet medical needs. Twelve of the approved products of biotechnology stem from Genentech science. The Company manufactures and markets 8 products directly in the United States. In 1998, the Company licensed its marketing and development rights to Actimmune(R), to Connetics Corporation ("Connetics"). Following a transition period ending January 1999, the Company will no longer market Actimmune, and Connetics has agreed to pay the Company royalties on its sales of Actimmune. In conjunction with an October 1995 agreement with F. Hoffmann-La Roche Ltd ("Hoffmann-La Roche"), a subsidiary of Roche Holdings, Inc. ("Roche"), the Company receives royalties on sales of certain of its products in Canada, on sales of Pulmozyme(R), outside of the United States and on sales of rituximab, outside of the United States (excluding Japan) from Hoffmann-La Roche. See Relationship with Roche Holdings, Inc. note for further discussion. The Company receives royalties on sales of two of its products, growth hormone and tissue-plasminogen activator, outside of the United States and Canada through other licensees. The Company also receives worldwide royalties on five additional licensed products, and received royalties on the sale of one other licensed product for which those royalties expired in August 1998, that originated from the Company's technology and are marketed by other companies. Principles of Consolidation: The consolidated financial statements include the accounts of the Company and all significant subsidiaries. Material intercompany balances and transactions are eliminated. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Cash Equivalents: The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Short-term Investments and Long-term Marketable Securities: The Company invests its excess cash balances in short-term and long-term marketable securities, primarily corporate notes, certificates of deposit, treasury notes, asset-backed securities and municipal bonds. As part of its strategic alliance efforts, the Company also invests in equity securities, dividend bearing convertible preferred stock and interest bearing convertible debt of other biotechnology companies. Marketable equity securities are accounted for as available-for-sale investment securities as described below. Nonmarketable equity securities and convertible debt are carried at cost. At December 31, 1998 and 1997, the Company had investments of $55.8 million and $55.2 million, respectively, in convertible debt of various biotechnology companies. Investment securities are classified into one of three categories: held-to-maturity, available-for-sale, or trading. Securities are considered held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. These securities are recorded as either short-term investments or long-term marketable securities on the balance sheet depending upon their original contractual maturity dates. Held-to-maturity securities are stated at amortized cost, including adjustments for amortization of premiums and accretion of discounts. Securities are considered trading when bought principally for the purpose of selling in the near term. These securities are recorded as short-term investments and are carried at market value. Unrealized holding gains and losses on trading securities are included in interest income. Securities not classified as held-to-maturity or as trading are considered available-for-sale. These securities are recorded as either short-term investments or long-term marketable securities and are carried at market value with unrealized gains and losses included in accumulated other comprehensive income in stockholders' equity. If a decline in fair value below cost is considered other than temporary, such securities are written down to estimated fair value with a charge to marketing, general and administrative expenses. The cost of all securities sold is based on the specific identification method. Property, Plant and Equipment: The costs of buildings and equipment are depreciated using the straight-line method over the following estimated useful lives of the assets: buildings--25 years; certain manufacturing equipment--15 years; other equipment--4 or 8 years; leasehold improvements--length of applicable lease. The costs of repairs and maintenance are expensed as incurred. Repairs and maintenance expenses for the years ended December 31, 1998, 1997 and 1996 were F-7 90 GENENTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) $35.9 million, $32.9 million and $28.8 million, respectively. Capitalized interest on construction-in-progress of $3.0 million in 1998, $3.9 million in 1997 and $2.5 million in 1996 is included in property, plant and equipment. Property, plant and equipment balances are summarized below:
------------------------ AS OF DECEMBER 31, ------------------------ 1998 1997 ---------- ---------- In thousands At cost: Land........................................................ $ 69,437 $ 69,010 Buildings................................................... 378,133 339,708 Equipment................................................... 607,369 494,874 Leasehold improvements...................................... 3,565 3,270 Construction in progress.................................... 86,960 152,533 ---------- ---------- 1,145,464 1,059,395 Less: accumulated depreciation.............................. 445,215 376,091 ---------- ---------- Net property, plant and equipment........................... $ 700,249 $ 683,304 ========== ==========
Patents and Other Intangible Assets: As a result of its research and development ("R&D") programs, the Company owns or is in the process of applying for patents in the United States and other countries which relate to products and processes of significant importance to the Company. Costs of patents and patent applications are capitalized and amortized on a straight-line basis over their estimated useful lives of approximately 12 years. Intangible assets are generally amortized on a straight-line basis over their estimated useful lives. Contract Revenue: Contract revenue for R&D is recorded as earned based on the performance requirements of the contract. Nonrefundable contract fees for which no further performance obligations exist are recognized when the payments are received or when collection is assured. In return for contract payments, contract partners may receive certain marketing and manufacturing rights, products for clinical use and testing, and/or R&D services. Royalty Expenses: Royalty expenses directly related to product sales are classified in cost of sales. Other royalty expenses, relating to royalty revenue, totaled $38.3 million, $39.8 million and $36.0 million in 1998, 1997 and 1996, respectively, and are classified in marketing, general and administrative expenses. Advertising Expenses: The Company expenses the costs of advertising, which also includes promotional expenses, as incurred. Advertising expenses for the years ended December 31, 1998, 1997 and 1996, were $47.7 million, $41.8 million and $28.0 million, respectively. Income Taxes: The Company accounts for income taxes by the asset and liability approach for financial accounting and reporting of income taxes. Earnings Per Share: Basic earnings per share is computed based on the weighted average number of shares of the Company's Callable Putable Common Stock ("Special Common Stock") and Common Stock outstanding. Diluted earnings per share is computed based on the weighted average number of shares of the Company's Special Common Stock, Common Stock and other dilutive securities. See also Earnings Per Share note. Financial Instruments: As part of its overall portfolio, the Company uses two external money managers to manage its investment portfolios that are held for trading purposes and one external manager that manages an available-for-sale portfolio. The investment portfolios consist entirely of debt securities. When the money managers purchase securities denominated in a foreign currency, they enter into foreign currency forward contracts which are recorded at fair value with the related gain or loss recorded in interest income. The Company purchases simple foreign currency put options ("options") with expiration dates and amounts of currency that are based on a portion of probable nondollar revenues so that the potential adverse impact of movements in currency exchange F-8 91 GENENTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) rates on the nondollar denominated revenues will be at least partially offset by an associated increase in the value of the options. See the Financial Instruments note for further discussion. At the time the options are purchased they have little or no intrinsic value. Realized and unrealized gains related to the options are deferred until the designated hedged revenues are recorded. The associated costs, which are deferred and classified as other current assets, are amortized over the term of the options and recorded as a reduction of the hedged revenues. Realized gains, if any, are recorded in the income statement with the related hedged revenues. Options are generally terminated, or offsetting contracts are entered into, upon determination that purchased options no longer qualify as a hedge or are determined to exceed probable anticipated net foreign revenues. The realized gains and losses are recorded as a component of other revenues. For early termination of options that qualify as hedges, the gain or loss on termination will be deferred through the original term of the option and then recognized as a component of the hedged revenues. Changes in the fair value of hedging instruments that qualify as a hedge are not recognized and changes in the fair value of instruments that do not qualify as a hedge would be recognized in other revenues. The Company may also enter into foreign currency forward contracts ("forward contracts") as hedging instruments. Forward contracts are recorded at fair value, and any gains and losses from these forward contracts are recorded in the income statement with the related hedged revenues. Financial instruments, such as forward contracts, not qualifying as hedges under generally accepted accounting principles are marked to market with gains or losses recorded in other revenues if they occur. Interest rate swaps ("swaps") have been used and may be used in the future to adjust the duration of the investment portfolio in order to meet duration targets. Interest rate swaps are contracts in which two parties agree to swap future streams of payments over a specified period. See the Financial Instruments note for further discussion. The accrued net settlement amounts on swaps are reflected on the balance sheet as other accounts receivable or other accrued liabilities. Net payments made or received on swaps are included in interest income as adjustments to the interest received on invested cash. Amounts deferred on terminated swaps are classified as other assets and are amortized to interest income over the original contractual term of the swaps by a method that approximates the level-yield method. For early termination of swaps where the underlying asset is not sold, the amount of the terminated swap is deferred and amortized over the remaining life of the original swap. For early termination of swaps with the corresponding termination or sale of the underlying asset, the amounts are recognized through interest income. Changes in the fair value of swap hedging instruments that qualify as a hedge are not recognized and changes in the fair value of swap instruments that do not qualify as a hedge would be recognized in other income. The Company's marketable equity portfolio consists primarily of investments in biotechnology companies whose risk of market fluctuations is greater than the stock market in general. To manage a portion of this risk, the Company enters into certain costless collar instruments to hedge certain equity securities against changes in market value. See the Financial Instruments note for further discussion. Gains and losses on these instruments are recorded as an adjustment to unrealized gains and losses on marketable securities with a corresponding receivable or payable recorded in short-term or long-term other assets or liabilities. Equity collar instruments that do not qualify for hedge accounting and early termination of these instruments with the sale of the underlying security would be recognized through earnings. For early termination of these instruments without the sale of the underlying security, the time value would be recognized through earnings and the intrinsic value will adjust the cost basis of the underlying security. 401(k) Plan: The Company's 401(k) Plan (the "Plan") covers substantially all of its employees. Under the Plan, eligible employees may contribute up to 15% of their eligible compensation, subject to certain Internal Revenue Service restrictions. The Company matches a portion of employee contributions, up to a maximum of 4% of each employee's eligible compensation. The match is effective December 31 of each year and is fully vested when made. During 1998, 1997 and 1996, the Company provided $7.3 million, $6.7 million and $6.1 million, respectively, for the Company match under the Plan. Comprehensive Income: The Company adopted Statement of Financial Accounting Standards ("FAS") 130, "Reporting Comprehensive Income," at December 31, 1998. Under FAS 130, the Company is required to display comprehensive income and its components as part of the Company's full set of financial statements. The measurement and presentation of net income did not change. Comprehensive income is comprised of net income and other comprehensive income. Other comprehensive income includes certain changes in equity of the Company that are excluded from net income. Specifically, FAS 130 requires unrealized holding gains and losses on the Company's available-for-sale securities, which were reported separately in F-9 92 GENENTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) stockholders' equity, to be included in accumulated other comprehensive income. Comprehensive income for years ended December 31, 1998, 1997 and 1996 has been reflected in the Consolidated Statements of Stockholders' Equity. New Accounting Standard: In June 1998, the Financial Accounting Standards Board issued FAS 133, "Accounting for Derivative Instruments and Hedging Activities," effective beginning in the first quarter of 2000. FAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires companies to recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting under FAS 133. The Company is currently evaluating the impact of FAS 133 on its financial position and results of operations. Inventories: Inventories are stated at the lower of cost or market. Cost is determined using a weighted-average approach which approximates the first-in first-out method. Inventories are summarized below:
-------------------- AS OF DECEMBER 31, -------------------- 1998 1997 -------- -------- In thousands Raw materials and supplies.................................. $ 21,414 $ 17,544 Work in process............................................. 106,383 84,831 Finished goods.............................................. 20,829 13,651 -------- -------- Total............................................. $148,626 $116,026 ======== ========
Reclassifications: Certain reclassifications of prior year amounts have been made to conform with the current year presentation. SEGMENT, SIGNIFICANT CUSTOMER AND GEOGRAPHIC INFORMATION The Company adopted FAS 131, "Disclosure about Segments of an Enterprise and Related Information," at December 31, 1998. FAS 131 establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas and major customers. Under FAS 131, the Company's operations are treated as one operating segment as it only reports profit and loss information on an aggregate basis to chief operating decision makers of the Company. Information about the Company's product sales and major customers are as follows:
-------------------------- YEAR ENDED DECEMBER 31, -------------------------- PRODUCT SALES 1998 1997 1996 ------------- ------ ------ ------ In millions Herceptin................................................... $ 30.5 -- -- Rituxan..................................................... 162.6 $ 5.5 -- Activase.................................................... 213.0 260.7 $284.1 Growth hormone (Protropin, Nutropin and Nutropin AQ)........ 214.0 223.6 218.2 Pulmozyme................................................... 93.8 91.6 76.0 Actimmune................................................... 3.9 3.5 4.5 ------ ------ ------ Total product sales............................... $717.8 $584.9 $582.8 ====== ====== ======
Hoffmann-La Roche contributed approximately 11% of the Company's total revenues in 1998, 11% in 1997 and 14% in 1996. See the Related Party Transactions note below for further information. Three other major customers, Caremark, Inc., Bergen Brunswig and Cardinal Distribution, Inc., each contributed 10% or more of the Company's total revenues in at least one of the last three years. Caremark, Inc., a national distributor, which accounted for 10%, 14% and 15% of total revenues in 1998, 1997 and 1996, respectively, distributes the Company's growth hormone products, Pulmozyme and Actimmune through its extensive branch network and is then reimbursed through a variety of sources. Bergen Brunswig, a national wholesale F-10 93 GENENTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) distributor of all of the Company's products, contributed 11% of total revenues in 1998 and 10% in 1997 and 1996. Cardinal Distribution, Inc., a national wholesaler distributor of all the Company's products, contributed 11% of total revenues in 1998. Approximate foreign sources of revenues were as follows:
-------------------------- YEAR ENDED DECEMBER 31, -------------------------- 1998 1997 1996 In millions ------ ------ ------ Europe...................................................... $171.0 $139.5 $146.4 Asia (primarily Japan)...................................... 16.9 34.2 17.8 Canada...................................................... 11.7 11.7 11.1
The Company currently sells primarily to distributors and health care companies throughout the United States, performs ongoing credit evaluations of its customers' financial condition and extends credit generally without collateral. In 1998, 1997 and 1996, the Company did not record any material additions to, or losses against, its provision for doubtful accounts. RESEARCH AND DEVELOPMENT ARRANGEMENTS To gain access to potential new products and technologies and to utilize other companies to help develop the Company's potential new products, the Company has established strategic alliances with various companies. These strategic alliances include the acquisition of both marketable and nonmarketable equity investments and convertible debt of companies developing technologies that fall outside the Company's research focus and include companies having the potential to generate new products through technology exchanges and investments. Potential future payments may be due to certain collaborative partners achieving certain benchmarks as defined in the collaborative agreements. The Company has also entered into product-specific collaborations to acquire development and marketing rights for products. In December 1997, the Company and Alteon, Inc. ("Alteon") entered into a collaborative agreement to develop and market pimagedine, an advanced glycosylation end-product formation inhibitor to treat kidney disease in diabetic patients. Under the terms of the agreement, the Company licensed pimagedine and second generation compounds from Alteon and has made investments in Alteon stock of $37.5 million. In 1998, as a result of unsuccessful clinical trials with pimagedine and the decline in the value of the Company's investment in Alteon, the Company wrote down $24.2 million of its marketable and nonmarketable equity investments in Alteon. The Company is in discussions with Alteon as to the future direction of the collaboration. INCOME TAXES The income tax provision consists of the following amounts:
------------------------------- YEAR ENDED DECEMBER 31, ------------------------------- 1998 1997 1996 In thousands ------- -------- -------- Current: Federal................................................... $39,945 $ 30,617 $ 61,502 State..................................................... 1,004 432 2,104 Foreign................................................... -- 2 2 ------- -------- -------- Total current..................................... 40,949 31,051 63,608 ------- -------- -------- Deferred: Federal................................................... 29,006 23,799 (34,021) State..................................................... 787 (14,099) -- ------- -------- -------- Total deferred.................................... 29,793 9,700 (34,021) ------- -------- -------- Total income tax provision........................ $70,742 $ 40,751 $ 29,587 ======= ======== ========
Actual current tax liabilities are lower by $17.3 million, $14.0 million and $8.4 million in 1998, 1997 and 1996, respectively, due to employee stock option related tax benefits which were credited to stockholders' equity. F-11 94 GENENTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A reconciliation between the Company's effective tax rate and the U.S. statutory rate follows:
-------------------------------------- TAX RATE ----------------------- 1998 AMOUNT 1998 1997 1996 ----------- ----- ----- ----- In thousands Tax at U.S. statutory rate.................................. $ 88,428 35.0% 35.0% 35.0% R&D credits realized........................................ (11,919) (4.7) (11.4) (3.0) Tax benefit of certain realized gains on securities available-for-sale........................................ (2,982) (1.2) (3.8) -- Adjustment of deferred tax assets valuation allowance....... -- -- -- (15.3) Foreign losses realized..................................... (10,500) (4.2) -- (3.4) State taxes................................................. 7,491 3.0 2.3 2.3 Other....................................................... 224 0.1 1.9 4.4 -------- ----- ----- ----- Income tax provision.............................. $ 70,742 28.0% 24.0% 20.0% ======== ===== ===== =====
The components of deferred taxes consist of the following:
-------------------- AS OF DECEMBER 31, -------------------- 1998 1997 -------- -------- In thousands Deferred tax liabilities Depreciation.............................................. $ 66,471 $ 55,137 Unrealized gain on securities available-for-sale.......... 30,617 25,086 Other..................................................... 20,016 2,173 -------- -------- Total deferred tax liabilities.................... 117,104 82,396 Deferred tax assets Capitalized R&D costs..................................... 42,317 33,950 Federal credit carryforwards.............................. 86,725 100,400 Expenses not currently deductible......................... 56,699 35,000 State credit carryforwards................................ 30,632 28,365 Other..................................................... 4,992 4,398 -------- -------- Total deferred tax assets.............................. 221,365 202,113 Valuation allowance.................................... (62,844) (48,508) -------- -------- Total net deferred tax assets.......................... 158,521 153,605 -------- -------- Total net deferred taxes.......................... $ 41,417 $ 71,209 ======== ========
Total tax credit carryforwards of $117.4 million expire in the years 1999 through 2012, except for $43.0 million of alternative minimum tax credits which have no expiration date. The valuation allowance at December 31, 1998, reflected above relates to the tax benefits of stock option deductions which will be credited to additional paid-in capital when realized. The valuation allowance increased by $14.3 million and $12.7 million in 1998 and 1997, respectively, and decreased by $17.0 million in 1996. Realization of net deferred taxes depends on future earnings from existing and new products and new indications for existing products. The timing and amount of future earnings will depend on continued success in marketing and sales of the Company's current products, as well as the scientific success, results of clinical trials, availability of third party reimbursement for therapies and regulatory approval of products under development. EARNINGS PER SHARE The following is a reconciliation of the numerator and denominators of the basic and diluted EPS computations for the years ended December 31, 1998, 1997 and 1996. F-12 95 GENENTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
-------------------------------- YEAR ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 -------- -------- -------- In thousands NUMERATOR Net income--numerator for basic and diluted EPS........... $181,909 $129,044 $118,348 ======== ======== ======== DENOMINATOR Denominator for basic EPS--weighted-average shares........ 125,767 123,042 120,623 Effect of dilutive securities Stock options............................................. 4,105 3,355 3,325 Warrants.................................................. -- -- 21 -------- -------- -------- Denominator for diluted EPS--adjusted weighted-average shares and assumed conversions............................ 129,872 126,397 123,969 ======== ======== ========
Options to purchase 178,575 shares of the Company's Special Common Stock ranging from $70.50 to $71.13 per share, 103,700 shares of Special Common Stock at $59.00 per share and 5,251,665 shares of Special Common Stock at $54.25 per share were outstanding during 1998, 1997 and 1996, respectively, but were not included in the computation of diluted earnings per share. These options' exercise price was greater than the average market price of the Special Common Stock and therefore, the effect would be anti-dilutive. See Capital Stock note for information on option expiration dates. During 1998, 1997 and 1996, the Company had convertible subordinated debentures which were convertible to 1,013,447, 1,013,514 and 1,013,514 shares, respectively, of Special Common Stock, but were not included in the computation of diluted earnings per share because they were anti-dilutive. See the Long-term Debt note for additional information on the convertible subordinated debentures. F-13 96 GENENTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INVESTMENT SECURITIES Securities classified as trading, available-for-sale and held-to-maturity at December 31, 1998 and 1997 are summarized below. Estimated fair value is based on quoted market prices for these or similar investments.
----------------------------------------------- AS OF DECEMBER 31, 1998 ----------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- --------- In thousands Total trading securities (carried at estimated fair value).................................................... $236,330 $ 3,817 $ (246) $239,901 ======== ======= ======= ======== Securities available-for-sale (carried at estimated fair value) Equity securities......................................... $ 42,024 $77,364 $(1,042) $118,346 United States Treasury securities and obligations of other United States government agencies maturing: between 5-10 years............................................. 31,294 1,812 (74) 33,032 Corporate debt securities maturing: within 1 year.......................................... 251,238 233 (515) 250,956 between 1-5 years...................................... 309,762 3,525 (934) 312,353 between 5-10 years..................................... 149,410 6,603 (472) 155,541 Other debt securities maturing: between 1-5 years...................................... 70,768 172 (2,502) 68,438 between 5-10 years..................................... 19,836 267 -- 20,103 greater than 10 years.................................. 9,033 49 (7) 9,075 -------- ------- ------- -------- Total Available-for-Sale.......................... $883,365 $90,025 $(5,546) $967,844 ======== ======= ======= ======== Securities held-to-maturity (carried at amortized cost) Corporate debt securities maturing: within 1 year.......................................... $115,687 $ -- $ (79) $115,608 ======== ======= ======= ======== Total held-to-maturity............................ $115,687 $ -- $ (79) $115,608 ======== ======= ======= ========
F-14 97 GENENTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------- AS OF DECEMBER 31, 1997 ----------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- --------- In thousands Total trading securities (carried at estimated fair value).................................................... $256,428 $ 686 $(4,487) $252,627 ======== ======= ======= ======== Securities available-for-sale (carried at estimated fair value) Equity securities......................................... $ 46,262 $75,796 $(2,147) $119,911 United States Treasury securities and obligations of other United States government agencies maturing between 5-10 years..................................... 38,979 577 (3) 39,553 Corporate debt securities maturing: within 1 year.......................................... 100,178 51 (8) 100,221 between 1-5 years...................................... 100,713 770 (103) 101,380 between 5-10 years..................................... 149,242 4,053 -- 153,295 Other debt securities maturing: within 1 year.......................................... 41,061 -- (578) 40,483 between 1-5 years...................................... 41,057 -- (2,008) 39,049 -------- ------- ------- -------- Total Available-for-Sale.......................... $517,492 $81,247 $(4,847) $593,892 ======== ======= ======= ======== Securities held-to-maturity (carried at amortized cost) Corporate debt securities maturing: within 1 year.......................................... $195,522 $ 19 -- $195,541 -------- ------- ------- -------- Total held-to-maturity............................ $195,522 $ 19 -- $195,541 ======== ======= ======= ========
The carrying value of all investment securities held at December 31, 1998 and 1997 is summarized below:
------------------- AS OF DECEMBER 31, ------------------- 1998 1997 -------- -------- In thousands SECURITY Trading securities.......................................... $239,901 $252,627 Securities available-for-sale maturing within one year...... 250,956 140,704 Securities held-to-maturity maturing within one year........ 115,687 195,522 -------- -------- Total short-term investments...................... $606,544 $588,853 ======== ======== Securities available-for-sale maturing between 1-10 years, including equity securities............................ $716,888 $453,188 -------- -------- Total long-term marketable securities............. $716,888 $453,188 ======== ========
In 1998, proceeds from the sales of available-for-sale securities totaled $431.0 million; gross realized gains totaled $9.5 million and gross realized losses totaled $1.8 million. In 1997, proceeds from the sales of available-for-sale securities totaled $410.4 million; gross realized gains totaled $13.2 million and gross realized losses totaled $2.1 million. In 1996, proceeds from sales of available-for-sale securities totaled $182.6 million; gross realized gains totaled $1.0 million and gross realized losses totaled $0.7 million. The Company recorded charges in 1998 and 1997 of $20.2 million and $4.0 million, respectively, to write down certain available-for-sale biotechnology equity securities for which the decline in fair value below cost was other than temporary. In 1996, there were no such write-downs. During the year ended December 31, 1998, 1997 and 1996, net change in unrealized holding gains/(losses) on trading securities included in net income totaled $7.4 million, ($3.8) million and ($1.0) million, respectively. F-15 98 GENENTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Marketable debt securities held by the Company are issued by a diversified selection of corporate and financial institutions with strong credit ratings. The Company's investment policy limits the amount of credit exposure with any one institution. Other than asset-backed securities, these debt securities are generally not collateralized. The Company has not experienced any material losses due to credit impairment on its investments in marketable debt securities in the years 1998, 1997 and 1996. FINANCIAL INSTRUMENTS Foreign Currency Instruments Certain of the Company's revenues are earned outside of the United States. Moreover, the Company's foreign currency denominated revenues exceed its foreign currency denominated expenses; therefore, risk exists that net income may be impacted by changes in the exchange rates between the United States dollar and foreign currencies. To hedge a portion of anticipated nondollar denominated net revenues, the Company currently purchases options and may enter into forward contracts. At December 31, 1998, the Company had hedged approximately 75% of probable net foreign revenues anticipated within 12 months and 40% of its probable net foreign revenues through the year 2000. At December 31, 1998 and 1997, the notional amounts of the options totaled $75.0 million and $122.9 million, respectively, and consisted of the following currencies: German marks, Spanish pesetas, French francs, British pounds, Italian lire, Japanese yen and Swedish krona. All option contracts mature within the next two years. The fair value of the options was based on exchange rates and market conditions at December 31, 1998 and 1997. All forward contracts were closed out at the end of 1997 and no forward contracts were entered into in 1998. Credit exposure is limited to the unrealized gains on these contracts. All agreements are with a diversified selection of institutions with strong credit ratings which minimizes risk of loss due to nonpayment from the counterparty. The Company has not experienced any material losses due to credit impairment of its foreign currency instruments. Interest Rate Swaps Interest income is subject to fluctuations as interest rates change, primarily United States interest rates. To manage this risk, the Company periodically establishes duration targets for its investment portfolio that reflect its anticipated use of cash and fluctuations in market rates of interest. The Company may enter into swaps as part of its overall strategy of managing the duration of its investment portfolio. For each swap, the Company receives interest based on fixed rates and pays interest to counterparties based on floating rates on a notional principal amount. The Company's swap counterparties have strong credit ratings which minimize the risk of non-performance on the swaps. The Company has not experienced any material losses due to credit impairment. At December 31, 1998 and 1997, the Company had three swap contracts outstanding with notional amounts totaling $150.0 million. The Company's credit exposure on swaps and the net carrying amounts of swaps held at December 31, 1998 and 1997, were not material. Net interest income from swaps in 1998, 1997 and 1996 was also immaterial. Equity Collar Instruments To hedge against fluctuations in the market value of a portion of the marketable equity portfolio, the Company has entered into costless collar instruments, a form of equity collar instrument, that expire in 1999 and will require settlement in equity securities or cash. A costless collar instrument is a purchased put option and a written call option on a specific equity security such that the cost of the purchased put and the proceeds of the written call offset each other; therefore, there is no initial cost or cash outflow for these instruments. The fair value of the purchased puts and the written calls were determined based on quoted market prices at year end. At December 31, 1998, the notional amounts of the put and call options were $32.0 million and $46.0 million, respectively. At December 31, 1997, the notional amounts of the put and call options were $33.7 million and $50.1 million, respectively. Financial Instruments Held for Trading Purposes As part of its 1998 overall investment strategy, the Company has contracted with two external money managers to manage part of its investment portfolio. These portfolios at December 31, 1998, consisted of United States and nondollar denominated investments. To hedge the nondollar denominated investments, the money managers enter into forward contracts. The notional amounts of the forward contracts at December 31, 1998 and 1997, were $211.6 million and $209.3 million, respectively. The fair value at December 31, 1998 and 1997, of the forward contracts, totaled $0.4 million and $3.3 million, respectively. The average fair value during 1998 and 1997 totaled ($0.9) million and $2.1 million, respectively. Net realized and unrealized trading gains on the portfolio totaled approximately $16.2 million in F-16 99 GENENTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1998 and $9.1 million in 1997, respectively, and are included in interest income. Counterparties have strong credit ratings which minimize the risk of non-performance from the counterparties. Summary of Fair Values The table below summarizes the carrying value and fair value at December 31, 1998 and 1997, of the Company's financial instruments. The fair value of the long-term debt was estimated based on the quoted market price at year end (in thousands):
------------------------------------------------- 1998 1997 ----------------------- ----------------------- In thousands CARRYING FAIR CARRYING FAIR FINANCIAL INSTRUMENTS VALUE VALUE VALUE VALUE --------------------- ---------- ---------- ---------- ---------- ASSETS: Investment securities............................... $1,323,432 $1,323,353 $1,042,041 $1,042,060 Convertible equity loans............................ 55,800 55,800 55,248 55,248 Purchased foreign exchange put options.............. 1,441 5,741 3,891 14,468 Outstanding interest rate swaps..................... 5,742 167,535 5,742 165,559 LIABILITIES: Long-term debt...................................... 149,990 148,000 150,000 139,500 Equity collars...................................... 4,857 11,600 12,161 15,533 Outstanding interest rate swaps..................... 3,587 153,587 3,732 153,732
OTHER ACCRUED LIABILITIES Other accrued liabilities at December 31 are as follows:
-------------------- 1998 1997 In thousands -------- -------- Accrued compensation........................................ $ 47,057 $ 44,624 Accrued clinical and other studies.......................... 35,535 47,269 Accrued royalties........................................... 23,392 23,905 Accrued marketing and promotion costs....................... 9,417 13,369 Other....................................................... 77,639 55,678 -------- -------- Total other accrued liabilities................... $193,040 $184,845 ======== ========
LONG-TERM DEBT The Company's long-term debt as of December 31, 1998 and 1997 consisted of $150.0 million of convertible subordinated debentures, with interest payable at 5%, due in 2002. The debentures are convertible, at the option of the holder, into shares of the Company's Special Common Stock. Upon conversion, the holder receives, for each $74 in principal amount of debenture converted, one-half share of the Company's Special Common Stock and $18 in cash. The $18 in cash is reimbursed by Roche to the Company. Generally, the Company may redeem the debentures until maturity. LEASES, COMMITMENTS AND CONTINGENCIES Leases: Future minimum lease payments under operating leases, net of sublease income at December 31, 1998, are as follows:
----------------------------------------------------------------------------- 1999 2000 2001 2002 2003 THEREAFTER TOTAL In thousands ------- ------- ------- ------- ------- ---------- -------- $25,855 $23,591 $22,470 $19,627 $18,637 $36,707 $146,887
The Company leases various real property under operating leases that generally require the Company to pay taxes, insurance and maintenance. Rent expense was approximately $12.7 million, $11.7 million and $11.7 million for the years 1998, 1997 and 1996, respectively. Sublease income was not material in any of the three years presented. Under four of the lease agreements, the Company has an option to purchase the properties at an amount that does not constitute a bargain. Alternatively, the Company can cause the property to be sold to a third party. The Company is F-17 100 GENENTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) contingently liable, under residual value guarantees, for approximately $377.0 million. The Company also is required to maintain certain financial ratios and is limited to the amount of additional debt it can assume. Commitments: The Company and CuraGen Corporation entered into a research collaborative agreement in November 1997, whereby the Company invested $5.0 million in equity of CuraGen and has agreed to provide a convertible equity loan to CuraGen of up to $26.0 million. As of December 31, 1998, no loan amounts have been funded to CuraGen. Also, in December 1997, the Company and LeukoSite Inc. entered into a collaboration agreement to develop and commercialize LeukoSite's LDP-02, a humanized monoclonal antibody for the potential treatment of inflammatory bowel diseases. Under the terms of the agreement, the Company made a $4.0 million equity investment in LeukoSite and has agreed to provide a convertible equity loan for approximately $15.0 million to fund Phase II development costs. Upon successful completion of Phase II, if LeukoSite agrees to fund 25% of Phase III development costs, the Company has agreed to provide a second loan to LeukoSite for such funding. As of December 31, 1998, no loan amounts have been funded to LeukoSite. In addition, the Company has entered into research collaborations with companies whereby potential future payments may be due to selective collaborative partners achieving certain benchmarks as defined in the collaborative agreements. The Company may also, from time to time, lend additional funds to these companies, subject to approval. The Company is a limited partner in the Vector Later-Stage Equity Fund II, LP (Vector Fund). The General Partner is Vector Fund Management II, LLC, a Delaware limited liability company. The purpose of the Vector Fund is to invest in biotech equity and equity-related securities. Under the terms of the Vector Fund agreement, the Company makes contributions to the capital of the Vector Fund through installments in cash as called by the General Partner. The Company's total commitment to the Vector Fund through September 2003 is $25.0 million, of which $7.2 million was contributed as of December 31, 1998. The Vector Fund will terminate and be dissolved in September 2007. Contingencies: The Company is a party to various legal proceedings, including patent infringement cases involving human growth hormone products and Activase(R) and other matters. In July 1997, an action was filed in the United States District Court for the Northern District of California alleging that the Company's manufacture, use and sale of its Nutropin(R) human growth hormone products infringed a patent (the Goodman Patent) owned by the Regents of the University of California ("UC"). This action is substantially the same as a previous action filed in 1990 against the Company by UC alleging that the Company's manufacture, use and sale of its Protropin(R) human growth hormone products infringed the Goodman Patent. The 1997 case has been stayed pending the conclusion of the 1990 case, which is expected to commence trial in April 1999. Based upon the nature of the claims made and the information available to date to the Company and its counsel through investigations and otherwise, the Company believes the outcome of these actions is not likely to 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. In addition to the above, 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 the Company's past clinical, sales and marketing activities associated with human growth hormone. In February 1997, February 1998 and October 1998, the Company received grand jury document subpoenas from the same court related to the same subject matter. The government is actively investigating this matter, and the Company is a target of that investigation. The Company expects further activity with respect to this matter in the near future. At this time, the Company cannot reasonably estimate a possible range of loss, if any, that may result from this investigation due to uncertainty regarding the outcome. RELATIONSHIP WITH ROCHE HOLDINGS, INC. On October 25, 1995, the Company and Roche entered into the Agreement. Each share of the Company's Common Stock not held by Roche or its affiliates on that date automatically converted to one share of Special Common Stock. The Agreement extends until June 30, 1999 Roche's option to cause the Company to redeem (call) the outstanding Special Common Stock of the Company at predetermined prices. During the quarter beginning January 1, 1999, the call price is $81.00 per share and increases by $1.50 per share each quarter through the end of the option period on June 30, 1999, on which date the price will F-18 101 GENENTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) be $82.50 per share. If Roche does not cause the redemption as of June 30, 1999, the Company's stockholders will have the option (put) to cause the Company to redeem none, some or all of their shares of Special Common Stock at $60.00 per share (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) within thirty business days commencing July 1, 1999. Roche Holding Ltd, a Swiss corporation, has guaranteed Roche's obligation under the put. In the event of the put, wherein sufficient shares of the Company's Special Common Stock are tendered to result in Roche owning at least 85% of the total outstanding shares of the Company's stock, the Company has in place an Incentive Units Program ("Program") which could result in amounts payable to eligible employees. These amounts are based on specified performance benchmarks achieved by the Company during the term of the Program. In the event of the put, at December 31, 1998, $14.8 million is contingently payable under the Program. In conjunction with the Agreement, Hoffmann-La Roche was granted an option for ten years for licenses to use and sell certain of the Company's products in non-U.S. markets (the License Agreement). In 1997, the Company and Hoffmann-La Roche agreed in principle to changes to the License Agreement. Key changes to the License Agreement are summarized as follows: (1) For future products, Hoffmann-La Roche may choose to exercise its option either when the Company determines to move a product into development, or at the end of Phase II clinical trials (as in the 1995 agreement). United States and European development costs will be shared (discontinuing the distinction regarding location or purpose of studies). (2) If Hoffmann-La Roche exercises its option at the development determination point, United States and European development costs will be shared 50/50. (3) If Hoffmann-La Roche exercises its option at the end of Phase II clinical trials, Hoffmann-La Roche will reimburse the Company for 50 percent of any development costs incurred, and subsequent United States and European development costs will be shared 75/25, Hoffmann-La Roche/Genentech. (4) For nerve growth factor, which Hoffmann-La Roche has already exercised its option to develop, prospective United States and European development costs will be shared 60/40, Hoffmann-La Roche/Genentech. (5) Hoffmann-La Roche has assumed development of Xubix, (TM), (the oral IIb/IIIa antagonist) globally on its own. The Company may subsequently opt-in and join development at any time through the New Drug Application approval for the first indication. If the Company does not opt-in, it will receive from Hoffmann-La Roche a 6.0% royalty on worldwide sales of Xubix. In general, with respect to the Company's products, Hoffmann-La Roche pays a royalty of 12.5% until a product reaches $100.0 million in aggregate sales outside of the United States, at which time the royalty rate on all sales thereafter increases to 15%. In addition, Hoffmann-La Roche has rights to, and pays the Company 20% royalties on, Canadian sales of Activase, Protropin, Nutropin, Pulmozyme and Actimmune, sales of Pulmozyme outside of the United States and sales of Rituxan outside of the United States, excluding Japan. Hoffmann-La Roche currently has the right to sell Pulmozyme exclusively in Canada and Europe and pays royalties to the Company on such sales. The Company supplies its products to Hoffmann-La Roche, and has agreed to supply its products for which Hoffmann-La Roche has exercised its option, for sales outside of the United States at cost plus 20%. Under the Agreement, independent of its right to cause the Company to redeem the Special Common Stock, Roche may increase its ownership of the Company up to 79.9% by making purchases on the open market. Roche holds approximately 65.3% of the outstanding common equity of the Company as of December 31, 1998. RELATED PARTY TRANSACTIONS The Company has transactions with Hoffmann-La Roche (an affiliate of Roche, with two officers on the Company's Board of Directors) and its affiliates in the ordinary course of business. The Company recorded nonrecurring contract revenues from Hoffmann-La Roche of $40.0 million for Herceptin(R), (trastuzumab) marketing rights outside of the United States in 1998 (see below) and $44.7 million for the exercise of its options under the License Agreement with respect to three development projects (Rituxan, insulin-like growth factor ("IGF-I") which was subsequently terminated, and nerve growth factor) in 1996. All other contract revenue from Hoffmann-La Roche, including reimbursement for ongoing development expenses after the option exercise date, totaled $21.6 million in 1998, $67.6 million in 1997, $50.6 million in 1996. All other revenue from Hoffmann-La Roche and their affiliates, principally royalties under previous product licensing agreements, and royalties and product sales under the License Agreement, totaled $63.8 million in 1998, $42.8 million in 1997 and $39.5 million in 1996. F-19 102 GENENTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In July 1998, the Company entered into an agreement with Hoffmann-La Roche to provide Hoffmann-La Roche exclusive marketing rights outside of the United States for Herceptin. Under the agreement, Hoffmann-La Roche paid $40.0 million and has agreed to pay cash milestones tied to future product development activities, to contribute equally with the Company up to a maximum of $40.0 million on global development costs and to make royalty payments on product sales. As of December 31, 1998, no additional amounts have been paid. The Company has a contractual relationship with Novation, LLC ("Novation"), a group purchasing organization that is a joint venture of VHA, Inc. and University HealthSystem Consortium. One officer of VHA, Inc. is on the Company's Board of Directors. Under the contractual relationship, the Company pays to Novation an administrative fee, and pays to Novation member hospitals a rebate, based on a percentage of the purchases of Activase by such member hospitals. In 1998, administrative fees and rebates paid to Novation and its member hospitals, respectively, were not material. The Company has contracted with Jacobs Engineering Group Inc. ("Jacobs") to provide design and engineering services for various projects of the Company. One of the members of the Board of Directors of Jacobs is also a member of the Board of Directors of the Company. In 1998, the amounts the Company paid to Jacobs were not material. CAPITAL STOCK Common Stock, Special Common Stock and Redeemable Common Stock: After the close of business on June 30, 1995, each share of the Company's redeemable Common Stock automatically converted to one share of Genentech Common Stock, in accordance with the terms of the redeemable Common Stock put in place at the time of its issuance in 1990 and as described in Genentech's Certificate of Incorporation. On October 25, 1995, pursuant to the Agreement with Roche, each share of the Company's Common Stock not held by Roche or its affiliates automatically converted to one share of Special Common Stock. See the Relationship with Roche Holdings, Inc. note above for a discussion of these transactions. Stock Award Plans: The Company has stock option plans adopted in 1996, 1994, 1990 and 1984, which variously allow for the granting of non-qualified stock options, stock awards and stock appreciation rights to employees, non-employee directors and consultants of the Company. Incentive stock options may only be granted to employees under these plans. Generally, non-qualified options have a maximum term of 20 years, except those granted under the 1996 Plan and options granted prior to 1992 under the 1984 Plan, which have a term of 10 years. Incentive options have a maximum term of 10 years. In general, options vest in increments over four years from the date of grant, although the Company may grant options with different vesting terms from time-to-time. No stock appreciation rights have been granted to date. The Company adopted the 1991 Employee Stock Plan (the "1991 Plan") on December 4, 1990, and amended it during 1993, 1995 and 1997. The 1991 Plan allows eligible employees to purchase Special Common Stock at 85% of the lower of the fair market value of the Special Common Stock on the grant date or the fair market value on the first business day of each calendar quarter. Purchases are limited to 15% of each employee's eligible compensation. All full-time employees of the Company are eligible to participate in the 1991 Plan. Of the 4,500,000 shares of Special Common Stock reserved for issuance under the 1991 Plan, 3,743,789 shares have been issued as of December 31, 1998. During 1998, 2,818 of the eligible employees participated in the 1991 Plan. The Company has elected to continue to follow "Accounting Principles Board ("APB") 25" for accounting for its employee stock options because the alternative fair value method of accounting prescribed by FAS 123, "Accounting for Stock-Based Compensation", requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, "Accounting for Stock Issued to Employees", no compensation expense is recognized because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant. Pro forma information regarding net income and earnings per share has been determined as if the Company had accounted for its employee stock options and employee stock plan under the fair value method prescribed by FAS 123 and the earnings per share method under FAS 128. The resulting effect on pro forma net income and earnings per share disclosed is not likely to be representative of the effects on net income and earnings per share on a pro forma basis in future years, due to subsequent years including additional grants and years of vesting. The fair value of options was estimated at the date of grant using a Black-Scholes option valuation model with the following weighted average assumptions for 1998, 1997 and 1996, F-20 103 GENENTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) respectively: risk-free interest rates of 5.5%, 6.2% and 5.8%; dividend yields of 0%; volatility factors of the expected market price of the Company's Common Stock of 11.9%, 9.2% and 6.2%; and a weighted-average expected life of the option of five years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of options is amortized to pro forma expense over the options' vesting period. Pro forma information for the years ending December 31 follows (in thousands, except per share amounts):
-------------------------------- YEAR ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 -------- -------- -------- In thousands, except per share amounts Net income--as reported..................................... $181,909 $129,044 $118,348 Net income--pro forma....................................... 140,995 111,441 104,358 Earnings per share--as reported: Basic..................................................... $ 1.45 $ 1.05 $ 0.98 Diluted................................................... 1.40 1.02 0.95 Earnings per share--pro forma: Basic..................................................... $ 1.12 $ 0.91 $ 0.87 Diluted................................................... 1.10 0.89 0.84
A summary of the Company's stock option activity and related information were as follows:
--------------------------- WEIGHTED SHARES AVERAGE PRICE ---------- ------------- Options outstanding at December 31, 1995.................... 15,209,074 $36.80 Grants...................................................... 6,761,545 53.99 Exercises................................................... (1,624,541) 29.39 Cancellations............................................... (743,569) 48.73 ---------- Options outstanding at December 31, 1996.................... 19,602,509 42.89 Grants...................................................... 329,505 58.21 Exercises................................................... (2,443,696) 30.07 Cancellations............................................... (1,248,709) 52.35 ---------- Options outstanding at December 31, 1997.................... 16,239,609 44.41 Grants...................................................... 4,594,925 67.82 Exercises................................................... (2,460,907) 35.32 Cancellations............................................... 1,248,021 54.64 ---------- Options outstanding at December 31, 1998.................... 17,125,606 51.27 ==========
F-21 104 GENENTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table summarizes information concerning currently outstanding and exercisable options as of December 31, 1998:
---------------------------------------------------------------------------------------------- OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------------- --------------------------------- WEIGHTED AVERAGE RANGE OF NUMBER YEARS REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE --------------- ----------- ---------------- ---------------- ----------- ---------------- $15.990 - $21.375 214,951 0.58 $19.87 214,951 $19.87 $25.500 - $38.125 3,196,155 11.08 28.18 3,155,655 28.20 $41.750 - $59.000 9,306,775 11.98 52.09 4,937,820 51.35 $67.063 - $71.125 4,407,725 9.68 67.82 1,525 67.31 ---------- ----------- 17,125,606 8,309,951 ========== ===========
Using the Black-Scholes option valuation model, the weighted average fair value of options granted in 1998, 1997 and 1996, respectively was $17.23, $15.37 and $13.36. Shares of Special Common Stock available for future grants under all stock option plans were 2,041,218 at December 31, 1998. SUBSEQUENT EVENTS (UNAUDITED) Contingencies The Company has entered into a settlement agreement with the U.S. Department of Justice and the U.S. Attorney for the Northern District of California concerning an investigation, ongoing since 1995, into the Company's promotional practices with respect to human growth hormone. As part of the settlement agreement, the Company paid a criminal fine and restitution in the amount of $50 million and pleaded guilty to a felony of promoting Protropin for medical uses for which it was not approved. The Company recorded a $50 million charge in the first quarter of 1999 related to the settlement. In May 1999, the 1990 case brought by UC referred to in "Leases, Commitments and Contingencies" above was submitted to a jury, and on June 2, 1999 the jury announced it was deadlocked. Because the jury could not reach a unanimous decision, no finding of infringement was made, and there is no current legal basis for the Company to be held liable to UC for any claim of damages. On June 22, 1999, the judge held a hearing known as a status conference to discuss further proceedings relating to the 1990 case and 1997 case referred to in "Leases, Commitments and Contingencies" above. At that time, Genentech renewed its request that the judge hold a non-jury trial and decide whether UC defrauded the U.S. Patent and Trademark Office when obtaining the patent. The judge has previously denied a request by UC that this defense be thrown out of the case for lack of merit. A favorable ruling by the judge in any such trial would render the patent unenforceable. On July 1, 1999, the judge issued a written decision setting the schedule for further proceedings. The judge consolidated the 1990 and 1997 cases for a jury trial to begin on January 3, 2000. The issues of infringement and willfulness will be tried to the jury first, and only if the jury finds liability would the issue of damages be tried. Pursuant to the judge's decision, that jury trial is to be followed immediately by a court trial of Genentech's fraud (inequitable conduct) claim against UC. In addition, UC has made a motion for entry of judgment as a matter of law of infringement notwithstanding the lack of unanimous jury verdict on that issue. Redemption of Special Common Stock On June 30, 1999, the Company redeemed all of its special common stock by paying $82.50 per share in cash to holders of special common stock other than Roche. The funds for the redemption of the special common stock were deposited by Roche. As a result, Roche currently owns 100% of the Company's common stock. Consequently, push-down accounting is required under generally accepted accounting principles which will require the Company to record goodwill and other intangible assets of approximately $1.7 billion and $1.5 billion, respectively, on its balance sheet during the second quarter of 1999. Also as a result of push down accounting, the Company expects to record $0.8 billion charge related to in-process research and development in the second quarter of 1999. F-22 105 GENENTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Stock Options In connection with the redemption of the Company's special common stock, the following changes with respect to stock options outstanding have occurred: - Options for the purchase of approximately 6.8 million shares of special common stock have been canceled in accordance with the terms of the applicable stock option plans, and the holders are receiving cash payments in the amount of $82.50 per share, less the exercise price; - Options for the purchase of approximately 4.0 million shares of special common stock are being converted into options to purchase a like number of shares of common stock at the same exercise price; and - Options for the purchase of approximately 4.9 million shares of special common stock have been canceled, in accordance with the terms of the Company's 1996 Stock Option/Stock Incentive Plan (the "1996 Plan"). With certain exceptions, the Company expects to grant new options for the purchase of 1.333 times the number of shares under the previous options with an exercise price equal to the public offering price of the shares offered in this offering. The number of shares that will be the subject of these new options, which are expected to be issued under our 1999 Stock Plan, will be approximately 5.0 million. Alternative arrangements were provided for certain holders of some of the unvested options under the 1996 Plan. The Company expects to record, in the quarter ending June 30, 1999, cash compensation expense of approximately $284.5 million primarily associated with the cash out of stock options and non-cash compensation expense of approximately $102.3 million associated with the remeasurement, for accounting purposes, of the converted options. Additional non-cash compensation expense in an amount equal to the difference between the redemption price and the public offering price per share will be recorded for these converted options in the quarter ending September 30, 1999. Such estimated non-cash compensation amounts are based on an assumed public offering price per share. A limited number of employees will also have the alternative to participate in a cash based deferred compensation plan, with an aggregate of $27.4 million available to be earned over a two year period. Amended Agreement with Hoffmann-La Roche and Tax Sharing Agreement In connection with this offering, Genentech and Roche have amended their licensing and marketing agreement, the major provisions of which include: - the extension of Hoffmann-La Roche's option until at least 2015; - Hoffmann-La Roche may exercise its option to license the Company's products upon the occurrence of any of the following: (1) the Company's decision to file an Investigational New Drug exemption application, or IND, for a product, (2) completion of a Phase II trial for a product or (3) if Hoffmann-La Roche previously paid a fee of $10 million to extend its option on a product, completion of a Phase III trial for that product; - Genentech agreed, in general, to manufacture for and supply to Hoffmann-La Roche its clinical requirements of the Company's products at cost, and its commercial requirements at cost plus a margin of 20%; however, Hoffmann-La Roche will have the right to manufacture the Company's products under certain circumstances; - Hoffmann-La Roche has agreed to pay, for each product for which Hoffmann-La Roche exercises its option upon either a decision to file an IND with the FDA or completion of the Phase II trials, a royalty of 12.5% on the first $100 million on its aggregate sales of that product and thereafter a royalty of 15% on its aggregate sales of that product in excess of $100 million until the later in each country of the expiration of the Company's last relevant patent or 25 years from first commercial introduction of that product; and - Hoffmann-La Roche will pay, for each product for which Hoffmann-La Roche exercises its option after completion of the Phase III trials, a royalty of 15% on its sales of that product until the later in each country of the expiration of the Company's relevant patent or 25 years from the first commercial introduction of that product; however, $5 million of any option extension fee paid by Hoffmann-La Roche shall be credited against royalties payable to Genentech in the first calendar year of sales by Hoffmann-La Roche in which aggregate sales of that product exceed $100 million. F-23 106 GENENTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) After the redemption of the Company's special common stock, Genentech will be included in Roche Holdings, Inc. federal (and certain states and local jurisdictions) consolidated (or combined) income tax group. As a result the Company's tax liability will be included in the consolidated or combined tax liability for federal and certain states and local purposes. The Company has entered into a tax sharing agreement with Roche Holdings, Inc. which provides that Genentech will make payments to Roche Holdings, Inc. on the basis as though the Company filed separate, stand-alone federal, state and local income tax returns rather than being treated as part of Roche Holdings, Inc.'s consolidated/combined tax return. F-24 107 INDEPENDENT ACCOUNTANTS' REVIEW REPORT The Board of Directors and Stockholders Genentech, Inc. We have reviewed the accompanying condensed consolidated balance sheet of Genentech, Inc. as of March 31, 1999, and the related condensed consolidated statements of income and cash flows for the three-month periods ended March 31, 1999 and 1998. 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 an 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, 1998 and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended (included elsewhere herein) and in our report dated January 20, 1999, 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, 1998, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. ERNST & YOUNG LLP San Jose, California April 9, 1999 F-25 108 GENENTECH, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------- THREE MONTHS ENDED MARCH 31, 1999 1998 -------- -------- In thousands, except per share data Revenues Product sales (including amounts from related parties 1999--$13,624; 1998--$6,607)........................... $234,069 $164,719 Royalties (including amounts from related parties: 1999--$11,241; 1998--$7,129)........................... 46,618 64,493 Contract and other (including amounts from related parties: 1999--$4,269; 1998--$7,798)............................ 19,266 14,865 Interest.................................................. 22,399 20,623 -------- -------- Total revenues.................................... 322,352 264,700 Costs and expenses Cost of sales (including amounts from related parties: 1999--$10,786; 1998--$6,025)........................... 45,723 33,621 Research and development (including contract related: 1999--$7,860; 1998--$8,562)............................ 90,740 98,202 Marketing, general and administrative..................... 97,201 74,950 Legal settlement.......................................... 50,000 -- Interest.................................................. 1,363 959 -------- -------- Total costs and expenses.......................... 285,027 207,732 Income before taxes......................................... 37,325 56,968 Income tax provision........................................ 22,910 15,951 -------- -------- Net income.................................................. $ 14,415 $ 41,017 ======== ======== Earnings per share Basic..................................................... $ 0.11 $ 0.33 ======== ======== Diluted................................................... $ 0.11 $ 0.32 ======== ======== Weighted average shares used to compute diluted earnings per share..................................................... 132,522 128,807 ======== ========
See Notes to Unaudited Condensed Consolidated Financial Statements. F-26 109 GENENTECH, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------------- THREE MONTHS ENDED MARCH 31, 1999 1998 --------- --------- In thousands CASH FLOWS FROM OPERATING ACTIVITIES Net income................................................ $ 14,415 $ 41,017 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................... 21,912 17,936 Deferred income taxes.................................. (924) 4,386 Gain on sales of securities available-for-sale......... (12,259) (5,835) Loss on sales of securities available-for-sale......... 30 376 Write-down of securities available-for-sale............ 914 2,555 Write-down of nonmarketable securities................. 432 -- Changes in assets and liabilities: Investments in trading securities...................... (2,772) 25,290 Receivables and other current assets................... (10,503) 15,071 Inventories............................................ 1,914 (1,685) Accounts payable, other current liabilities and other long-term liabilities................................. 40,466 (30,252) --------- --------- Net cash provided by operating activities................... 53,625 68,859 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of securities held-to-maturity.................. (126,981) (128,731) Proceeds from maturities of securities held-to-maturity... 112,357 102,874 Purchases of securities available-for-sale................ (220,652) (177,731) Proceeds from sales of securities available-for-sale...... 113,533 96,636 Purchases of non-marketable equity securities............. (2,317) -- Capital expenditures...................................... (18,209) (21,002) Change in other assets.................................... (14,148) 1,336 --------- --------- Net cash used in investing activities..................... (156,417) (126,618) CASH FLOWS FROM FINANCING ACTIVITIES Stock issuances........................................... 35,190 34,578 --------- --------- Net cash provided by financing activities................. 35,190 34,578 --------- --------- Net decrease in cash and cash equivalents................... (67,602) (23,181) --------- --------- Cash and cash equivalents at beginning of period.......... 281,162 244,469 --------- --------- Cash and cash equivalents at end of period................ $ 213,560 $ 221,288 ========= =========
See Notes to Unaudited Condensed Consolidated Financial Statements. F-27 110 GENENTECH, INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------- MARCH 31, DECEMBER 31, 1999 1998 ---------- ------------ In thousands ASSETS Current assets Cash and cash equivalents................................. $ 213,560 $ 281,162 Short-term investments.................................... 681,410 606,544 Accounts receivable, net (including amounts from related party: 1999--$32,522; 1998--$22,850)................... 168,816 149,741 Inventories............................................... 146,712 148,626 Prepaid expenses and other current assets................. 51,940 55,885 ---------- ---------- Total current assets.............................. 1,262,438 1,241,958 Long-term marketable securities............................. 767,450 716,888 Property, plant and equipment, less accumulated depreciation (1999--$464,749; 1998--$445,215).......................... 698,887 700,249 Other assets................................................ 197,333 196,307 ---------- ---------- Total assets...................................... $2,926,108 $2,855,402 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable.......................................... $ 31,576 $ 40,895 Accrued liabilities--related party........................ 12,778 10,945 Other accrued liabilities................................. 275,422 239,487 ---------- ---------- Total current liabilities......................... 319,776 291,327 Long-term debt.............................................. 149,990 149,990 Other long-term liabilities................................. 66,638 70,240 ---------- ---------- Total liabilities................................. 536,404 511,557 COMMITMENTS AND CONTINGENCIES Stockholders' equity Preferred stock........................................... -- -- Special Common Stock...................................... 1,027 1,010 Common Stock.............................................. 1,532 1,532 Additional paid-in capital................................ 1,630,326 1,588,990 Retained earnings......................................... 707,465 693,050 Accumulated other comprehensive income.................... 49,354 59,263 ---------- ---------- Total stockholders' equity........................ 2,389,704 2,343,845 ---------- ---------- Total liabilities and stockholders' equity........ $2,926,108 $2,855,402 ========== ==========
See Notes to Unaudited Condensed Consolidated Financial Statements. F-28 111 GENENTECH, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 periods ended March 31, 1999 and 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. The condensed consolidated balance sheet as of December 31, 1998 has been derived from the audited financial statements as of that date. For further information, refer to the annual consolidated financial statements and notes thereto included elsewhere herein. 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 June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("FAS") 133, "Accounting for Derivative Instruments and Hedging Activities," effective beginning in the first quarter of 2000. FAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires companies to recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting under FAS 133. The Company is currently evaluating the impact of FAS 133 on its financial position and results of operations. NOTE 3--EARNINGS PER SHARE The following is a reconciliation of the numerator and denominators of the basic and diluted earnings per share (EPS) computations for the quarters ended March 31, 1999 and 1998 (in thousands).
1999 1998 -------- -------- Numerator: Net income--numerator for basic and diluted EPS........... $ 14,415 $ 41,017 ======== ======== Denominator: Denominator for basic EPS--weighted-average shares........ 127,704 124,758 Effect of dilutive securities: Stock options............................................. 4,818 4,049 -------- -------- Denominator for diluted EPS--adjusted weighted-average shares and assumed conversions............................ 132,522 128,807 ======== ========
In the first quarter of 1999, all options outstanding were dilutive. In the first quarter of 1998, options to purchase 2,850,050 shares of Special Common Stock at $67.31 per share were outstanding, but were not included in the computation of diluted EPS. These options' exercise price was greater than the average market price of the Special Common Stock and therefore, the effect would be anti-dilutive. The Company had convertible subordinated debentures that were convertible to 1,013,447 shares of Special Common Stock in the first quarter of 1999 and had convertible subordinated debentures that were convertible to 1,013,514 shares of Special Common Stock in the comparable period in 1998, but were not included in the computation of diluted EPS because they were anti-dilutive. NOTE 4--COMPREHENSIVE INCOME The Company adopted FAS 130, "Reporting Comprehensive Income," in 1998. Comprehensive income is comprised of net income and other comprehensive income. The Company's other comprehensive income includes unrealized holding gains and F-29 112 GENENTECH, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) losses on its available-for-sale securities, which were reported separately in stockholders' equity, and included in accumulated other comprehensive income. Comprehensive income was $4.5 million for the quarter ended March 31, 1999 and $46.1 million for the comparable period in 1998. NOTE 5--RELATIONSHIP WITH ROCHE HOLDINGS, INC. On June 30, 1999, Roche Holdings, Inc.'s ("Roche") option to cause the Company to redeem (the "call") the outstanding Callable Putable Common Stock ("Special Common Stock") of the Company at $82.50 will expire. This arrangement was the result of the October 1995 agreement (the "Agreement") between the Company and Roche. If Roche does not cause the redemption as of June 30, 1999, within thirty business days commencing July 1, 1999, the Company's stockholders will have the option (the "put") to cause the Company to redeem none, some, or all of their shares of Special Common Stock at $60.00 per share (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). Roche Holding Ltd, a Swiss corporation, has guaranteed Roche's obligation under the put. In the event that sufficient shares of the Company's Special Common Stock are tendered pursuant to the put to result in Roche owning at least 85% of the total outstanding shares of the Company's outstanding equity, the Company has in place an Incentive Units Program (the "Program") that would result in amounts becoming payable to eligible employees if specified performance benchmarks are achieved by the Company during the term of the Program. In event of the put, at March 31, 1999, $14.7 million is contingently payable under the Program. Under the Agreement, independent of its right to cause the Company to redeem the Special Common Stock, Roche may increase its ownership of the Company up to 79.9% by making purchases on the open market. Roche held approximately 64.9% of the outstanding common equity of the Company as of March 31, 1999. In conjunction with the Agreement, the Company and F. Hoffmann-La Roche Ltd (Hoffmann-La Roche) entered into an agreement (the License Agreement), pursuant to which Hoffmann-La Roche was granted an option for ten years for licenses to use and sell certain of the Company's products in non-U.S. markets. In the second quarter of 1997 and the second and fourth quarters of 1998, the Company and Hoffmann-La Roche agreed in principle to changes to the License Agreement. As so revised under the License Agreement, Hoffmann-La Roche may exercise its option to license any such future product of the Company either when the Company determines to move such product into development or at the end of Phase II clinical trials. The License Agreement provides that the Company and Hoffmann-La Roche will share the United States and European development costs regardless of the location or purpose of studies. Also, as part of this Agreement, the Company receives royalties on sales of certain of its products in Canada, on sales of Pulmozyme(R) outside of the United States and on sales of rituximab outside of the United States, excluding Japan. Contract revenue from Hoffmann-La Roche for the reimbursement of ongoing development expenses was $4.3 million for the first quarter of 1999 and $7.8 million for the comparable period in 1998. In addition, on July 6, 1998, the Company entered into an agreement with Hoffmann-La Roche to provide Hoffmann-La Roche exclusive marketing rights outside of the United States for Herceptin(R) (trastuzumab). Under the agreement, Hoffmann-La Roche paid $40.0 million and has agreed to pay cash milestones tied to future product development activities, to contribute equally with the Company up to a maximum of $40.0 million on global development costs and to make royalty payments on product sales. As of March 31, 1999, no additional amounts have been paid. NOTE 6--LEGAL PROCEEDINGS The Company is a party to various legal proceedings, including patent infringement cases involving human growth hormone products and Activase, product liability cases and other matters. In July 1997, an action was filed in the United States District Court for the Northern District of California alleging that the Company's manufacture, use and sale of its Nutropin(R) human growth hormone products infringed a patent (the "Goodman Patent") owned by the Regents of the University of California ("UC"). This action is substantially the same as a previous action filed in 1990 against the Company by UC alleging that the Company's manufacture, use and sale of its Protropin(R) F-30 113 GENENTECH, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) human growth hormone products infringed the Goodman Patent. The 1997 case has been stayed pending the conclusion of the 1990 case, which is now in trial. UC has publicly stated that it is seeking $400 million in damages from the Company pursuant to the 1990 case. In the 1990 case, UC contends that the Protropin production plasmid, developed and used by the Company, infringes the claims of the Goodman Patent under the doctrine of equivalents. UC contends that UC human growth hormone cDNA brought to Genentech by an ex-employee of UC, Peter Seeburg, was used in the construction of the Company's Protropin production plasmid, and that such use, if it occurred, constitutes some evidence of infringement under the doctrine of equivalents. The Company vigorously and emphatically denies that the UC human growth hormone cDNA brought to Genentech by Mr. Seeburg was used in the construction of Genentech's human growth hormone production plasmid. Rather, the Company's records demonstrate that the plasmid was developed internally by Dr. David Goeddel without any use of the UC cDNA. In addition, the Company believes the evidence in the case strongly supports its position that there is no infringement of the Goodman Patent under the doctrine of equivalents. The Company also believes that UC committed fraud upon the United States Patent and Trademark Office in obtaining the Goodman Patent when it was originally issued to UC in 1982, and that the Goodman Patent is therefore invalid because of UC's inequitable conduct. Based upon the nature of the claims made and the information available to date to the Company and its counsel through investigations and otherwise, the Company believes the outcome of these actions is not likely to 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. The Company has entered into a settlement agreement with the United States Department of Justice and the United States Attorney for the Northern District of California concerning an investigation, ongoing since 1995, into the Company's past promotional practices with respect to human growth hormone. As part of the settlement agreement, the Company will pay a criminal fine and restitution in the amount of $50 million and will plead guilty to a felony of promoting Protropin for medical uses for which it was not approved. The Company recorded a $50 million charge in the first quarter of 1999 related to the settlement. NOTE 7--INVENTORIES Inventories are summarized below:
------------------------- MARCH 31, DECEMBER 31, 1999 1998 --------- ------------ In thousands Raw materials and supplies.................................. $ 21,700 $ 21,414 Work in process............................................. 102,520 106,383 Finished goods.............................................. 22,492 20,829 -------- -------- Total............................................. $146,712 $148,626 ======== ========
NOTE 8--SUBSEQUENT EVENTS Contingencies In May 1999, the 1990 case brought by UC referred to in "Note 6 -- Legal Proceedings" above was submitted to a jury, and on June 2, 1999 the jury announced it was deadlocked. Because the jury could not reach a unanimous decision, no finding of infringement was made, and there is no current legal basis for the Company to be held liable to UC for any claim of damages. On June 22, 1999, the judge held a hearing known as a status conference to discuss further proceedings relating to the 1990 case and 1997 case referred to in "Note 6 -- Legal Proceedings" above. At that time, Genentech renewed its request that the judge hold a non-jury trial and decide whether UC defrauded the U.S. Patent and Trademark Office when obtaining the patent. The judge has previously denied a request by UC that this defense be thrown out of the case for lack of merit. A favorable ruling by the judge in any such trial would render the patent unenforceable. On July 1, 1999, the judge issued a written F-31 114 GENENTECH, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) decision setting the schedule for further proceedings. The judge consolidated the 1990 and 1997 cases for a jury trial to begin on January 3, 2000. The issues of infringement and willfulness will be tried to the jury first, and only if the jury finds liability would the issue of damages be tried. Pursuant to the judge's decision, that jury trial is to be followed immediately by a court trial of Genentech's fraud (inequitable conduct) claim against UC. In addition, UC has made a motion for entry of judgment as a matter of law of infringement notwithstanding the lack of unanimous jury verdict on that issue. Redemption of Special Common Stock On June 30, 1999, the Company redeemed all of its special common stock by paying $82.50 per share in cash to holders of special common stock other than Roche. The funds for the redemption of the special common stock were deposited by Roche. As a result, Roche currently owns 100% of the Company's common stock. Consequently, push-down accounting is required under generally accepted accounting principles which will require the Company to record goodwill and other intangible assets of approximately $1.7 billion and $1.5 billion, respectively, on its balance sheet during the second quarter of 1999. Also as a result of push down accounting, the Company expects to record $0.8 billion charge related to in-process research and development in the second quarter of 1999. Stock Options In connection with the redemption of the Company's special common stock, the following changes with respect to stock options outstanding have occurred: - Options for the purchase of approximately 6.8 million shares of special common stock have been canceled in accordance with the terms of the applicable stock option plans, and the holders are receiving cash payments in the amount of $82.50 per share, less the exercise price; - Options for the purchase of approximately 4.0 million shares of special common stock are being converted into options to purchase a like number of shares of common stock at the same exercise price; and - Options for the purchase of approximately 4.9 million shares of special common stock have been canceled, in accordance with the terms of the Company's 1996 Stock Option/Stock Incentive Plan (the "1996 Plan"). With certain exceptions, the Company expects to grant new options for the purchase of 1.333 times the number of shares under the previous options with an exercise price equal to the public offering price of the shares offered in this offering. The number of shares that will be the subject of these new options, which are expected to be issued under our 1999 Stock Option Plan, will be approximately 5.0 million. Alternative arrangements were provided for certain holders of some of the unvested options under the 1996 Plan. The Company expects to record, in the quarter ending June 30, 1999, cash compensation expense of approximately $284.5 million primarily associated with the cash out of stock options and non-cash compensation expense of approximately $102.3 million associated with the remeasurement, for accounting purposes, of the converted options. Additional non-cash compensation expense in an amount equal to the difference between the redemption price and the public offering price per share will be recorded for these converted options in the quarter ending September 30, 1999. Such estimated non-cash compensation amounts are based on an assumed public offering price per share. A limited number of employees will also have the alternative to participate in a cash based deferred compensation plan, with an aggregate of $27.4 million available to be earned over a two year period. Amended Agreement with Hoffmann-La Roche In connection with this offering, Genentech and Roche have amended their licensing and marketing agreement, the major provisions of which include: - the extension of Hoffmann-La Roche's option until at least 2015; - Hoffmann-La Roche may exercise its option to license the Company's products upon the occurrence of any of the following: (1) the Company's decision to file an Investigational New Drug exemption application, or IND, for a product, F-32 115 GENENTECH, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (2) completion of a Phase II trial for a product or (3) if Hoffmann-La Roche previously paid a fee of $10 million to extend its option on a product, completion of a Phase III trial for that product; - Genentech agreed, in general, to manufacture for and supply to Hoffmann-La Roche its clinical requirements of the Company's products at cost, and its commercial requirements at cost plus a margin of 20%; however, Hoffmann-La Roche will have the right to manufacture the Company's products under certain circumstances; - Hoffmann-La Roche has agreed to pay, for each product for which Hoffmann-La Roche exercises its option upon either a decision to file an IND with the FDA or completion of the Phase II trials, a royalty of 12.5% on the first $100 million on its aggregate sales of that product and thereafter a royalty of 15% on its aggregate sales of that product in excess of $100 million until the later in each country of the expiration of the Company's last relevant patent or 25 years from first commercial introduction of that product; and - Hoffmann-La Roche will pay, for each product for which Hoffmann-La Roche exercises its option after completion of the Phase III trials, a royalty of 15% on its sales of that product until the later in each country of the expiration of the Company's relevant patent or 25 years from the first commercial introduction of that product; however, $5 million of any option extension fee paid by Hoffmann-La Roche shall be credited against royalties payable to Genentech in the first calendar year of sales by Hoffmann-La Roche in which aggregate sales of that product exceed $100 million. Tax Sharing Agreement After the redemption of the Company's special common stock, Genentech will be included in Roche Holdings, Inc. federal (and certain states and local jurisdictions) consolidated (or combined) income tax group. As a result the Company's tax liability will be included in the consolidated or combined tax liability for federal and certain states and local purposes. The Company has entered into a tax sharing agreement with Roche Holdings, Inc. which provides that Genentech will make payments to Roche Holdings, Inc. on the basis as though the Company filed separate, stand-alone federal, state and local income tax returns rather than being treated as part of Roche Holdings, Inc.'s consolidated/combined tax return. F-33 116 APPENDIX - DESCRIPTION OF GRAPHICS INSIDE FRONT COVER Graphic: Illustration of the Company's product "pipeline." Caption: Pipeline as Lifeline -- With 17 projects in development, all for treating serious medical conditions, Genentech's product pipeline offers hope to waiting patients. Phase I: o AMD Fab, age-related macular degeneration. Currently preparing for Phase I trial o LDP-02 Antibody, inflammatory bowel disease o Pulmezyme AERx(TM) delivery system, cystic fibrosis. Currently preparing for Phase I clinical trial Phase II: o Anti-CD18 Antibody, acute myocardial infarction o Anti-VEGF Antibody, several types of solid-tumor cancers o Herceptin Antibody, other tumors o VEGF, coronary artery disease. A recently completed Phase II clinical trial did not meet its primary objectives. Genentech is currently deciding on next steps for this program. 117 Preparing for Phase III: o Activase, catheter clearance o Anti-CD11a Antibody (hu1124), psoriasis o Herceptin Antibody, adjuvant therapy breast cancer o Thrombopoietin, thrombocytopenia related to cancer treatment. Pharmacia + Upjohn has exclusive worldwide rights for thrombopoietin. Preparing for Phase III o Anti-IgE Antibody, allergic asthma and seasonal allergic rhinitis o Pulmozyme, early-stage cystic fibrosis o Rituxan Antibody, intermediate- and high-grade non-Hodgkin's Lymphoma o Xubix, acute coronary syndrome. Under clinical development by Hoffmann-La Roche, Genentech retains certain opt-in rights with respect to the United States Preparing Regulatory Filing o TNK, acute myocardial infarcation Awaiting Regulatory Clearance o Nutropin Depot (TM), growth hormone deficiency in children (The 17 projects are differentiated as either cardiovascular, endocrinology, oncology or opportunistic.) 118 GATEFOLD Graphic: Photograph of ten patients representing Genentech's approved indications. Caption: In Business For Life. Genentech manufactures and markets seven pharmaceutical products for ten serious medical conditions. Celebrating life are ten patients who have found new hope with these medicines, each patient representing one of the ten approved indications. Sandra Jones: Activase, Acute ischemic stroke Dustin Watney: Protropin, Growth hormone deficiency in children Mary Ann Noriux: Activase, Acute massive pulmonary embolism Paul Workman: Ritoxan, Relapsed or refractory low-grade or follicular, CD20 positive, B-cell non-Hodgkin's lymphoma Martha Lopez: Nutropin, short stature associated with Turner Syndrome. Nutropin and Nutropin AQ Amy Applebaum: Herceptin, Metastic breast cancer Jenna Lismowski: Nutropin, Growth failure associated with chronic renal insufficiency. Nutropin and Nutropin AQ. Allen Strohmeier: Activase, Acute myocardial infarction Lindsay Longcor: Nutropin, Growth hormone deficiency in adults. Nutropin and Nutropin AQ. Abigail Robinson: Pulmozyme, Cystic fibrosis 119 [Genentech] 120 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
---------- AMOUNT TO BE PAID ---------- Registration fee............................................ $ 581,020 NASD Filing fee............................................. 30,500 New York Stock Exchange Listing Fee......................... 5,300 Transfer agent's fees....................................... 20,000 Printing and engraving expenses............................. 250,000 Legal fees and expenses..................................... 650,000 Accounting fees and expenses................................ 850,000 Miscellaneous............................................... 613,180 ---------- Total............................................. $3,000,000 ==========
Each of the amounts set forth above, other than the Registration fee and the NASD filing fee, is an estimate. Genentech is responsible for all expenses except that Roche Holdings, Inc. has agreed to pay the registration and filing fees payable under any federal or state securities or Blue Sky laws in addition to certain expenses to be directly incurred by Roche, including underwriting, discounts and its counsel fees. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS Our certificate of incorporation limits, to the fullest extent permitted by Delaware corporate law, the personal liability of directors for monetary damages for breach of their fiduciary duties. Section 145 of the General Corporation Law of the State of Delaware (the "DGCL") provides, in summary, that directors and officers of Delaware corporations are entitled, under certain circumstances, to be indemnified against all expenses and liabilities (including attorneys' fees) incurred by them as a result of suits brought against them in their capacity as a director or officer, if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, if they had no reasonable cause to believe their conduct was unlawful; provided, that no indemnification may be made against expenses in respect of any claim, issue or matter as to which they shall have been adjudged to be liable to the corporation, unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, they are fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. Any such indemnification may be made by the corporation only as authorized in each specific case upon a determination by the stockholders or disinterested directors that indemnification is proper because the indemnitee has met the applicable standard of conduct. Our board of directors may provide similar indemnification to our officers, employees and agents as they deem appropriate and as authorized by Delaware law. We may purchase insurance on behalf of any director, officer, employee or agent against any expense incurred by such person in his or her capacity. Our certificate of incorporation also provides that Roche and the officers or directors of Roche will not be presumed liable to us or our stockholders for breach of any fiduciary duty or duty of loyalty, failure to act in the best interests of Genentech, or receipt of any improper personal benefit, simply because Roche or any director or officer of Roche, in good faith, takes any action, exercises any right or gives or withholds any consent with respect to any agreement or contract between Roche and Genentech. In addition, Roche will not be liable to us or our stockholders for breach of any fiduciary duty if Roche pursues or acquires a potential corporate opportunity of ours or does not inform us of a potential corporate opportunity. If a director, officer or employee of Genentech who is also a director, officer or employee of Roche knows of a potential transaction or matter that may be a corporate opportunity both for Genentech and Roche, the director, officer or employee is entitled to offer the corporate II-1 121 opportunity to us or Roche as the director, officer or employee deems appropriate under the circumstances in his sole discretion, and no such director, officer or employee will be liable to us or our stockholders for breach of any fiduciary duty or duty of loyalty or failure to act in our best interests or the derivation of any improper personal benefit by reason of the fact that such director, officer or employee offered such corporate opportunity to Roche (rather than to us) or did not communicate information regarding such corporate opportunity to us, or Roche pursues or acquires such corporate opportunity for itself or directs such corporate opportunity to another person or does not communicate the corporate opportunity to us. Neither Roche nor any officer or director thereof shall be liable to us or our stockholders for breach of any fiduciary duty or duty of loyalty or failure to act in (or not opposed to) our best interests or the derivation of any improper personal benefit by reason of the fact that Roche or an officer of director thereof in good faith takes any action or exercises any rights or gives or withholds any consent in connection with any agreement or contract between Roche and Genentech. No vote cast or other action taken by any person who is an officer, director or other representative of Roche, which vote is cast or action is taken by such person in his capacity as a director of Genentech, shall constitute an action of or the exercise of a right by or a consent of Roche for the purpose of any such agreement or contract. ITEM 16. EXHIBITS (a) The following exhibits are filed as part of this Registration Statement:
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1 -- Form of Underwriting Agreement 3.1 -- Certificate of Incorporation 3.2 -- By-Laws 4.1 -- Form of Common Stock Certificate 5 -- Opinion of Davis Polk & Wardwell 10.1 -- Form of Affiliation Agreement between Genentech, Inc. and Roche Holdings, Inc. 10.2 -- Form of Amended and Restated Agreement between Genentech, Inc. and F. Hoffmann-La Roche Ltd regarding commercialization of Genentech's Products outside the United States 10.3 -- Form of Tax Sharing Agreement between Genentech, Inc. and Roche Holdings, Inc. 10.4 -- Form of 1999 Stock Option Plan 15.1 -- Letter re: Unaudited Interim Financial Information 23.1 -- Consent of Ernst & Young LLP, Independent Auditors 23.2 -- Consent of Davis Polk & Wardwell (included in Exhibit 5) 24.1 -- Power of Attorney (included on signature page)**
- --------------- ** Previously filed. (b) The financial statement schedule included in the company's Annual Report on Form 10-K for the year ended December 31, 1998 has been incorporated by reference. ITEM 17. UNDERTAKINGS The undersigned hereby undertakes: (a) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions referenced in Item 15 of this Registration Statement, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-2 122 (b) The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 123 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 3 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Francisco, State of California, on the 16th day of July, 1999. GENENTECH, INC. By: /s/ ARTHUR D. LEVINSON --------------------------------------- Name: Arthur D. Levinson Title: President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 3 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ ARTHUR D. LEVINSON Principal Executive Officer and Director July 16, 1999 - ----------------------------------------------------- Arthur D. Levinson * Principal Financial Officer July 16, 1999 - ----------------------------------------------------- Louis J. Lavigne, Jr. * Principal Accounting Officer July 16, 1999 - ----------------------------------------------------- John M. Whiting * Director July 16, 1999 - ----------------------------------------------------- Franz B. Humer * Director July 16, 1999 - ----------------------------------------------------- Jonathan K.C. Knowles *By: /s/ ARTHUR D. LEVINSON ------------------------------------------------- Arthur D. Levinson Attorney-in-Fact
II-4 124 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1 -- Form of Underwriting Agreement 3.1 -- Certificate of Incorporation 3.2 -- By-Laws 4.1 -- Form of Common Stock Certificate 5 -- Opinion of Davis Polk & Wardwell 10.1 -- Form of Affiliation Agreement between Genentech, Inc. and Roche Holdings, Inc. 10.2 -- Form of Amended and Restated Agreement between Genentech, Inc. and F. Hoffmann-La Roche Ltd regarding commercialization of Genentech's Products outside the United States 10.3 -- Form of Tax Sharing Agreement between Genentech, Inc. and Roche Holdings, Inc. 10.4 -- Form of 1999 Stock Option Plan 15.1 -- Letter re: Unaudited Interim Financial Information 23.1 -- Consent of Ernst & Young LLP, Independent Auditors 23.2 -- Consent of Davis Polk & Wardwell (included in Exhibit 5) 24.1 -- Power of Attorney (included on signature page)**
- --------------- ** Previously filed. EX-1 2 EXHIBIT 1 1 EXHIBIT 1 GENENTECH, INC. 20,000,000 Shares of Common Stock Underwriting Agreement July [ ], 1999 J.P. Morgan Securities Inc. Goldman, Sachs & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated Warburg Dillon Read LLC BancBoston Robertson Stephens Inc. As Representatives of the several Underwriters listed in Schedule I hereto c/o J.P. Morgan Securities Inc. 60 Wall Street New York, New York 10260 Ladies and Gentlemen: Roche Holdings, Inc., a Delaware corporation (the "Selling Stockholder") and the sole stockholder of Genentech, Inc., a Delaware corporation (the "Company"), proposes to sell to the several Underwriters listed in Schedule I hereto (the "Underwriters"), for whom you are acting as representatives (the "Representatives"), an aggregate of 20,000,000 shares (the "Underwritten Shares") of Common Stock, par value $0.02 per share, of the Company (the "Common Stock"). In addition, for the sole purpose of covering over-allotments in connection with the sale of the Underwritten Shares, the Selling Stockholder proposes to issue and sell to the Underwriters, at the option of the Underwriters, up to an additional 2,000,000 shares (the "Option Shares") of Common Stock. The Underwritten Shares and the Option Shares are herein referred to as the "Shares." The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively, the "Securities Act"), a registration statement, including a prospectus, relating to the Shares. The registration statement as amended at the time when it became or shall become effective, in- 2 -2- cluding information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Securities Act, is referred to in this Agreement as the "Registration Statement," and the prospectus in the form first used to confirm sales of Shares is referred to in this Agreement as the "Prospectus." If the Company has filed an abbreviated registration statement pursuant to Rule 462(b) under the Securities Act (the "Rule 462 Registration Statement"), then any reference herein to the term "Registration Statement" shall be deemed to include such Rule 462 Registration Statement. Any reference in this Agreement to the Registration Statement, any preliminary prospectus or the Prospectus shall be deemed to refer to and include the documents incorporated by reference therein pursuant to Item 12 of Form S-3 under the Securities Act, as of the effective date of the Registration Statement or the date of such preliminary prospectus or the Prospectus, as the case may be, and any reference to "amend," "amendment" or "supplement" with respect to the Registration Statement, any preliminary prospectus or the Prospectus shall be deemed to refer to and include any documents filed after such date under the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder (collectively, the "Exchange Act") that are deemed to be incorporated by reference therein. 1. The Selling Stockholder agrees to sell the Underwritten Shares to the several Underwriters as hereinafter provided, and each Underwriter, upon the basis of the representations and warranties herein contained, but subject to the conditions hereinafter stated, agrees to purchase, severally and not jointly, from the Selling Stockholder at a purchase price per share of $[ ] (the "Purchase Price") the number of Underwritten Shares to be purchased by such Underwriter as set forth opposite the name of such Underwriter in Schedule I hereto. In addition, the Selling Stockholder agrees to issue and sell the Option Shares to the several Underwriters as hereinafter provided, and the Underwriters, upon the basis of the representations and warranties herein contained, but subject to the conditions hereinafter stated, shall have the option to purchase, severally and not jointly, from the Selling Stockholder at the Purchase Price that portion of the number of Option Shares as to which such election shall have been exercised (to be adjusted by you so as to eliminate fractional shares) determined by multiplying such number of Option Shares by a fraction, the numerator of which is the maximum number of Underwritten Shares which such Underwriter is entitled to purchase as set forth opposite the name of such Underwriter in Schedule I hereto and the denominator of which is the maximum number of Underwritten Shares which all of the Underwriters are entitled to purchase hereunder, for the sole purpose of covering over-allotments (if any) in the sale of Underwritten Shares by the several Underwriters. The Underwriters may exercise the option to purchase the Option Shares at any time (but not more than once) on or before the thirtieth day following the date of this Agreement, by written notice from the Representatives to the Selling Stockholder. Such notice shall set forth the aggregate number of Option Shares as to which the option is being exercised and 3 -3- the date and time when the Option Shares are to be delivered and paid for, which may be the same date and time as the Closing Date (as hereinafter defined) but shall not be earlier than the Closing Date nor later than the tenth full Business Day (as hereinafter defined) after the date of such notice (unless such time and date are postponed in accordance with the provisions of Section 9 hereof). Any such notice shall be given at least two Business Days prior to the date and time of delivery specified therein. 2. The Company and the Selling Stockholder understand that the Underwriters intend (i) to make a public offering of the Shares as soon after (A) the Registration Statement has become effective and (B) the parties hereto have executed and delivered this Agreement as in the judgment of the Representatives is advisable and (ii) initially to offer the Shares upon the terms set forth in the Prospectus. 3. Payment for the Shares shall be made by wire transfer in immediately available funds to the account specified by the Selling Stockholder to the Representatives, in the case of the Underwritten Shares, on July [ ], 1999, or at such other time on the same or such other date, not later than the fifth Business Day thereafter, as the Representatives and the Selling Stockholder may agree upon in writing, or, in the case of the Option Shares, on the date and time specified by the Representatives in the written notice of the Underwriters' election to purchase such Option Shares. The time and date of such payment for the Underwritten Shares is referred to herein as the "Closing Date," and the time and date for such payment for the Option Shares, if other than the Closing Date, are herein referred to as the "Additional Closing Date." As used herein, the term "Business Day" means any day other than a day on which banks are permitted or required to be closed in New York City. Payment for the Shares to be purchased on the Closing Date or the Additional Closing Date, as the case may be, shall be made against delivery to the Representatives for the respective accounts of the several Underwriters of the Shares to be purchased on such date registered in such names and in such denominations as the Representatives shall request in writing not later than two full Business Days prior to the Closing Date or the Additional Closing Date, as the case may be, with any transfer taxes payable in connection with the transfer to the Underwriters of the Shares duly paid by the Selling Stockholder. The certificates for the Shares will be made available for inspection and packaging by the Representatives at the office of J.P. Morgan Securities Inc. set forth above not later than 1:00 P.M., New York City time, on the Business Day prior to the Closing Date or the Additional Closing Date, as the case may be. 4. (A) The Company represents and warrants to each Underwriter and the Selling Stockholder that: 4 -4- (a) no order preventing or suspending the use of any preliminary prospectus has been issued by the Commission, and each preliminary prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Securities Act, complied when so filed in all material respects with the Securities Act, and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that the foregoing representations and warranties shall not apply to any statements or omissions made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representatives expressly for use therein; (b) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceeding for that purpose has been instituted or, to the knowledge of the Company, threatened by the Commission; the Registration Statement and Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) comply, or will comply, as the case may be, in all material respects with the Securities Act and do not and will not, as of the applicable effective date as to the Registration Statement and any amendment thereto and as of the date of the Prospectus and any amendment or supplement thereto, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and the Prospectus, as amended or supplemented, if applicable, at the Closing Date or Additional Closing Date, as the case may be, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, except that the foregoing representations and warranties shall not apply to any statements or omissions in the Registration Statement or the Prospectus made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representatives expressly for use therein; (c) the documents incorporated by reference in the Prospectus, when they became effective or were filed with the Commission, as the case may be, conformed in all material respects to the requirements of the Securities Act or the Exchange Act, as applicable, and none of such documents contained an untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; any further documents so filed and incorporated by reference in the Prospectus, when such documents are filed with the Commission, will conform in all material respects to the requirements of the Exchange Act, and will not contain an untrue statement of a material 5 -5- fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (d) the financial statements, and the related notes thereto, included or incorporated by reference in the Registration Statement and the Prospectus present fairly the consolidated financial position of the Company and its consolidated subsidiaries as of the dates indicated and the results of their operations and changes in their consolidated cash flows for the periods specified; said financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis, and the supporting schedules included or incorporated by reference in the Registration Statement present fairly the information required to be stated therein; and the pro forma financial information, and the related notes thereto, included or incorporated by reference in the Registration Statement and the Prospectus has been prepared in accordance with the applicable requirements of the Securities Act and the Exchange Act, as applicable, and is based upon good faith estimates and assumptions believed by the Company to be reasonable; (e) since the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been any change in the capital stock or long-term debt of the Company or any of its subsidiaries, or any material adverse change, or any development involving a prospective material adverse change, in or affecting the general affairs, business, prospects, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries, taken as a whole (a "Material Adverse Change"), otherwise than as set forth or contemplated in the Prospectus; and except as set forth or contemplated in the Prospectus, neither the Company nor any of its subsidiaries has entered into any transaction or agreement (whether or not in the ordinary course of business) material to the Company and its subsidiaries, taken as a whole; (f) the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus, and has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties, or conducts any business, so as to require such qualification, other than where the failure to be so qualified or in good standing would not have a material adverse effect on the general affairs, business, prospects, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries, taken as a whole (a "Material Adverse Effect"); 6 -6- (g) each of the Company's subsidiaries has been duly incorporated and is validly existing as a corporation under the laws of its jurisdiction of incorporation, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus, and has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each jurisdiction in which it owns or leases properties, or conducts any business, so as to require such qualification, other than where the failure to be so qualified or in good standing would not have a Material Adverse Effect; and all the outstanding shares of capital stock of each subsidiary of the Company have been duly authorized and validly issued, are fully-paid and non-assessable, and (except, in the case of foreign subsidiaries, for directors' qualifying shares and except as described in the Prospectus) are owned by the Company, directly or indirectly, free and clear of all liens, encumbrances, security interests and claims; (h) this Agreement has been duly authorized, executed and delivered by the Company; (i) the Company has an authorized capitalization as set forth in the Prospectus and such authorized capital stock conforms as to legal matters to the description thereof set forth in the Prospectus, and all of the outstanding shares of capital stock of the Company (including the Shares) have been duly authorized and validly issued, are fully paid and non-assessable and are not subject to any pre-emptive or similar rights; and, except as described in or expressly contemplated by the Prospectus, there are no outstanding rights (including, without limitation, pre-emptive rights), warrants or options to acquire, or instruments convertible into or exchangeable for, any shares of capital stock or other equity interest in the Company or any of its subsidiaries, or any contract, commitment, agreement, understanding or arrangement of any kind relating to the issuance of any capital stock of the Company or any such subsidiary, any such convertible or exchangeable securities or any such rights, warrants or options; (j) neither the Company nor any of its subsidiaries is, or with the giving of notice or lapse of time or both would be, in violation of or in default under its certificate of incorporation or by-laws or any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which it or any of them or any of their respective properties is bound, except for violations and defaults which would not, individually or in the aggregate, have a Material Adverse Effect; the performance by the Company of its obligations under this Agreement and the consummation of the transactions contemplated herein and in the Prospectus will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its sub- 7 -7- sidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject, nor will any such action result in any violation of the provisions of the certificate of incorporation or the by-laws of the Company or any of its subsidiaries or any applicable law or statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company, its subsidiaries or any of their respective properties; and no consent, approval, authorization, order, license, registration or qualification of or with any such court or governmental agency or body is required for the consummation by the Company of the transactions contemplated by this Agreement and the Prospectus, except such consents, approvals, authorizations, orders, licenses, registrations or qualifications as have been obtained under the Securities Act and as may be required under state securities or blue sky laws in connection with the purchase and distribution of the Shares by the Underwriters; (k) other than as set forth in the Prospectus, there are no legal or governmental investigations, actions, suits or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company or any of its subsidiaries or any of their respective properties or to which the Company or any of its subsidiaries is or may be a party or to which any property of the Company or any of its subsidiaries is or may be the subject which, if determined adversely to the Company or any of its subsidiaries, could, individually or in the aggregate, have, or reasonably be expected to have, a Material Adverse Effect, and, to the Company's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others; and there are no statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required; (l) the Company and its subsidiaries have good title in fee simple to all items of real property and good title to all personal property owned by them, in each case free and clear of all liens, encumbrances and defects except such as are described or referred to in the Prospectus or such as do not materially interfere with the use made or proposed to be made of such property by the Company and its subsidiaries; and any real property and buildings held under lease by the Company and its subsidiaries are held by them under valid, existing and enforceable leases with such exceptions as are not material and do not materially interfere with the use made or proposed to be made of such property and buildings by the Company or its subsidiaries; (m) no relationship, direct or indirect, exists between or among the Company or any of its subsidiaries, on the one hand, and the directors, officers, stockholders, customers or suppliers of the Company or any of its subsidiaries, on the other hand, 8 -8- which is required by the Securities Act to be described in the Registration Statement and the Prospectus which is not so described; (n) no person has the right to require the Company to register any securities for offering and sale under the Securities Act by reason of the filing of the Registration Statement with the Commission or, to the best knowledge of the Company, the sale of the Shares by the Selling Stockholder pursuant hereto, except for rights which have been waived; (o) the Company is not an "investment company" as such term is defined in the Investment Company Act of 1940, as amended (the "Investment Company Act"); (p) Ernst & Young LLP ("Ernst & Young"), who have certified certain financial statements of the Company, are independent public accountants as required by the Securities Act; (q) the Company and its subsidiaries have filed all federal, state, local and foreign tax returns which have been required to be filed and have paid all taxes shown thereon and all assessments received by them or any of them to the extent that such taxes have become due and are not being contested in good faith; and, except as disclosed in the Registration Statement and the Prospectus, no tax deficiency has been determined adversely to the Company or any subsidiary which has had, nor does the Company have any knowledge of any tax deficiency, which if determined adversely to the Company or any subsidiary might have a Material Adverse Effect; (r) the Company has not taken nor will it take, directly or indirectly, any action designed to, or that might be reasonably expected to, cause or result in stabilization or manipulation of the price of the Common Stock; (s) the statistical and market-related data included in the Registration Statement and the Prospectus are based on or derived from sources which are believed by the Company to be reliable; (t) each of the Company and its subsidiaries owns, is licensed to use or otherwise possesses adequate rights to use the patents, patent rights, licenses, inventions, trademarks, service marks, trade names, copyrights and know-how, including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems, processes or procedures (collectively, the "Intellectual Property"), reasonably necessary to carry on the business conducted by it, except to the extent that the failure to own, be licensed to use or otherwise possess adequate rights to use such Intellectual Property would not, individually or in the aggregate, be reasonably expected to have a 9 -9- Material Adverse Effect; except as set forth in the Prospectus, the Company has not received any notice of infringement of or conflict with, and the Company has no knowledge of any infringement of or conflict with, asserted rights of others with respect to its Intellectual Property which could reasonably be expected to result in a Material Adverse Effect; except as set forth in the Prospectus, the discoveries, inventions, products or processes of the Company referred to in the Registration Statement and the Prospectus do not, to the knowledge of the Company, infringe or conflict with any right or patent of any third party, or any discovery, invention, product or process which is the subject of a patent application filed by any third party which patent application has been published or is otherwise known to the Company which could reasonably be expected to result in a Material Adverse Effect; except as set forth in the Prospectus, the Company is not obligated to pay a royalty, grant a license or provide other consideration to any third party in connection with its patents, patent rights, licenses, inventions, trademarks, service marks, trade names, copyrights and know-how which could reasonably be expected to result in a Material Adverse Effect; and no third party, including any academic or governmental organization, possesses rights to the Intellectual Property which, if exercised, could reasonably be expected to have a Material Adverse Effect; (u) since the respective dates as of which information is given in the Registration Statement and the Prospectus, the studies, tests and preclinical and clinical trials conducted by or on behalf of the Company that are described in the Registration Statement and the Prospectus were and, if still pending, are being conducted in accordance with experimental protocols, procedures and controls pursuant to, where applicable, accepted professional scientific standards, except where the failure could not reasonably be expected to result in a Material Adverse Effect; the descriptions of the results of such studies, tests and trials contained in the Registration Statement and the Prospectus are accurate and complete in all material respects; and the Company has not received any notices or correspondence from the U.S. Food and Drug Administration (the "FDA") or any foreign, state or local governmental body exercising comparable authority requiring the termination, suspension or material modification of any studies, tests or preclinical or clinical trials conducted by or on behalf of the Company which termination, suspension or material modification could reasonably be expected to have a Material Adverse Effect; (v) the Company has reviewed its operations and those of its subsidiaries and has made inquiries of third parties with which the Company or any of its subsidiaries has a material relationship to evaluate the extent to which the business or operations of the Company or any of its subsidiaries will be affected by the Year 2000 Problem; as a result of such review and inquiries, the Company has no reason to believe, and does not believe, that the Year 2000 Problem will have a Material Adverse Effect. The 10 -10- "Year 2000 Problem" as used herein means any significant risk that computer hardware or software used in the receipt, transmission, processing, manipulation, storage, retrieval, retransmission or other utilization of data or in the operation of mechanical or electrical systems of any kind will not, in the case of dates or time periods occurring after December 31, 1999, function at least as effectively as in the case of dates or time periods occurring prior to January 1, 2000; (w) there are no existing or, to the knowledge of the Company, threatened labor disputes with the employees of the Company which are likely to have a Material Adverse Effect; (x) the Company carries, or is covered by, insurance in such amounts and covering such risks as is adequate for the conduct of its business and the value of its properties and as is customary for companies engaged in similar businesses in similar industries; (y) the Company (i) is in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants (collectively, "Environmental Laws"), (ii) has received all permits, licenses or other approvals required of it under applicable Environmental Laws to conduct its businesses and (iii) is in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; and (z) each employee benefit plan, within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), that is maintained, administered or contributed to by the Company or any of its affiliates for employees or former employees of the Company and its affiliates has been maintained in material compliance with its terms and the requirements of any applicable statutes, orders, rules and regulations, including but not limited to ERISA and the Internal Revenue Code of 1986, as amended ("Code"); no prohibited transaction, within the meaning of Section 406 of ERISA or Section 4975 of the Code, has occurred with respect to any such plan excluding transactions effected pursuant to a statutory or administrative exemption; for each such plan which is subject to the funding rules of Section 412 of the Code or Section 302 of ERISA, no "accumulated funding deficiency," as defined in Section 412 of the Code, has been incurred, whether or not waived, and the fair market value of the assets of each such plan (excluding for these 11 -11- purposes accrued but unpaid contributions) exceed the present value of all benefits accrued under such plan determined using reasonable actuarial assumptions. (B) The Selling Stockholder hereby represents and warrants to each of the Underwriters that: (a) the Selling Stockholder has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware; (b) the Selling Stockholder has good and valid title to the Shares to be sold by the Selling Stockholder hereunder, free and clear of all mortgages, pledges, security interests, liens, claims, encumbrances or equities, with full right and authority to deliver the same hereunder; upon payment for the Shares to be sold by the Selling Stockholder as provided herein, delivery of such Shares, as directed by the Underwriter, to Cede & Co. ("Cede") or such other nominee as may be designated by the Depository Trust Company ("DTC"), registration of such Shares in the name of Cede or such other nominee and the crediting of such Shares on the books of DTC to securities accounts of the Underwriters, (A) DTC shall be a "protected purchaser" of such Shares within the meaning of 8-303 of the Uniform Commercial Code as in effect in the State of New York (the "UCC"), (B) under Section 8-501 of the UCC, the Underwriters will acquire a valid security entitlement in respect of such Shares and (C) no action based on any "adverse claim" (as defined in Section 8-102 of the UCC) (other than any adverse claim arising through the Underwriters) to such Shares may be asserted against the Underwriters with respect to such security entitlement (it being understood that for the purpose of this representation and warranty, the Selling Stockholder may assume that when such payment, delivery and crediting occur, (i) such Shares will have been registered in the name of Cede or another nominee designated by DTC, in each case on the Company's share registry in accordance with its certificate of incorporation, bylaws and applicable law, (ii) DTC will be registered as a "clearing corporation" within the meaning of Section 8-102 of the UCC, and (iii) appropriate entries to the accounts of the several Underwriters on the records of DTC will have been made pursuant to the UCC); (c) the Selling Stockholder has not taken nor will it take, directly or indirectly, any action which is designed to, or that might reasonably be expected to, cause or result in stabilization or manipulation of the price of the Common Stock; (d) the sale of the Shares by the Selling Stockholder pursuant to this Agreement is not prompted by any material information concerning the Company which is not set forth in the Registration Statement or the Prospectus; 12 -12- (e) each preliminary prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Securities Act, did not contain an untrue statement of a material fact or omit to state a material fact, in each case with respect to information relating to the Selling Stockholder furnished to the Company in writing by or on behalf of the Selling Stockholder expressly for use therein, required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (f) the Registration Statement and the Prospectus (as amended or supplemented) do not and will not, as of the applicable effective date of the Registration Statement and any amendment thereto and as of the date of the Prospectus and any amendment or supplement thereto, contain any untrue statement of a material fact or omit to state any material fact, in each case with respect to information relating to the Selling Stockholder furnished to the Company by or on behalf of the Selling Stockholder expressly for use therein, required to be stated therein or necessary to make the statements therein not misleading, and the Prospectus, as amended or supplemented, if applicable, at the Closing Date or Additional Closing Date, as the case may be, will not contain any untrue statement of a material fact or omit to state a material fact, in each case relating to the Selling Stockholder, necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (g) this Agreement has been duly authorized, executed and delivered by the Selling Stockholder; and (h) the sale of the Shares by the Selling Stockholder hereunder, the compliance by the Selling Stockholder with all of the provisions of this Agreement and the consummation of the transactions contemplated herein will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument to which the Selling Stockholder is a party or by which the Selling Stockholder is bound or to which any of the property or assets of the Selling Stockholder is subject, nor will such action result in any violation of the provisions of the certificate of incorporation or by-laws of the Selling Stockholder, nor will such action result in any violation of any applicable statute or any applicable order, rule or regulation of any court or governmental agency or body having jurisdiction over the Selling Stockholder or any of its properties; no consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or body is required for the sale of the Shares or the consummation by the Selling Stockholder of the transactions contemplated by this Agreement, except such consents, approvals, authorizations, orders, licenses, registrations or qualifications as have been obtained or 13 -13- made under the Securities Act or the Exchange Act and as may be required under state securities or blue sky laws in connection with the purchase and distribution of the Shares by the Underwriters; the Selling Stockholder has full right, power and authority to enter into this Agreement and to sell, assign, transfer and deliver the Shares to be sold by it; and each agreement between the Company and the Selling Stockholder referred to in the Prospectus has been duly executed and delivered by the Selling Stockholder and constitutes a valid and binding obligation of the Selling Stockholder enforceable against the Selling Stockholder in accordance with its terms. 5. (A) The Company covenants and agrees with each of the several Underwriters as follows: (a) if the Registration Statement is not already effective, to use its best efforts to cause the Registration Statement to become effective at the earliest possible time and, if required, to file the final Prospectus with the Commission within the time periods specified by Rule 424(b) and Rule 430A under the Securities Act and to file promptly all reports and any definitive proxy or information statements required to be filed by the Company with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of the Prospectus and for so long as the delivery of a prospectus is required in connection with the offering or sale of the Shares; and to furnish copies of the Prospectus to the Underwriters in New York City prior to 10:00 a.m., New York City time, on the Business Day next succeeding the date of this Agreement in such quantities as the Representatives may reasonably request; (b) to deliver, at the expense of the Company, to the Representatives five signed copies of the Registration Statement (as originally filed) and each amendment thereto, in each case including exhibits and documents incorporated by reference therein, and to each other Underwriter a conformed copy of the Registration Statement (as originally filed) and each amendment thereto, in each case without exhibits but including the documents incorporated by reference therein and, during the period mentioned in paragraph (e) below, to each of the Underwriters as many copies of the Prospectus (including all amendments and supplements thereto) and documents incorporated by reference therein as the Representatives may reasonably request; (c) before filing any amendment or supplement to the Registration Statement or the Prospectus, whether before or after the time the Registration Statement becomes effective, to furnish to the Representatives a copy of the proposed amendment or supplement for review and not to file any such proposed amendment or supplement to which the Representatives reasonably object; 14 -14- (d) to advise the Representatives promptly, and to confirm such advice in writing, (i) when the Registration Statement has become effective, (ii) when any amendment to the Registration Statement has been filed or becomes effective, (iii) when any supplement to the Prospectus or any amended Prospectus has been filed and to furnish the Representatives with copies thereof, (iv) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for any additional information, (v) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any preliminary prospectus or the Prospectus or the initiation or threatening of any proceeding for that purpose, (vi) of the occurrence of any event, during the period mentioned in paragraph (e) below, as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, and (vii) of the receipt by the Company of any notification with respect to any suspension of the qualification of the Shares for offer and sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and to use its best efforts to prevent the issuance of any such stop order, or of any order preventing or suspending the use of any preliminary prospectus or the Prospectus, or of any order suspending any such qualification of the Shares, or notification of any such order thereof, and, if issued, to obtain as soon as possible the withdrawal thereof; (e) if, during such period of time after the first date of the public offering of the Shares as in the opinion of counsel for the Underwriters a prospectus relating to the Shares is required by law to be delivered in connection with sales by the Underwriters or any dealer, any event shall occur as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if it is necessary to amend or supplement the Prospectus to comply with law, forthwith to prepare and furnish, at the expense of the Company if delivery of the prospectus is required at any time prior to the expiration of 9 months after the Closing Date (and at the expense of such Underwriters if delivery of the Prospectus is required 9 months or more after the Closing Date), to the Underwriters and to the dealers (whose names and addresses the Representatives will furnish to the Company) to which Shares may have been sold by the Representatives on behalf of the Underwriters and to any other dealers upon request, such amendments or supplements to the Prospectus as may be necessary so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances when the Prospectus is delivered to a purchaser, be misleading or so that the Prospectus will comply with law; 15 -15- (f) to endeavor to qualify the Shares for offer and sale under the securities or blue sky laws of such jurisdictions as the Representatives shall reasonably request and to continue such qualification in effect so long as reasonably required for distribution of the Shares; provided that the Company shall not be required to file a general consent to service of process in any jurisdiction; (g) to make generally available to its security holders and to the Representatives as soon as practicable an earnings statement covering a period of at least twelve months beginning with the first fiscal quarter of the Company occurring after the effective date of the Registration Statement, which shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 of the Commission promulgated thereunder; (h) during the period of three years after the date of this Agreement, to furnish to the Representatives copies of all reports or other communications (financial or other) furnished to holders of the Shares, and copies of any reports and financial statements furnished to or filed with the Commission or any national securities exchange; (i) for a period of 90 days after the date of the initial public offering of the Shares not to, (i) directly or indirectly, offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any shares of Common Stock or any securities of the Company which are substantially similar to the Common Stock, including but not limited to any securities convertible into or exercisable or exchangeable for, or that represent the right to receive, Common Stock or any such substantially similar securities or (ii) enter into any swap, option, future, forward or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Common Stock or any such substantially similar securities, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise without the prior written consent of J.P. Morgan Securities Inc., other than (i) any options granted or shares of Common Stock of the Company issued upon the exercise of options granted or to be granted under the Company's employee stock option plans existing on the date of the Prospectus and (ii) in connection with the agreement described under "Relationship with Roche -- Roche's Right to Maintain its Percentage Ownership Interest in Our Stock" in the Prospectus; (j) to list the Shares on the New York Stock Exchange (the "Exchange"); and (k) whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, to pay or cause to be paid all costs and ex- 16 -16- penses incident to the performance of its obligations hereunder, including without limiting the generality of the foregoing, all costs and expenses (i) incident to the preparation, registration, transfer, execution and delivery of the Shares, (ii) except as provided in paragraph (c) of Section 5(B), incident to the preparation, printing and filing under the Securities Act of the Registration Statement, the Prospectus and any preliminary prospectus, including in each case all exhibits, amendments and supplements thereto prior to or during the period specified in paragraph (e) of this Section 5(A), (iii) in connection with the listing of the Shares on the Exchange, (iv) related to the filing with, and clearance of the offering by, the National Association of Securities Dealers, Inc., (v) in connection with the printing (including word processing and duplication costs) and delivery of this Agreement, any blue sky memoranda and the furnishing to the Underwriters and dealers of copies of the Registration Statement and the Prospectus, including mailing and shipping, as herein provided, (vi) any expenses incurred by the Company in connection with a "road show" presentation to potential investors, (vii) the cost of preparing stock certificates, (viii) the cost and charges of the Company's transfer agent and registrar and (ix) costs and expenses (other than the filing fees contemplated by paragraph (c)(ii) of Section 5(B)) incurred in connection with the registration or qualification of the Shares under the laws of such jurisdictions as the Representatives may designate (including fees of counsel for the Underwriters and its disbursements). (B) The Selling Stockholder covenants and agrees with the several Underwriters as follows: (a) for a period of 90 days after the date of the initial public offering of the Shares not to, (i) directly or indirectly, offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any shares of Common Stock or any securities of the Company which are substantially similar to the Common Stock, including but not limited to any securities convertible into or exercisable or exchangeable for, or that represent the right to receive, Common Stock or any such substantially similar securities or (ii) enter into any swap, future, forward or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Common Stock or any such substantially similar securities, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise or (iii) make any demand for or exercise any right with respect to the registration of any shares of Common Stock or any such substantially similar securities without the prior written consent of J.P. Morgan Securities Inc., in each case other than the Shares to be sold by such Selling Stockholder hereunder; 17 -17- (b) to deliver to the Representatives prior to or at the Closing Date a properly completed and executed United States Treasury Department Form W-9 (or other applicable form or statement specified by the Treasury Department regulations in lieu thereof) in order to facilitate the Underwriters' documentation of their compliance with the reporting and withholding provisions of the Tax Equity and Fiscal Responsibility Act of 1982 with respect to the transactions herein contemplated; and (c) whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, to pay or cause to be paid all costs and expenses incident to the performance of its obligations hereunder, including without limiting the generality of the foregoing, all (i) filing fees incident to the filing under the Securities Act of the Registration Statement, including in each case all amendments and supplements thereto, (ii) filing fees paid in connection with the registration or qualification of the Shares under the laws of such jurisdictions as the Representatives may designate and (iii) costs and expenses incurred directly by the Selling Stockholder including, without limitation, the fees and expenses of its counsel. 6. The several obligations of the Underwriters hereunder to purchase the Shares on the Closing Date or the Additional Closing Date, as the case may be, are subject to the performance by the Company and the Selling Stockholder of their respective obligations hereunder and to the following additional conditions: (a) the Registration Statement shall have become effective (or if a post-effective amendment is required to be filed under the Securities Act, such post-effective amendment shall have become effective) not later than 5:00 P.M., New York City time, on the date hereof; and no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment shall be in effect, and no proceedings for such purpose shall be pending before or threatened by the Commission; the Prospectus shall have been filed with the Commission pursuant to Rule 424(b) within the applicable time period prescribed for such filing by the rules and regulations under the Securities Act and in accordance with Section 5(A)(a) hereof; and all requests for additional information shall have been complied with to the satisfaction of the Representatives; (b) the representations and warranties of the Company and the Selling Stockholder contained herein are true and correct on and as of the Closing Date or the Additional Closing Date, as the case may be, as if made on the Closing Date or the Additional Closing Date, as the case may be, and each of the Company and the Selling Stockholder shall have complied with all agreements and all conditions on its part to be performed or satisfied hereunder at or prior to the Closing Date or the Additional Closing Date, as the case may be; 18 -18- (c) subsequent to the execution and delivery of this Agreement and prior to the Closing Date or the Additional Closing Date, as the case may be, there shall not have occurred any downgrading, nor shall any notice have been given of (i) any downgrading, (ii) any intended or potential downgrading or (iii) any review or possible change that does not indicate an improvement, in the rating accorded any securities of or guaranteed by the Company by any "nationally recognized statistical rating organization," as such term is defined for purposes of Rule 436(g)(2) under the Securities Act; (d) since the respective dates as of which information is given in the Prospectus, there shall not have been any change in the capital stock or long-term debt of the Company or its subsidiaries or any Material Adverse Change otherwise than as set forth or contemplated in the Prospectus, the effect of which in the judgment of the Representatives makes it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares on the Closing Date or the Additional Closing Date, as the case may be, on the terms and in the manner contemplated in the Prospectus; and neither the Company nor any of its subsidiaries has sustained since the date of the latest audited financial statements included or incorporated by reference in the Prospectus any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus; (e) the Representatives shall have received on and as of the Closing Date or the Additional Closing Date, as the case may be, (1) a certificate of the Chief Executive Officer and Chief Financial Officer of the Company, satisfactory to the Representatives, to the effect set forth in subsections (a) through (c) (with respect to the respective representations, warranties, agreements and conditions of the Company) of this Section 6 and to the further effect that there has not occurred any Material Adverse Change from that set forth or contemplated in the Registration Statement and (2) a certificate from the Selling Stockholder, satisfactory to the Representatives, to the effect set forth in subsection (b) of this Section 6 (with respect to the respective representations, warranties, agreements and conditions of the Selling Stockholder); (f) Davis Polk & Wardwell, counsel for the Company and the Selling Stockholder, shall have furnished to the Representatives their written opinion, dated the Closing Date or the Additional Closing Date, as the case may be, in form and substance satisfactory to the Representatives, to the effect that: (i) each of the Company and the Selling Stockholder has been duly incorporated and is validly existing as a corporation in good standing under the 19 -19- laws of the State of Delaware, with corporate power and authority to own its properties and conduct its business as described in the Prospectus; (ii) this Agreement has been duly authorized, executed and delivered by the Company and the Selling Stockholder; (iii) the authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus; (iv) the statements in the Prospectus under "Description of Capital Stock," "Material U.S. Federal Tax Considerations for Non-U.S. Holders of Common Stock" and "Underwriting" and in the Registration Statement in Item 15, insofar as such statements constitute a summary of the terms of the Common Stock, legal matters or documents referred to therein, fairly present the information called for with respect to such terms, legal matters or documents; (v) such counsel shall state that no facts have come to their attention to cause them to believe that (A) the Registration Statement and the Prospectus and any supplement or amendment thereto (other than any financial statements and related schedules and other financial or statistical information therein as to which no opinion is expressed) do not comply as to form in all material respects with the Securities Act, (B) the Registration Statement (other than any financial statements and related schedules and other financial or statistical information therein as to which no opinion is expressed) at its effective date and, as supplemented by the Prospectus, at the Closing Date or the Additional Closing Date, as the case may be, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements contained therein not misleading and (C) the Prospectus, as of the Closing Date or the Additional Closing Date, as the case may be (other than any financial statements and related schedules and other financial or statistical information therein as to which no opinion is expressed), contains any untrue statement of a material fact or omits to state any material fact necessary to make the statements contained therein, in the light of the circumstances under which they were made, not misleading; (vi) no consent, approval, authorization, order, license, registration or qualification of or with any court or government agency or body is required for the consummation by the Company of the transactions contemplated by this Agreement and the Prospectus, except such consents, approvals, authorizations, orders, licenses, registrations or qualifications as have been obtained under the Securities Act and as may be required under state securities or blue sky 20 -20- laws in connection with the purchase and distribution of the Shares by the Underwriters; (vii) the Company is not an "investment company" " as such term is defined in the Investment Company Act; (viii) upon payment for the Shares to be sold by the Selling Stockholder as provided herein, delivery of such Shares, as directed by the Underwriters, to Cede or such other nominee as may be designated by DTC, registration of such Shares in the name of Cede or such other nominee and the crediting of such Shares on the books of DTC to securities accounts of the Underwriters (assuming that neither DTC nor any such Underwriter has notice of any adverse claim (as such phrase is defined in Section 8-105 of the UCC) to such Shares)), (A) DTC shall be a "protected purchaser" of such Shares within the meaning of 8-303 of the UCC, (B) under Section 8-501 of the UCC, the Underwriters will acquire a valid security entitlement in respect of such Shares and (C) no action based on any "adverse claim" (as defined in Section 8-102 of the UCC) to such Shares may be asserted against the Underwriters with respect to such security entitlement (it being understood that for the purpose of this opinion, such counsel may assume that when such payment, delivery and crediting occur, (x) such Shares will have been registered in the name of Cede or another nominee designated by DTC, in each case on the Company's share registry in accordance with its certificate of incorporation, bylaws and applicable law, (y) DTC will be registered as a "clearing corporation" within the meaning of Section 8-102 of the UCC and (z) appropriate entries to the accounts of the several Underwriters on the records of DTC will have been made pursuant to the UCC); (ix) the sale of the Shares by the Selling Stockholder hereunder, the compliance by the Selling Stockholder with all of the provisions of this Agreement and the consummation of the transactions contemplated herein will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument to which the Selling Stockholder is a party or by which the Selling Stockholder is bound or to which any of the property or assets of the Selling Stockholder is subject, nor will such action result in any violation of the provisions of the certificate of incorporation or by-laws of the Selling Stockholder, nor will such action result in any violation of any applicable statute or any applicable order, rule or regulation of any court or governmental agency or body having jurisdiction over the Selling Stockholder or any of its properties; and 21 -21- (x) no consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or body is required for the sale of the Shares or the consummation by the Selling Stockholder of the transactions contemplated by this Agreement, except such consents, approvals, authorizations, orders, licenses, registrations or qualifications as have been obtained or made under the Securities Act or the Exchange Act and as may be required under state securities or blue sky laws in connection with the purchase and distribution of the Shares by the Underwriters. In rendering such opinions, such counsel may rely (A) as to matters involving the application of laws other than the laws of the United States and the State of New York and the General Corporation Law of the State of Delaware, to the extent such counsel deems proper and to the extent specified in such opinion, if at all, upon an opinion or opinions (in form and substance reasonably satisfactory to the Underwriters' counsel) of other counsel reasonably acceptable to the Underwriters' counsel, familiar with the applicable laws; and (B) as to matters of fact, to the extent such counsel deems proper, on certificates of responsible officers of the Company and the Selling Stockholder, as applicable, and certificates or other written statements of officials of jurisdictions having custody of documents respecting the corporate existence or good standing of the Company and the Selling Stockholder, as applicable. The opinion of such counsel for the Company and the Selling Stockholder shall state that the opinion of any such other counsel upon which they relied is in form satisfactory to such counsel and, in such counsel's opinion, the Underwriters and they are justified in relying thereon. With respect to the matters to be covered in subparagraph (vii) above, counsel may state their opinion and belief is based upon their participation in the preparation of the Registration Statement and the Prospectus and any amendment or supplement thereto (other than the documents incorporated by reference therein) and review and discussion of the contents thereof (including the documents incorporated by reference therein) but is without independent check or verification except as specified. The opinion of Davis Polk & Wardwell described above shall be rendered to the Underwriters at the request of the Company and the Selling Stockholder and shall so state therein; (g) Stephen G. Juelsgaard, Esq., General Counsel of the Company, shall have furnished to the Representatives his written opinion, dated the Closing Date or the Additional Closing Date, as the case may be, in form and substance satisfactory to the Representatives, to the effect that: 22 -22- (i) the Company has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties, or conducts any business, so as to require such qualification, other than where the failure to be so qualified or in good standing would not have a Material Adverse Effect; (ii) each of the Company's subsidiaries has been duly incorporated and is validly existing as a corporation under the laws of its jurisdiction of incorporation with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus and has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties, or conducts any business, so as to require such qualification, other than where the failure to be so qualified and in good standing would not have a Material Adverse Effect; and all of the outstanding shares of capital stock of each subsidiary have been duly and validly authorized and issued, are fully paid and non-assessable and (except, in the case of foreign subsidiaries, for directors' qualifying shares and except as otherwise set forth in the Prospectus) are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or claims; (iii) the outstanding shares of capital stock of the Company (including the Shares) have been duly authorized and are validly issued, fully paid and non-assessable; (iv) other than as set forth or contemplated in the Prospectus, there are no legal or governmental investigations, actions, suits or proceedings pending or, to the best of such counsel's knowledge, threatened against or affecting the Company or any of its subsidiaries or any of their respective properties or to which the Company or any of its subsidiaries is or may be a party or to which any property of the Company or its subsidiaries is or may be the subject which, if determined adversely to the Company or any of its subsidiaries, could, individually or in the aggregate, have, or reasonably be expected to have, a Material Adverse Effect, and, to the best of such counsel's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others; and such counsel does not know of any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required; 23 -23- (v) such counsel (A) is of the opinion that the Registration Statement and the Prospectus and any supplement or amendment thereto (other than any financial statements and related schedules and other financial or statistical information therein as to which no opinion is expressed) comply as to form in all material respects with the Securities Act, (B) shall state that no facts have come to his attention to cause him to believe that the Registration Statement (other than any financial statements and related schedules and other financial or statistical information therein as to which no opinion is expressed) at its effective date and, as supplemented by the Prospectus, at the Closing Date or the Additional Closing Date, as the case may be, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements contained therein not misleading, and (C) shall state that no facts have come to his attention to cause him to believe that the Prospectus, as of the Closing Date or the Additional Closing Date, as the case may be (other than any financial statements and related schedules and other financial or statistical information therein as to which no opinion is expressed), contains any untrue statement of a material fact or omits to state any material fact necessary to make the statements contained therein, in the light of the circumstances under which they were made, not misleading; (vi) neither the Company nor any of its subsidiaries is, or with the giving of notice or lapse of time or both would be, in violation of or in default under, its certificate of incorporation or by-laws or any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument known to such counsel to which the Company or any of its subsidiaries is a party or by which it or any of them or any of their respective properties is bound, except for violations and defaults which would not, individually or in the aggregate, have a Material Adverse Effect; (vii) the performance by the Company of its obligations under this Agreement and the consummation of the transactions contemplated herein will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument known to such counsel to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject, nor will any such action result in any violation of the provisions of the certificate of incorporation or the by-laws of the Company or any applicable law or statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company, its subsidiaries or any of their respective properties; 24 -24- (viii) (A) the documents incorporated by reference in the Prospectus or any further amendment or supplement thereto made by the Company prior to the Closing Date or the Additional Closing Date, as the case may be (other than any financial statements and related schedules and other financial or statistical information therein as to which no opinion is expressed), when they were filed with the Commission complied as to form in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and (B) such counsel shall state that no facts have come to his attention to cause him to believe that any of such documents, when such documents were so filed (other than any financial statements and related schedules and other financial or statistical information therein as to which no opinion is expressed), contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such documents were so filed, not misleading; (ix) each of the Company and its subsidiaries owns, possesses or has obtained all licenses, permits, certificates, consents, orders, approvals and other authorizations from, and has made all declarations and filings with, all federal, state, local and other governmental authorities (including foreign regulatory agencies), all self-regulatory organizations and all courts and other tribunals, domestic or foreign, necessary to own or lease, as the case may be, and to operate its properties and to carry on its business as conducted as of the date hereof, and neither the Company nor any such subsidiary has received any actual notice of any proceeding relating to revocation or modification of any such license, permit, certificate, consent, order, approval or other authorization, except as described in the Registration Statement and the Prospectus; and each of the Company and its subsidiaries is in compliance with all laws and regulations relating to the conduct of its business as conducted as of the date of the Prospectus where the failure to so comply would have a Material Adverse Effect; (x) the Company and its subsidiaries have good title in fee simple to all real property and good title to all personal property owned by them, in each case free and clear of all liens, encumbrances and defects except such as are described or referred to in the Prospectus or such as do not interfere with the use made and proposed to be made of such property by the Company and its subsidiaries; and any real property and buildings held under lease by the Company and its subsidiaries are held by them under valid, existing and enforceable leases with such exceptions as are not material and do not interfere with the use made or proposed to be made of such property and buildings by the Company or its subsidiaries; 25 -25- (xi) each of the Company and its subsidiaries is in compliance with all Environmental Laws, except, in each case, where noncompliance, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect; there are no legal or governmental proceedings pending or, to the knowledge of such counsel, threatened against or affecting the Company or any of its subsidiaries under any Environmental Law which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect; (xii) each of the Company and its subsidiaries owns, possesses or has adequate rights to use the Intellectual Property employed by it in connection with the business conducted by it as of the date hereof except to the extent that the failure to own, possess or have adequate rights to use such Intellectual Property would not, individually or in the aggregate, have a Material Adverse Effect; (xiii) such counsel is of the opinion that the statements in the Registration Statement and the Prospectus included therein at the time the Registration Statement became effective set forth under (A) "Risk Factors -- Protecting our Proprietary Rights is Difficult and Costly " and "Business -- Proprietary Technology -- Patents and Trade Secrets," insofar as such statements concern patents, patent applications and patent rights, and (B) "Risk Factors -- Our Products Are Subject to Governmental Regulations and Approvals," "Business -- Products," "-- Products in Development," "-- Competition" and "-- Government Regulation," insofar as such statements concern the Federal Food, Drug and Cosmetic Act, the Public Health Services Act and the Food and Drug Administration Modernization Act of 1997 and the regulations promulgated thereunder and any similar foreign statutes and regulations, in each case, did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and that such statements in the captions set forth above in the Prospectus, as amended or supplemented, if applicable, do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (xiv) other than as set forth or contemplated in the Prospectus, to the knowledge of such counsel, the Company has not received any notice of infringement of or conflict with, and such counsel has no knowledge of any infringement of or conflict with, asserted rights of others with respect to its Intellectual Property which could reasonably be expected to result in a Material Adverse Effect; 26 -26- (xv) other than as set forth or contemplated in the Prospectus, the discoveries, inventions, products or processes of the Company referred to in the Registration Statement and the Prospectus do not, to the knowledge of such counsel, infringe or conflict with any rights of any third party, or any discovery, invention, product or process which is the subject of a patent application filed by any third party which patent application has not been published or is otherwise known to the Company except to the extent that any such infringement, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect; (xvi) other than as set forth or contemplated in the Prospectus, no third party, including any academic or governmental organization, possesses rights to the Company's patents, patent applications or patent rights which, if exercised, could reasonably be expected to have a Material Adverse Effect; and (xvii) to the knowledge of such counsel, the Company has not received any notices or correspondence from the FDA or any foreign, state or local governmental body exercising comparable authority requiring the termination, suspension or material modification of any studies, tests or preclinical or clinical trials conducted by or on behalf of the Company which termination, suspension or material modification could reasonably be expected to have a Material Adverse Effect. In rendering such opinions, such counsel may rely (A) as to matters involving the application of laws other than the laws of the United States and the State of California and the General Corporation Law of the State of Delaware, to the extent such counsel deems proper and to the extent specified in such opinion, if at all, upon an opinion or opinions (in form and substance reasonably satisfactory to the Underwriters' counsel) of other counsel reasonably acceptable to the Underwriters' counsel, familiar with the applicable laws; and (B) as to matters of fact, to the extent such counsel deems proper, on certificates of responsible officers of the Company and certificates or other written statements of officials of jurisdictions having custody of documents respecting the corporate existence or good standing of the Company. The opinion of such counsel for the Company shall state that the opinion of any such other counsel upon which they relied is in form satisfactory to such counsel and, in such counsel's opinion, the Underwriters and they are justified in relying thereon. With respect to the matters to be covered in subparagraph (iv) above, counsel may state his opinion and belief is based upon his participation in the preparation of the Registration Statement and the Prospectus and any amendment or supplement thereto and review and discussion of the contents thereof but is without independent check or verification except as specified. 27 -27- The opinion of the General Counsel of the Company described above shall be rendered to the Underwriters at the request of the Company and shall so state therein; (h) on the date hereof and the effective date of the most recently filed post-effective amendment filed on or subsequent to the date hereof to the Registration Statement and also on the Closing Date or Additional Closing Date, as the case may be, Ernst & Young shall have furnished to you letters, dated the respective dates of delivery thereof, in form and substance satisfactory to you, containing statements and information of the type customarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained or incorporated by reference in the Registration Statement and the Prospectus; (i) the Representatives shall have received on and as of the Closing Date or Additional Closing Date, as the case may be, an opinion of Cahill Gordon & Reindel, counsel to the Underwriters, with respect to the Registration Statement, the Prospectus and other related matters as the Representatives may reasonably request, and such counsel shall have received such papers and information as they may reasonably request to enable them to pass upon such matters; (j) the Shares to be delivered on the Closing Date or Additional Closing Date, as the case may be, shall have been approved for listing on the Exchange; (k) on or prior to the Closing Date or Additional Closing Date, as the case may be, the Company and the Selling Stockholder shall have furnished to the Representatives such further certificates and documents as the Representatives shall reasonably request; and (l) the "lock-up" agreements, each substantially in the form of Exhibit A hereto, among you and the directors and management executive committee members of the Company relating to sales and certain other dispositions of shares of Common Stock or certain other securities, delivered to you on or before the date hereof, shall be in full force and effect on the Closing Date or Additional Closing Date, as the case may be. 7. (a) The Company agrees to indemnify and hold harmless each Underwriter, each affiliate of any Underwriter which assists such Underwriter in the distribution of the Shares and each person, if any, who controls any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages and liabilities (including, without limitation, the legal fees and other expenses incurred in connection with any suit, action or proceeding or any claim as- 28 -28- serted) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) or any preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representatives expressly for use therein; provided, however, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any Underwriter (or affiliate of such Underwriter which assists such Underwriter in the distribution of the Shares) from whom the persons asserting any such losses, claims, damages or liabilities purchased Shares, or any person controlling such Underwriter, if a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage or liability. (b) The Selling Stockholder agrees to indemnify and hold harmless each Underwriter, each affiliate of any Underwriter which assists such Underwriter in the distribution of the Shares and each person, if any, who controls any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, and the Company, its directors, its officers who sign the Registration Statement and each person who controls the Company within the meaning of either such Section, from and against any and all losses, claims, damages and liabilities (including, without limitation, the legal fees and other expenses incurred in connection with any suit, action or proceeding or any claim asserted) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) or any preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only with reference to information relating to the Selling Stockholder furnished in writing by or on behalf of the Selling Stockholder expressly for use in the Registration Statement or the Prospectus or in any preliminary prospectus; provided, however, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any Underwriter (or affiliate of such Underwriter which assists such Underwriter in the distribution of the Shares) from whom the person asserting any such losses, claims, damages or liabilities purchased Shares, or any person controlling such Underwriter, if a copy of the Prospectus (as then 29 -29- amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage or liability. (c) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement and each person who controls the Company within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act and the Selling Stockholder to the same extent as the foregoing indemnity from the Company to each Underwriter, but only with reference to information relating to such Underwriter furnished to the Company in writing by such Underwriter through the Representatives expressly for use in the Registration Statement, the Prospectus, any amendment or supplement thereto, or any preliminary prospectus. If any suit, action, proceeding (including any governmental or regulatory investigation), claim or demand shall be brought or asserted against any person in respect of which indemnity may be sought pursuant to the preceding paragraphs of this Section 7, such person (the "Indemnified Person") shall promptly notify the person or persons against whom such indemnity may be sought (each an "Indemnifying Person") in writing, and such Indemnifying Persons, upon request of the Indemnified Person, shall retain counsel reasonably satisfactory to the Indemnified Person to represent the Indemnified Person and any others the Indemnifying Persons may designate in such proceeding and shall pay the reasonable fees and expenses of such counsel related to such proceeding. In any such proceeding, any Indemnified Person shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person and not the Indemnifying Persons unless (i) the Indemnifying Persons and the Indemnified Person shall have mutually agreed to the contrary, (ii) the Indemnifying Person has failed within a reasonable time to retain counsel reasonably satisfactory to the Indemnified Person or (iii) the named parties in any such proceeding (including any impleaded parties) include both an Indemnifying Person and the Indemnified Person and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that no Indemnifying Person shall, in connection with any proceeding or related proceeding in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm (in addition to any local counsel) for all Indemnified Persons, and that all such fees and expenses shall be reimbursed as they are incurred. Any such separate firm for the Underwriters, each affiliate of any Underwriter which assists such Underwriter in the distribution of the Shares and such control persons of Underwriters shall be desig- 30 -30- nated in writing by J.P. Morgan Securities Inc. and any such separate firm for the Company, its directors, its officers who sign the Registration Statement and such control persons of the Company shall be designated in writing by the Company and any such separate firm for the Selling Stockholder shall be designated in writing by the Selling Stockholder. No Indemnifying Person shall be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, each Indemnifying Person agrees to indemnify any Indemnified Person from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an Indemnified Person shall have requested an Indemnifying Person to reimburse the Indemnified Person for fees and expenses of counsel as contemplated by the second and third sentences of this paragraph, such Indemnifying Person agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 90 days after receipt by such Indemnifying Person of the aforesaid request and (ii) such Indemnifying Person shall not have reimbursed the Indemnified Person in accordance with such request prior to the date of such settlement. No Indemnifying Person shall, without the prior written consent of the Indemnified Person, effect any settlement of any pending or threatened proceeding in respect of which any Indemnified Person is or could have been a party and indemnity could have been sought hereunder by such Indemnified Person, unless such settlement includes an unconditional release of such Indemnified Person from all liability on claims that are the subject matter of such proceeding. If the indemnification provided for in paragraphs (a) through (c) of this Section 7 is unavailable to an Indemnified Person or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each Indemnifying Person under such paragraph, in lieu of indemnifying such Indemnified Person thereunder, shall contribute to the amount paid or payable by such Indemnified Person as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Stockholder on the one hand and the Underwriters on the other hand from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Selling Stockholder on the one hand and the Underwriters on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholder on the one hand and the Underwriters on the other hand shall be deemed to be in the same respective proportions as the net proceeds from the offering (before deducting expenses) received by the Selling Stockholder and the total underwriting discounts received by the Underwriters, in each case as set forth in the table on the cover of the Prospectus, bear to the aggregate public offering price of the Shares. The relative fault of the Company and the Selling Stockholder on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company and the Selling Stock- 31 -31- holder by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Selling Stockholder and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purposes) or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Person as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses incurred by such Indemnified Person in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 7, in no event shall an Underwriter be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 7 are several in proportion to the respective number of Shares set forth opposite their names in Schedule I hereto, and not joint. The remedies provided for in this Section 7 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. The indemnity and contribution agreements contained in this Section 7 and the representations and warranties of the Company and the Selling Stockholder set forth in this Agreement shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter or by or on behalf of the Company, its officers or directors or any person controlling the Company or the Selling Stockholder and (iii) acceptance of and payment for any of the Shares. 8. Notwithstanding anything herein contained, this Agreement (or the obligations of the several Underwriters with respect to the Option Shares) may be terminated in the absolute discretion of the Representatives, by notice given to the Company and the Selling Stockholder, if after the execution and delivery of this Agreement and prior to the Closing Date (or, in the case of the Option Shares, prior to the Additional Closing Date) (i) trading generally shall have been suspended or materially limited on or by, as the case may be, any of the New York Stock Exchange, the American Stock Exchange, the Nasdaq National Market, 32 -32- the Chicago Board Options Exchange, the Chicago Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any securities of or guaranteed by the Company shall have been suspended on any exchange or in any over-the-counter market, (iii) a general moratorium on commercial banking activities in New York shall have been declared by either federal or New York State authorities, or (iv) there shall have occurred any outbreak or escalation of hostilities or any change in financial markets or any calamity or crisis that, in the judgment of the Representatives, is material and adverse and which, in the judgment of the Representatives, makes it impracticable to market the Shares being delivered at the Closing Date or the Additional Closing Date, as the case may be, on the terms and in the manner contemplated in the Prospectus. 9. This Agreement shall become effective upon the later of (x) execution and delivery hereof by the parties hereto and (y) release of notification of the effectiveness of the Registration Statement (or, if applicable, any post-effective amendment) by the Commission. If on the Closing Date or the Additional Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Shares which it or they have agreed to purchase hereunder on such date, and the aggregate number of Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of Shares to be purchased on such date, the other Underwriters shall be obligated severally in the proportions that the number of Shares set forth opposite their respective names in Schedule I bears to the aggregate number of Underwritten Shares set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as the Representatives may specify, to purchase the Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date; provided that in no event shall the number of Shares that any Underwriter has agreed to purchase pursuant to Section 1 be increased pursuant to this Section 9 by an amount in excess of one-ninth of such number of Shares without the written consent of such Underwriter. If on the Closing Date or the Additional Closing Date, as the case may be, any Underwriter or Underwriters shall fail or refuse to purchase Shares which it or they have agreed to purchase hereunder on such date, and the aggregate number of Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Shares to be purchased on such date, and arrangements satisfactory to the Representatives and the Selling Stockholder for the purchase of such Shares are not made within 36 hours after such default, this Agreement (or the obligations of the several Underwriters to purchase the Option Shares, as the case may be) shall terminate without liability on the part of any non-defaulting Underwriter or the Selling Stockholder. In any such case either the Representatives or the Selling Stockholder shall have the right to postpone the Closing Date (or, in the case of the Option Shares, the Additional Closing Date), but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and in the Prospectus or in any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve any de- 33 -33- faulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 10. If this Agreement shall be terminated by the Underwriters, or any of them, because of any failure or refusal on the part of the Company or the Selling Stockholder to comply with the terms or to fulfill any of the conditions of this Agreement, or if for any reason any of the Company or the Selling Stockholder shall be unable to perform its obligations under this Agreement or any condition of the Underwriters' obligations cannot be fulfilled, the Company and the Selling Stockholder agree to reimburse the Underwriters or such Underwriters as have so terminated this Agreement with respect to themselves, severally, for all out-of-pocket expenses (including the fees and expenses of its counsel) reasonably incurred by the Underwriter in connection with this Agreement or the offering contemplated hereunder. 11. This Agreement shall inure to the benefit of and be binding upon the Company, the Selling Stockholder and the Underwriters, any controlling persons referred to herein and their respective successors and assigns. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any other person, firm or corporation any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. No purchaser of Shares from any Underwriter shall be deemed to be a successor by reason merely of such purchase. 12. Any action by the Underwriters hereunder may be taken by the Representatives jointly or by J.P. Morgan Securities Inc. alone on behalf of the Underwriters, and any such action taken by the Representatives jointly or by J.P. Morgan Securities Inc. alone shall be binding upon the Underwriters. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Underwriters shall be given to the Representatives, c/o J.P. Morgan Securities Inc., 60 Wall Street, New York, New York 10260 (telefax: 212-648-5705), Attention: Syndicate Department, copy to Cahill Gordon & Reindel, 80 Pine Street, New York, New York 10005 (telefax: 212-269-5420), Attention: Gerald S. Tanenbaum, Esq. Notices to the Company shall be given to it at its office, 1 DNA Way, South San Francisco, California 94080 (telefax: 650-225-8654), Attention: Stephen G. Juelsgaard, Esq., Senior Vice President, General Counsel. Notices to the Selling Stockholder shall be given to it c/o Hoffmann-La Roche Inc., 340 Kingsland Street, Nutley, New Jersey 07110 (telefax: 973-235-3500), Attention: Law Department, Gerald Bohm, Esq. Copies of notices to any of the Company or the Selling Stockholder should be given to Davis Polk & Wardwell, 450 Lexington Avenue, New York, New York 10017 (telefax: 212-450-5527), Attention: Richard A. Drucker, Esq. 13. This Agreement may be signed in counterparts, each of which shall be an original and all of which together shall constitute one and the same instrument. 34 -34- 14. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAWS PROVISIONS THEREOF. 35 If the foregoing is in accordance with your understanding, please sign and return five counterparts hereof. Very truly yours, GENENTECH, INC. By: ------------------------------------- Name: Title: ROCHE HOLDINGS, INC. By: ------------------------------------- Name: Title: 36 Accepted: July [ ], 1999 J.P. MORGAN SECURITIES INC. GOLDMAN, SACHS & CO. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED WARBURG DILLON READ LLC BANCBOSTON ROBERTSON STEPHENS INC. Acting severally on behalf of themselves and the several Underwriters listed in Schedule I hereto. By: J.P. MORGAN SECURITIES INC. By: --------------------------------- Name: Title: 37 SCHEDULE I
Number of Underwritten Shares Underwriter To Be Purchased - ----------- --------------- J.P. Morgan Securities Inc.............................................. [ ] Goldman, Sachs & Co..................................................... [ ] Merrill Lynch, Pierce Fenner & Smith Incorporated....................... [ ] Warburg Dillon Read LLC................................................. [ ] BancBoston Robertson Stephens Inc....................................... [ ] --------------- Total.................................................... 20,000,000 ===============
38 Exhibit A [Form of Lock-Up Agreement] EX-3.1 3 EXHIBIT 3.1 1 EXHIBIT 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION GENENTECH, INC. Genentech, Inc. (the "CORPORATION"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby amend the Certificate of Incorporation of the Corporation, which was originally filed on December 23, 1986 under the name "Genentech Delaware, Inc.", and subsequently amended. The Certificate of Incorporation of the Corporation is hereby restated and further amended to read in its entirety as follows: ARTICLE 1 The name of the Corporation is: Genentech, Inc. ARTICLE 2 The address of the registered office of the Corporation in the State of Delaware is Corporation Service Company, 1013 Centre Road, City of Wilmington, County of New Castle, Delaware 19805. The name of its registered agent at such address is Corporation Service Company. ARTICLE 3 The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended ("DELAWARE LAW"). 2 ARTICLE 4 SECTION 4.01. Capital Stock. (a) The Corporation is authorized to issue two classes of stock to be designated, respectively, preferred stock and common stock. The total number of shares which the Corporation is authorized to issue is four hundred million (400,000,000) shares. One hundred million (100,000,000) shares shall be designated preferred stock, par value $0.02 per share ("PREFERRED STOCK"). Three hundred million (300,000,000) shares shall be designated common stock, par value $0.02 per share ("COMMON STOCK") The Common Stock of the Corporation shall be all of one class. (b) The number of authorized shares of any class or classes of stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of a majority of the Common Stock of the Corporation irrespective of the provisions of Section 242(b)(2) of Delaware Law. SECTION 4.02. Common Stock. (a) Issuance and Consideration. Any unissued or treasury shares of the Common Stock may be issued for such consideration as may be fixed in accordance with applicable law from time to time by the Board of Directors. (b) Dividends. Subject to the rights of holders of the Preferred Stock, the holders of the Common Stock shall be entitled to receive, when and as declared by the Board of Directors, out of the assets of the Corporation which are by law available therefor, dividends payable either in cash, in property, or in shares of stock and the holders of the Preferred Stock shall not be entitled to participate in any such dividends (unless otherwise provided by the Board of Directors in any resolution providing for the issue of a series of Preferred Stock). SECTION 4.03. Preferred Stock. (a) Series and Limits of Variations between Series. Any unissued or treasury shares of the Preferred Stock may be issued from time to time in one or more series for such consideration as may be fixed from time to time by the Board of Directors and each share of a series shall be identical in all respects with the other shares of such series, except that, if the dividends thereon are cumulative, the date from which they shall be cumulative may differ. Before any shares of Preferred Stock of any particular series shall be issued, a certificate shall be filed with the Secretary of State of Delaware setting forth the designation, rights, privileges, restrictions, and conditions to be attached to the Preferred Stock of such series and such other matters as may be required, and the Board of Directors 2 3 shall fix and determine, and is hereby expressly empowered to fix and determine, in the manner provided by law, the particulars of the shares of such series (so far as not inconsistent with the provisions of this Article 4 applicable to all series of Preferred Stock), including, but not limited to, the following: (i) the distinctive designation of such series and the number of shares which shall constitute such series, which number may be increased (except where otherwise provided by the Board of Directors in creating such series) or decreased (but not below the number of shares thereof then outstanding) from time to time by like action of the Board of Directors; (ii) the annual rate of dividends payable on shares of such series, the conditions upon which such dividends shall be payable and the date from which dividends shall be cumulative in the event the Board of Directors determines that dividends shall be cumulative; (iii) whether such series shall have voting rights, in addition to the voting rights provided by law and, if so, the terms of such voting rights; (iv) whether such series shall have conversion privileges and, if so, the terms and conditions of such conversion, including, but not limited to, provision for adjustment of the conversion rate upon such events and in such manner as the Board of Directors shall determine; (v) whether or not the shares of such series shall be redeemable and, if so, the terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; (vi) whether such series shall have a sinking fund for the redemption or purchase of shares of that series and, if so, the terms and amount of such sinking fund; (vii) the rights of the shares of such series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation, and the relative rights of priority, if any, of payment of shares of that series; and (viii) any other relative rights, preferences and limitations of such series. 3 4 ARTICLE 5 SECTION 5.01. Amendment of Bylaws by Directors. (a) In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter, amend, repeal and rescind the bylaws of the Corporation, subject to Sections 5.01(b) and 5.01(c) hereof. (b) Sections 2.02, 3.02, 3.03(a), 3.03(b), 3.04, 3.05, 3.14, and 5.06 of the bylaws may only be altered, amended, repealed, or rescinded by the affirmative vote of holders of capital stock entitled to vote thereon representing more than 60% of the shares entitled to be voted thereon. (c) Sections 3.03(c) and 3.15 of the bylaws may only be altered, amended, repealed, or rescinded by the affirmative vote of holders of capital stock entitled to vote thereon representing more than 90% of the shares entitled to be voted thereon. SECTION 5.02. Amendment of Certificate of Incorporation. Section 5.01(b) of this Certificate of Incorporation may only be altered, amended, repealed, or rescinded by the affirmative vote of holders of capital stock entitled to vote thereon representing more than 60% of the shares entitled to be voted thereon. Section 5.01(c) and Articles 10 and 11 of this Certificate of Incorporation may only be altered, amended, repealed, or rescinded by the affirmative vote of holders of capital stock entitled to vote thereon representing more than 90% of the shares entitled to be voted thereon. ARTICLE 6 SECTION 6.01. Election of Directors by Holders of Preferred Stock. During any period when the holders of any Preferred Stock or any one or more series thereof, voting as a class, shall be entitled to elect a specified number of directors, by reason of dividend arrearages or other provisions giving them the right to do so, then and during such time as such right continues (i) the then otherwise authorized number of directors shall be increased by such specified number of directors, and the holders of such Preferred Stock or such series thereof, voting as a class, shall be entitled to elect the additional directors so provided for, pursuant to the provisions of such Preferred Stock or series; (ii) each such additional director shall serve for such term, and have such voting powers, as shall be stated in the provisions pertaining to such Preferred Stock or series; and (iii) whenever the holders of any such Preferred Stock or series thereof are 4 5 divested of such rights to elect a specified number of directors, voting as a class, pursuant to the provisions of such Preferred Stock or series, the terms of office of all directors elected by the holders of such Preferred Stock or series, voting as a class pursuant to such provisions or elected to fill any vacancies resulting from the death, resignation or removal of directors so elected by the holders of such Preferred Stock or series, shall forthwith terminate and the authorized number of directors shall be reduced accordingly. SECTION 6.02. Ballots. Elections of directors at an annual or special meeting of stockholders need not be by written ballot unless the bylaws of the Corporation shall provide otherwise. SECTION 6.03. Elimination of Certain Personal Liability of Directors. (a) A director of the Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director to the fullest extent permitted by Delaware Law. (b) Each person (and the heirs, executors or administrators of such person) who was or is a party or is threatened to be made a party to, or is involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was a director of the Corporation or is or was serving at the request of the Corporation as a director of another corporation, partnership, joint venture, trust or other enterprise, shall be indemnified and held harmless by the Corporation to the fullest extent permitted by Delaware Law. The right to indemnification conferred in this Section 6.03 shall also include the right to be paid by the Corporation the expenses incurred in connection with any such proceeding in advance of its final disposition to the fullest extent authorized by Delaware Law. The right to indemnification conferred in this Section 6.03 shall be a contract right. (c) The Corporation may, by action of its Board of Directors, provide indemnification to such of the officers, employees and agents of the Corporation to such extent and to such effect as the Board of Directors shall determine to be appropriate and authorized by Delaware Law. (d) The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss incurred by such person in any such capacity or arising out of his status as such, whether or 5 6 not the Corporation would have the power to indemnify him against such liability under Delaware Law. (e) The rights and authority conferred in this Section 6.03 shall not be exclusive of any other right which any person may otherwise have or hereafter acquire. (f) Neither the alteration, amendment, repeal or recission of this Section 6.03, nor the adoption of any provision of this Certificate of Incorporation or the bylaws of the Corporation, nor, to the fullest extent permitted by Delaware Law, any modification of law, shall eliminate or reduce the effect of this Section 6.03 in respect of any acts or omissions occurring prior to such alteration, amendment, repeal, recission, adoption or modification. ARTICLE 7 SECTION 7.01. Section 203 of Delaware Law. The Corporation hereby elects not to be governed by Section 203 of Delaware Law. ARTICLE 8 [Reserved]. ARTICLE 9 SECTION 9.01. Removal of Directors for Cause. Any director may be removed at any special stockholders' meeting upon the affirmative vote of not less than 50 percent of the outstanding shares of voting stock of the Corporation at that time entitled to vote thereon; provided, however, that such director may be removed only for cause and shall receive a copy of the charges against him, delivered to him personally or by mail at his last known address at least 10 days prior to the date of the stockholders' meeting; provided further, that directors who shall have been elected by the holders of a series or class of Preferred Stock, 6 7 voting separately as a class, shall be removed only pursuant to the provisions establishing the rights of such series or class to elect such directors. ARTICLE 10 SECTION 10.01. Relationship With Roche. In anticipation that the Corporation will cease to be a wholly owned subsidiary of Roche Holdings, Inc., but that Roche (as defined in Section 10.05) will remain a stockholder of the Corporation, and in anticipation that the Corporation (as defined in Section 10.05) and Roche may engage in the same or similar activities or lines of business and have an interest in the same areas of corporate opportunities, and in recognition of (i) the benefits to be derived by the Corporation through its continued contractual, corporate and business relations with Roche (including service of officers and directors of Roche as directors of the Corporation) and (ii) the difficulties attendant to any director, who desires and endeavors fully to satisfy such director's fiduciary duties, in determining the full scope of such duties in any particular situation, the provisions of this Article 10 are set forth to regulate, define and guide the conduct of certain affairs of the Corporation as they may involve Roche and its officers and directors, and the powers, rights, duties and liabilities of the Corporation and its officers, directors and stockholders in connection therewith. SECTION 10.02. Similar Business Activities. Except as Roche Holdings, Inc. may otherwise agree in writing, (a) Roche shall not have a duty to refrain from engaging directly or indirectly in the same or similar business activities or lines of business as the Corporation, and (b) neither Roche nor any officer or director thereof shall be liable to the Corporation or its stockholders for breach of any fiduciary duty by reason of any such activities of Roche or of such person's participation therein. In the event that Roche acquires knowledge of a potential transaction or matter that may be a corporate opportunity for both Roche and the Corporation, Roche shall have no duty to communicate or offer such corporate opportunity to the Corporation and shall not be liable to the Corporation or its stockholders for breach of any fiduciary duty as a stockholder of the Corporation or controlling person of a stockholder by reason of the fact that Roche pursues or acquires such 7 8 corporate opportunity for itself, directs such corporate opportunity to another person or entity, or does not communicate information regarding, or offer, such corporate opportunity to the Corporation. SECTION 10.03. Corporate Opportunities. In the event that a director, officer or employee of the Corporation who is also a director, officer or employee of Roche acquires knowledge of a potential transaction or matter that may be a corporate opportunity for the Corporation and Roche (whether such potential transaction or matter is proposed by a third-party or is conceived of by such director, officer or employee of the Corporation), such director, officer or employee shall be entitled to offer such corporate opportunity to the Corporation or Roche as such director, officer or employee deems appropriate under the circumstances in his sole discretion, and no such director, officer or employee shall be liable to the Corporation or its stockholders for breach of any fiduciary duty or duty of loyalty or failure to act in (or not opposed to) the best interests of the Corporation or the derivation of any improper personal benefit by reason of the fact that (i) such director, officer or employee offered such corporate opportunity to Roche (rather than the Corporation) or did not communicate information regarding such corporate opportunity to the Corporation or (ii) Roche pursues or acquires such corporate opportunity for itself or directs such corporate opportunity to another person or does not communicate information regarding such corporate opportunity to the Corporation. SECTION 10.04. Deemed Consent of Stockholders. Any person or entity purchasing or otherwise acquiring any interest in any shares of capital stock of the Corporation shall be deemed to have notice of and to have consented to the provisions of this Article 10. SECTION 10.05. Definitions. For purposes of this Article 10 and Article 11 only, (i) the term "CORPORATION" shall mean the Corporation and all corporations, partnerships, joint ventures, associations and other entities in which the Corporation beneficially owns (directly or indirectly) fifty percent or more of the outstanding voting stock, voting power or similar voting interests, and (ii) the term "ROCHE" shall mean Roche Holdings, Inc. and all corporations, partnerships, joint ventures, associations and other entities (other than the Corporation, defined in accordance with clause (i) of this Section 10.05) that are "AFFILIATES" (as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) of Roche Holdings, Inc. SECTION 10.06. Termination; Binding Effect. Notwithstanding anything in this Certificate of Incorporation to the contrary, the foregoing provisions of this Article 10 shall expire on the date that Roche ceases to own beneficially Common Stock representing at least 5% of the number of outstanding shares of Common 8 9 Stock of the Corporation and no person who is a director or officer of the Corporation is also a director or officer of Roche. Neither such expiration, nor the alteration, amendment, change or repeal of any provision of this Article 10 nor the adoption of any provision of this Amended and Restated Certificate of Incorporation inconsistent with any provision of this Article 10 shall eliminate or reduce the effect of this Article 10 in respect of any matter occurring, or any cause of action, suit or claim that, but for this Article 10, would accrue or arise, prior to such expiration, alteration, amendment, repeal or adoption. SECTION 10.07. Article 11. The provisions of this Article 10 are in addition to the provisions of Article 11. ARTICLE 11 SECTION 11.01. Contracts Not Void. No contract, agreement, arrangement or transaction (or any amendment, modification or termination thereof) between the Corporation and Roche shall be void or voidable solely for the reason that Roche is a party thereto, or solely because any directors or officers of the Corporation who are affiliated with Roche are present at or participate in the meeting of the Board of Directors or committee thereof which authorizes the contract, agreement, arrangement, transaction, amendment, modification or termination or solely because his or their votes are counted for such purpose, but any such contract, agreement, arrangement or transaction (or any amendment, modification or termination thereof) shall be governed by the provisions of this Amended and Restated Certificate of Incorporation, the Corporation's Bylaws, Delaware Law and other applicable law. For purposes of this Article 11, the terms the "CORPORATION" and "ROCHE" have the meanings set forth in Section 10.05. SECTION 11.02. Quorum. Directors of the Corporation who are also directors or officers of Roche may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee that authorizes or approves any such contract, agreement, arrangement or transaction (or amendment, modification or termination thereof). Outstanding shares of Common Stock owned by Roche may be counted in determining the presence of a quorum at a meeting of stockholders that authorizes or approves any such contract, agreement, arrangement or transaction (or amendment, modification or termination thereof). 9 10 SECTION 11.03. No Liability For Good Faith Actions. Neither Roche nor any officer or director thereof shall be liable to the Corporation or its stockholders for breach of any fiduciary duty or duty of loyalty or failure to act in (or not opposed to) the best interests of the Corporation or the derivation of any improper personal benefit by reason of the fact that Roche or an officer of director thereof in good faith takes any action or exercises any rights or gives or withholds any consent in connection with any agreement or contract between Roche and the Corporation. No vote cast or other action taken by any person who is an officer, director or other representative of Roche, which vote is cast or action is taken by such person in his capacity as a director of this Corporation, shall constitute an action of or the exercise of a right by or a consent of Roche for the purpose of any such agreement or contract. SECTION 11.04. Deemed Consent by Stockholders. Any person or entity purchasing or otherwise acquiring any interest in any shares of capital stock of the Corporation shall be deemed to have notice of and to have consented to the provisions of this Article 11. SECTION 11.05. Contracts Covered. For purposes of this Article 11, any contract, agreement, arrangement or transaction with the Corporation or any corporation, partnership, joint venture, association or other entity in which the Corporation beneficially owns (directly or indirectly) fifty percent or more of the outstanding voting stock, voting power or similar voting interests shall be deemed to be a contract, agreement, arrangement or transaction with the Corporation. SECTION 11.06. Binding Effect. Neither the alteration, amendment, change or repeal of any provision of this Article 11 nor the adoption of any provision inconsistent with any provision of this Article 11 shall eliminate or reduce the effect of this Article 11 in respect of any matter occurring, or any cause of action, suit or claim that, but for this Article 11, would accrue or arise, prior to such alteration, amendment, change, repeal or adoption. SECTION 11.07. Article 10. The provisions of this Article 11 are in addition to the provisions of Article 10. 10 11 IN WITNESS WHEREOF, this Amended and Restated Certificate of Incorporation, having been duly adopted by the written consent of the sole stockholder of the Corporation in accordance with the provisions of Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware, has been executed this __th day of July, 1999. GENENTECH, INC. By: ------------------------------------- Name: Title: 11 EX-3.2 4 EXHIBIT 3.2 1 EXHIBIT 3.2 BYLAWS OF GENENTECH, INC. * * * * * ARTICLE 1 OFFICES SECTION 1.01. Registered Office. The registered office shall be Corporation Service Company, 1013 Centre Road, City of Wilmington, County of New Castle, State of Delaware. The name of its registered agent at such address is Corporation Service Company. SECTION 1.02. Other Offices. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require. SECTION 1.03. Books. The books of the Corporation may be kept within or without of the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE 2 MEETINGS OF STOCKHOLDERS SECTION 2.01. Time and Place of Meetings. All meetings of stockholders shall be held at such place, either within or without the State of Delaware, on such date and at such time as may be determined from time to time by the Board of Directors (or the Chairman in the absence of a designation by the Board of Directors). SECTION 2.02. Annual Meetings; Election of Directors. An annual meeting of stockholders, commencing with the year 2000, shall be held at such date and time as directors may determine to transact such business as may 2 properly be brought before the meeting. Prior to a Termination Event (as defined below), directors shall be nominated and elected at the annual meeting in accordance with Section 3.02 and Section 3.03. After a Termination Event has occurred, directors shall (subject to Section 3.03(c)) be elected by stockholders by ballot at the annual meeting, unless they are elected by written consent in lieu of an annual meeting as permitted by the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended ("DELAWARE LAW"). For purposes of these bylaws, a "TERMINATION EVENT" means the disposition by Roche and its "AFFILIATES" (as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) of beneficial ownership of Common Stock of the Corporation which disposition has the effect of causing Parent's Voting Interest (as defined herein) to be less than 40%. SECTION 2.03. Special Meetings. Special meetings of stockholders may be called by the Board of Directors or the Chairman of the Board and shall be called by the Secretary at the request in writing of holders of record of a majority of the outstanding capital stock of the Corporation entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. SECTION 2.04. Notice of Meetings and Adjourned Meetings; Waivers of Notice. (a) Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by Delaware Law, such notice shall be given not less than 10 nor more than 60 days before the date of the meeting to each stockholder of record entitled to vote at such meeting. Unless these bylaws otherwise require, when a meeting is adjourned to another time or place (whether or not a quorum is present), notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 30 days, or after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. (b) A written waiver of any such notice signed by the person entitled thereto, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Business 2 3 transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. SECTION 2.05. Quorum. Unless otherwise provided under the certificate of incorporation or these bylaws and subject to Delaware Law, the presence, in person or by proxy, of the holders of a majority of the outstanding capital stock of the Corporation entitled to vote at a meeting of stockholders shall constitute a quorum for the transaction of business. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders present in person or represented by proxy shall adjourn the meeting, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally notified. SECTION 2.06. Voting. (a) Unless otherwise provided in the certificate of incorporation and subject to Delaware Law, each stockholder shall be entitled to one vote for each outstanding share of capital stock of the Corporation held by such stockholder. Any share of capital stock of the Corporation held by the Corporation shall have no voting rights. Unless otherwise provided in Delaware Law, the certificate of incorporation or these bylaws, the affirmative vote of a majority of the shares of capital stock of the Corporation present, in person or by written proxy, at a meeting of stockholders and entitled to vote on the subject matter shall be the act of the stockholders. (b) Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to a corporate action in writing without a meeting may authorize another person or persons to act for him by written proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. SECTION 2.07. Action by Consent. (a) Unless otherwise provided in the certificate of incorporation, any action required to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special meeting of stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding capital stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered 3 4 office shall be by hand or by certified or registered mail, return receipt requested. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date for such meeting had been the date that written consents signed by a sufficient number of stockholders to take the action were delivered to the Corporation as provided in Section 2.07(b). (b) Every written consent shall bear the date of signature of each stockholder who signs the consent, and no written consent shall be effective to take the corporate action referred to therein unless, within 60 days of the earliest dated consent delivered in the manner required by this section and Delaware Law to the Corporation, written consents signed by a sufficient number of holders to take action are delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. SECTION 2.08. Organization. At each meeting of stockholders, the Chairman of the Board, if one shall have been elected, or in his absence or if one shall not have been elected, the director designated by the vote of the majority of the directors present at such meeting, shall act as chairman of the meeting. The Secretary (or in his absence or inability to act, the person whom the chairman of the meeting shall appoint secretary of the meeting) shall act as secretary of the meeting and keep the minutes thereof. SECTION 2.09. Order of Business; Conduct of Meetings. The order of business at all meetings of stockholders shall be as determined by the chairman of the meeting. In addition, the Board may adopt by resolution such rules and regulations for the conduct of meetings of stockholders as it shall deem appropriate. Except to the extent inconsistent with law and such rules and regulations as adopted by the Board, the chairman of any meeting of stockholders shall have the right and authority to convene and to adjourn the meeting, to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are appropriate for the proper conduct of the meeting. Such rules, regulations, or procedures, whether adopted by the Board or prescribed by the chairman of the meeting, may include, without limitation, the following: (i) the establishment of an agenda or order of business for the meeting; (ii) rules and procedures for maintaining order at the meeting and the safety of those present; (iii) limitations on attendance at or participation in the meeting to stockholders of record of the Corporation, their duly authorized and constituted 4 5 proxies or such other persons as the chairman of the meeting may determine; (iv) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (v) limitations on the time allotted to questions or comments by participants. The chairman of the meeting, in addition to making any other determinations that may be appropriate to the conduct of the meeting, shall, if the facts warrant, determine and declare to the meeting that a matter or business was not properly brought before the meeting and, if such chairman should so determine, declare to the meeting that any such matter or business not properly brought before the meeting shall not be transacted or considered. Unless and to the extent determined by the Board or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure. SECTION 2.10. Inspectors of Election. The Corporation may, and shall if required by law, in advance of any meeting of stockholders, appoint one or more inspectors of election, who may be employees of the Corporation, to act at the meeting or any adjournment thereof and to make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. In the event that no inspector so appointed or designated is able to act at a meeting of stockholders, the chairman of the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath to execute faithfully the duties of inspector with strict impartiality and according to the best of his or her ability. The inspector or inspectors so appointed or designated shall (i) ascertain the number of shares of capital stock of the Corporation outstanding and the voting power of each such share, (ii) determine the shares of capital stock of the Corporation represented at the meeting and the validity of proxies and ballots, (iii) count all votes and ballots, (iv) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors, and (v) certify their determination of the number of shares of capital stock of the Corporation represented at the meeting and such inspectors' count of all votes and ballots. Such certification and report shall specify such other information as may be required by law. In determining the validity and counting of proxies and ballots cast at any meeting of stockholders of the Corporation, the inspectors may consider such information as is permitted by applicable law. No person who is a candidate for an office at an election may serve as an inspector at such election. 5 6 ARTICLE 3 DIRECTORS SECTION 3.01. General Powers. Except as otherwise provided in Delaware Law or the certificate of incorporation, the business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. SECTION 3.02. Composition of Board of Directors; Terms of Directors. (a) Subject to the other provisions hereof, the number of directors comprising the Board shall be six, and shall include two nominees of Roche Holdings, Inc. ("ROCHE"), one executive officer of the Corporation nominated by the nominating or proxy committee, and three Independent Directors (as defined herein) nominated by the nominating or proxy committee. The Board shall at all times include at least two Independent Directors, and one executive officer of the Corporation. For purposes of these bylaws, the term "INDEPENDENT DIRECTOR" means a director of the Corporation who is not (i) an officer of the Corporation, (ii) an employee, director, principal stockholder or partner of Roche or any affiliate of Roche, or (iii) an employee, director, principal stockholder or partner of an entity (other than the Corporation or any of its subsidiaries) that was dependent upon Roche or any affiliate of Roche for more than 10% of its revenues or earnings in its most recent fiscal year. After a Termination Event has occurred, this Section 3.02(a) shall be of no further force or effect, and directors shall be elected as set forth in Section 2.02. (b) The directors of the Corporation shall be nominated as provided in these bylaws, and shall serve until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Certificate of Incorporation and these bylaws. The term of office of each director shall be one year, provided that this shall not prevent any director from serving multiple or successive terms. SECTION 3.03. Roche's Right to Proportional Representation. (a) Upon the request of Roche at any time by notice to the Corporation (a "GOVERNANCE NOTICE"), Roche shall be immediately entitled to representation on the Board such that Roche shall have a number of directors designated by Roche equal to Parent's Voting Interest times the total number of directors, rounded up to the next whole number if Parent's Voting Interest is greater than 50% and rounded down to the next whole number if Parent's Voting Interest is less than or equal to 50%. For purposes of these bylaws, "PARENT'S VOTING INTEREST" means the percentage of the outstanding common stock, par value $0.02 per share ("COMMON STOCK"), of the Corporation beneficially owned by Roche and its affiliates. 6 7 (b) Upon receipt of a Governance Notice, the Board and the Corporation shall immediately take or cause to be taken all action not previously taken to cause the numbers of directors constituting the Board to be increased, and to cause the Board to fill the vacancies created by any such increase by electing Roche's nominees for such vacancies, as necessary in order to achieve the proportionality required by Section 3.03(a). Any directors elected to fill a vacancy shall serve until the next annual meeting of stockholders. (c) After a Termination Event has occurred, Sections 3.03(a) and 3.03(b) shall be of no further force or effect, and Roche shall thereafter be entitled to nominate a number of directors (and their successors) which is proportional to Parent's Voting Interest, rounded down to the next whole number, until and unless Parent's Voting Interest is less than 5%. Both prior to and after a Termination Event, Roche may designate an affiliate of Roche to make nominations of directors and committee members on its behalf. SECTION 3.04. Committees. (a) The Board shall designate a nominating or proxy committee, an executive committee, an audit committee and a compensation committee. No action by any such committee shall be valid unless taken at a meeting for which adequate notice has been duly given to or waived by the members of such committee. Such notice shall include a description of the general nature of the business to be transacted at the meeting and no other business may be transacted at such meeting. Any committee member unable to participate in person at any meeting shall be given the opportunity to participate by telephone. (b) Any such committee, to the extent provided by resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to the following matter: (i) approving or adopting, or recommending to the stockholders, any action or matter expressly required by Delaware Law to be submitted to the stockholders for approval or (ii) adopting, amending or repealing any bylaw of the Corporation. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. The Corporation shall be governed by the provisions of Section 141(c)(2) of Delaware Law, as amended effective July 1, 1996. (c) Each committee of the Board (other than any special committee or committee of Independent Directors that may be constituted for purposes of making any determination provided for by agreement between the Corporation and Roche) shall at all times include at least one director designated by Roche 7 8 (and, following a Governance Notice, no less than a proportional number of directors designated by Roche). Any director designated by Roche to serve on any committee may designate as his or her alternate another director designated by Roche. (d) The nominating or proxy committee shall at all times have three members. At any time that Roche owns 80% or more of the TOTAL VOTING POWER of the Corporation stock (within the meaning of Section 1504 of the Internal Revenue Code of 1986, as amended), the nominating or proxy committee shall include two nominees of Roche and one Independent Director. At any time that Roche owns less than 80% of the total voting power, the nominating or proxy committee shall include (i) a number of nominees of Roche that is equal to the product of (A) the percentage owned by Roche of the total voting power and (B) three, rounded up to the next whole number if Roche's total voting power is greater than 50% and rounded down to the next whole number if Roche's total voting power is less than or equal to 50%, provided that (X) Roche shall at no time have more than two nominees, and (Y) if Roche's ownership of less than 80% of the total voting power is the result of a breach by the Corporation of any obligation under any agreement with Roche, the nominating or proxy committee shall include two nominees of Roche, and (ii) a number of Independent Directors equal to three minus the number of nominees of Roche determined pursuant to the preceding clause (i). (e) After a Termination Event has occurred, Sections 3.04(c) and 3.04(d) shall terminate and be of no further force or effect. SECTION 3.05. Nomination of Directors. The nominating or proxy committee shall require, for the nomination of any person not designated by Roche, the approval of a majority of the nominating or proxy committee. SECTION 3.06. Quorum and Manner of Acting. Unless the certificate of incorporation or these bylaws require a greater number, a majority of the total number of directors shall constitute a quorum for the transaction of business, and the affirmative vote of a majority of the directors present at meeting at which a quorum is present shall be the act of the Board of Directors. When a meeting is adjourned to another time or place (whether or not a quorum is present), notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Board of Directors may transact any business which might have been transacted at the original meeting. If a quorum shall not be present at any meeting of the Board of Directors the directors present thereat shall adjourn the meeting, from time to time, without notice other than announcement at the meeting, until a quorum shall be present. 8 9 SECTION 3.07. Time and Place of Meetings. The Board of Directors shall hold its meetings at such place, either within or without the State of Delaware, and at such time as may be determined from time to time by the Board of Directors (or the Chairman in the absence of a determination by the Board of Directors). SECTION 3.08. Annual Meeting. The Board of Directors shall meet for the purpose of organization, the election of officers and the transaction of other business, as soon as practicable after each annual meeting of stockholders, on the same day and at the same place where such annual meeting shall be held. Notice of such meeting need not be given. In the event such annual meeting is not so held, the annual meeting of the Board of Directors may be held at such place either within or without the State of Delaware, on such date and at such time as shall be specified in a notice thereof given as hereinafter provided in Section 3.10 herein or in a waiver of notice thereof signed by any director who chooses to waive the requirement of notice. SECTION 3.09. Regular Meetings. After the place and time of regular meetings of the Board of Directors shall have been determined and notice thereof shall have been once given to each member of the Board of Directors, regular meetings may be held without further notice being given. SECTION 3.10. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board or the President and shall be called by the Chairman of the Board, President or Secretary on the written request of three directors. Notice of special meetings of the Board of Directors shall be given to each director at least three days before the date of the meeting in such manner as is determined by the Board of Directors. SECTION 3.11. Action by Consent. Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. SECTION 3.12. Telephonic Meetings. Unless otherwise restricted by the certificate of incorporation or these bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or such committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 9 10 SECTION 3.13. Resignation. Any director may resign at any time by giving written notice to the Board of Directors or to the Secretary of the Corporation. The resignation of any director shall take effect upon receipt of notice thereof or at such later time as shall be specified in such notice; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 3.14. Vacancies. Except as otherwise provided in the certificate of incorporation or these bylaws, vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. Whenever the holders of any class or classes of stock or series thereof (or any particular holder or holders) are entitled to elect one or more directors by the certificate of incorporation or these bylaws, vacancies and newly created directorships of such class or classes or series may be filled by a majority of directors elected by such class or classes or series thereof (or particular holder or holders) then in office, or by a sole remaining director so elected. Each director so chosen shall hold office until his successor is elected and qualified, or until his earlier death, resignation or removal. If there are no directors in office, then an election of directors may be held in accordance with Delaware Law. SECTION 3.15. Removal. Directors may be removed only as provided in the Certificate of Incorporation. SECTION 3.16. Compensation. Unless otherwise restricted by the certificate of incorporation or these bylaws, the Board of Directors shall have authority to fix the compensation of directors, including fees and reimbursement of expenses. ARTICLE 4 OFFICERS SECTION 4.01. Principal Officers. The principal officers of the Corporation shall be a Chief Executive Officer, a Chief Operating Officer, a Chief Financial Officer, one or more Executive Vice Presidents, one or more Senior Vice Presidents, one or more Vice Presidents, a Treasurer and a Secretary who shall have the duty, among other things, to record the proceedings of the meetings of stockholders and directors in a book kept for that purpose. The Corporation may also have such other principal officers, including one or more Controllers, as the Board may in its discretion appoint. One person may hold the offices and 10 11 perform the duties of any two or more of said offices, except that no one person shall hold the offices and perform the duties of President and Secretary. SECTION 4.02. Election, Term of Office and Remuneration. The principal officers of the Corporation shall be elected annually by the Board of Directors at the annual meeting thereof. Each such officer shall hold office until his successor is elected and qualified, or until his earlier death, resignation or removal. The remuneration of all officers of the Corporation shall be fixed by the Board of Directors. Any vacancy in any office shall be filled in such manner as the Board of Directors shall determine. SECTION 4.03. Subordinate Officers. In addition to the principal officers enumerated in Section 4.01 herein, the Corporation may have one or more Assistant Treasurers, Assistant Secretaries and Assistant Controllers and such other subordinate officers, agents and employees as the Board of Directors may deem necessary, each of whom shall hold office for such period as the Board of Directors may from time to time determine. The Board of Directors may delegate to any principal officer the power to appoint and to remove any such subordinate officers, agents or employees. SECTION 4.04. Removal. Except as otherwise permitted with respect to subordinate officers, any officer may be removed, with or without cause, at any time, by resolution adopted by the Board of Directors. SECTION 4.05. Resignations. Any officer may resign at any time by giving written notice to the Board of Directors (or to a principal officer if the Board of Directors has delegated to such principal officer the power to appoint and to remove such officer). The resignation of any officer shall take effect upon receipt of notice thereof or at such later time as shall be specified in such notice; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 4.06. Powers and Duties. The officers of the Corporation shall have such powers and perform such duties incident to each of their respective offices and such other duties as may from time to time be conferred upon or assigned to them by the Board of Directors. 11 12 ARTICLE 5 GENERAL PROVISIONS SECTION 5.01. Fixing the Record Date. (a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than 60 nor less than 10 days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided that the Board of Directors may fix a new record date for the adjourned meeting. (b) In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than 10 days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by Delaware Law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by Delaware Law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. (c) In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, 12 13 conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than 60 days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. SECTION 5.02. Dividends. Subject to limitations contained in Delaware Law and the certificate of incorporation, the Board of Directors may declare and pay dividends upon the shares of capital stock of the Corporation, which dividends may be paid either in cash, in property or in shares of the capital stock of the Corporation. SECTION 5.03. Year. The fiscal year of the Corporation shall commence on January 1 and end on December 31 of each year. SECTION 5.04. Corporate Seal. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware". The seal may be used by causing it or a facsimile thereof to be impressed, affixed or otherwise reproduced. SECTION 5.05. Voting of Stock Owned by the Corporation. The Board of Directors may authorize any person, on behalf of the Corporation, to attend, vote at and grant proxies to be used at any meeting of stockholders of any corporation (except this Corporation) in which the Corporation may hold stock. SECTION 5.06. Amendments. These bylaws or any of them, may be altered, amended or repealed, or new bylaws may be made, by the stockholders entitled to vote thereon at any annual or special meeting thereof or by the Board of Directors, provided that Sections 2.02, 3.02, 3.03, 3.04, 3.05, 3.14, 3.15 and 5.06 of these bylaws may only be altered, amended, repealed or rescinded as provided in the Certificate of Incorporation. 13 EX-4.1 5 EXHIBIT 4.1 1 EXHIBIT 4.1 [FRONT OF STOCK CERTIFICATE] This certifies that ____________________ is the record holder of __________ ____________________________________________________ Seventy Shares of the Capital Stock of Genentech, Inc. transferable only on the books of the Corporation by the holder hereof in person or by Attorney upon surrender of this Certificate properly endorsed, or assigned. IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be signed by its duly authorized officers and its Corporate Seal to be hereunder affixed this ___ day of ____ A.D. 1999. 2 [BACK OF STOCK CERTIFICATE] For Value Received ____________ hereby sell, assign and transfer unto _______________________________ ____________________ Shares of the Capital Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ______________________________, Attorney to transfer the said Stock on the books of the within named Corporation with full power of substitution in the premises. Dated _______________________________ , 19___________ In presence of _________________________________________________________ EX-5 6 EXHIBIT 5 1 EXHIBIT 5 July 16, 1999 Genentech, Inc. 1 DNA Way South San Francisco, CA 94080-4990 Ladies and Gentlemen: We have acted as counsel to Genentech, Inc., a Delaware corporation ("Genentech"), in connection with the preparation of Genentech's Registration Statement on Form S-3 as amended (File No. 333-80601) (the "Registration Statement") filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Securities Act"), relating to the registration of shares (the "Shares") of common stock, par value $.02 per share, of Genentech to be sold by Roche Holdings, Inc. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments as we have deemed necessary for the purposes of rendering this opinion. In rendering this opinion we have assumed that prior to the offering of any of the Shares, the Registration Statement, as then amended, will have become effective under the Securities Act. On the basis of the foregoing, we are of the opinion that, when issued, the Shares will have been duly authorized, validly issued, fully paid and non-assessable. 2 2 July 16, 1999 We are members of the Bar of the State of New York and the foregoing opinion is limited to the laws of the State of New York, the federal laws of the United States of America and the General Corporation Law of the State of Delaware. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. We also consent to the reference to us under the caption "Legal Matters" in the Prospectus contained in this Registration Statement. Very truly yours, /s/ DAVIS POLK & WARDWELL -------------------------------- Davis Polk & Wardwell EX-10.1 7 EXHIBIT 10.1 1 EXHIBIT 10.1 DRAFT OF JULY 12, 1999 AFFILIATION AGREEMENT AFFILIATION AGREEMENT dated as of July __, 1999 between Genentech, Inc., a Delaware corporation (the "COMPANY") and Roche Holdings, Inc., a Delaware corporation ("ROCHE"). WHEREAS, the Amended and Restated Governance Agreement dated as of October 25, 1995 between Roche and the Company (the "TERMINATED GOVERNANCE AGREEMENT") was terminated pursuant to its terms on June 16, 1999; WHEREAS, Roche owns, as of the date hereof, all of the outstanding common stock, par value $0.02 per share, of the Company (the "COMMON STOCK"); WHEREAS, Roche expects to sell shares of Common Stock representing approximately __% of the Company's equity in a registered public offering (the "OFFERING"); WHEREAS, Roche and the Company desire to establish in this Agreement certain terms and conditions concerning the corporate governance of the Company after completion of the Offering; and WHEREAS, Roche and the Company also desire to establish in this Agreement certain terms and conditions concerning the acquisition and disposition of securities of the Company by Roche and its Affiliates (as defined herein) after completion of the Offering; NOW, THEREFORE, in consideration of the foregoing and the mutual promises and agreements contained herein, Roche and the Company hereby agree as follows: ARTICLE 1 DEFINITIONS SECTION 1.01. Definitions. (a) "AFFILIATE" and "AFFILIATE" have the meaning defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended (such Act, including the rules and regulations promulgated thereunder, the "1934 ACT"). 2 (b) "APPLICABLE STOCK" means, at any time, the (i) shares of Common Stock owned by Roche and its affiliates at such time that were owned on the date hereof, plus (ii) shares of Common Stock purchased by Roche and its affiliates pursuant to Section 4.04 of this Agreement, plus (iii) shares of Common Stock that were issued to Roche and its affiliates in respect of shares described in either clause (i) or clause (ii) in any reclassification, share combination, share subdivision, share dividend, share exchange, merger, consolidation or similar transaction or event. (c) "BENEFICIAL OWNERSHIP" has the meaning defined in Rule 13d-3 promulgated under the 1934 Act. (d) "CODE" means the Internal Revenue Code of 1986, as amended. (e) "EQUITY SECURITY" means any (A) voting stock of the Company (other than shares of voting stock not having the right to vote generally in any election of directors of the Company), (B) securities of the Company convertible into or exchangeable for such stock, and (C) options, rights and warrants issued by the Company to acquire such stock. (f) "INDEPENDENT DIRECTOR" means a director of the Company who is not (i) an officer of the Company, (ii) an employee, director, principal stockholder or partner of Roche or any affiliate of Roche, or (iii) an employee, director, principal stockholder or partner of an entity (other than the Company or any of its subsidiaries) that was dependent upon Roche or any affiliate of Roche for more than 10% of its revenues or earnings in its most recent fiscal year. (g) "MARKET PRICE" of any shares of Common Stock or Other Stock, as the case may be, on any date means (i) the average of the last sale price of such shares on each of the five trading days immediately preceding such date on the New York Stock Exchange, Inc. or, if such shares are not listed thereon, on the principal national securities exchange or automated interdealer quotation system on which such shares are traded or (ii) if such sale prices are unavailable or such shares are not so traded, the value of such shares on such date determined in accordance with agreed-upon procedures reasonably satisfactory to Roche and the Company. (h) "OTHER STOCK" means any class of the Company's capital stock other than Common Stock, and any other security of the Company that, in the opinion of Roche, will or is likely to be treated as stock for purposes of Section 1504 of the Code. 2 3 (i) "OWNERSHIP PERCENTAGE" means, at any time, the fraction, expressed as a percentage and rounded to the next highest thousandth of a percent, whose numerator is the aggregate Value of the Applicable Stock and whose denominator is the sum of the aggregate Value of the outstanding shares of Common Stock of the Company plus Repurchased Shares; provided, however, that any shares of Common Stock issued by the Company in violation of its obligations under Section 4.04 of this Agreement shall not be deemed outstanding for the purpose of determining the Ownership Percentage. (j) "PARENT'S VOTING INTEREST" means the percentage of the outstanding Common Stock beneficially owned by Roche and its affiliates. (k) "REPURCHASED SHARES" means the aggregate Value of shares of the Company's Common Stock that are, from and after the date hereof, repurchased by the Company from its shareholders, less the aggregate Value of shares of Common Stock (up to the aggregate Value so repurchased) that are re-issued from and after the date hereof upon the exercise of stock options or otherwise. (l) "VALUE" means, with respect to any share of stock, the value of such share determined by Roche under principles applicable for purposes of Section 1504 of the Code. ARTICLE 2 CORPORATE GOVERNANCE SECTION 2.01. Roche Approval Required for Certain Actions. The approval of the directors designated by Roche pursuant to the Company's bylaws shall be required to approve any of the following: (a) the acquisition by the Company of any business or assets that would constitute a substantial portion of the business or assets of the Company, whether such acquisition be by merger or consolidation or the purchase of stock or assets or otherwise; (b) the sale, lease, license, transfer or other disposal of all or a substantial portion of the business or assets of the Company other than in the ordinary course of business, other than any such sale, lease, license, transfer or other disposal which is subject to the other provisions hereof; 3 4 (c) the issuance of any Equity Securities or other capital stock of the Company, except for (i) issuances of shares of the Company's Common Stock, or options, warrants or rights to acquire, or securities convertible into or exchangeable for, such Common Stock pursuant to any employee compensation plan that has been approved by Roche not exceeding 5% of the voting stock, (ii) issuances thereof upon the exercise, conversion or exchange of any outstanding Equity Securities or other capital stock; and (iii) other issuances thereof during any 24 month period not exceeding 5% of the voting stock of the Company outstanding at the beginning of such 24 month period; and (d) the repurchase or redemption of any Equity Securities or other capital stock of the Company, other than redemptions required by the terms thereof and purchases made at fair market value in connection with any deferred compensation plan maintained by the Company. For purposes of clauses (a) and (b), unless a majority of Directors shall have made a contrary determination in good faith, a "substantial portion of the business or assets of the Company" shall mean a portion of the business or assets of the Company accounting for 10% of the consolidated total assets, contribution to net income or revenues of the Company and its consolidated subsidiaries. Following the giving of a Governance Notice (as defined in Section 3.03 of the Company's bylaws) , until the additional Roche designees shall have taken office as directors of the Company, the Directors shall not take any action, or fail to take any action, except in the ordinary course of business, without the consent of Roche. Roche agrees to use its best efforts to cause such designees to take office, and for any necessary filings to be made with respect thereto to be made, as promptly as practicable following such Governance Notice. SECTION 2.02. Licensing and Marketing Arrangements. Except as otherwise provided in the Amended and Restated Agreement between Genentech, Inc. and F. Hoffmann -- La Roche Ltd Regarding Commercialization of Genentech's Products Outside of the United States dated as of [Date], 1999 (the "MARKETING AGREEMENT"), the Company will not, and will not permit any of its subsidiaries to, enter into any material licensing or marketing agreement with respect to any products, processes, inventions or developments made by the Company or any subsidiary of the Company unless it shall have first negotiated in good faith with Roche for a reasonable period of not less than three or more than six months with a view towards reaching a mutually beneficial licensing or marketing agreement with respect to such products, processes, inventions or developments. 4 5 ARTICLE 3 REGISTRATION RIGHTS SECTION 3.01. Registration. (a) The Company agrees that upon the request of Roche it will file one or more registration statements (each a "REGISTRATION STATEMENT") under the Securities Act of 1933, as amended (the "1933 ACT") as to the number of shares of Common Stock specified in such request (the "REGISTERED SHARES"). Roche shall have the right to designate the underwriters for any public offering of Registered Shares. (b) The Company agrees to (i) use its best efforts to have any registration of the Registered Shares declared effective as promptly as practicable after the filing thereof and (ii) to keep such registration statement effective for a period sufficient to complete the distribution of the Registered Shares. The Company further agrees to supplement or make amendments to the Registration Statement, if required by (x) the registration form utilized by the Company for such registration or by the instructions applicable to such registration form, (y) the 1933 Act or the rules and regulations thereunder or (z) Roche (or any underwriter for Roche) with respect to information concerning Roche or such underwriter or the plan of distribution to be utilized with respect to the Registered Shares. The Company agrees to furnish to Roche copies of any such supplement or amendment prior to its being used or filed with the Securities and Exchange Commission (the "SEC"). SECTION 3.02. Registration Procedures. Subject to the provisions of Section 3.01 hereof, in connection with the registration of shares of Common Stock hereunder, the Company will as expeditiously as possible: (a) furnish to Roche, prior to the filing of a Registration Statement, copies of such Registration Statement as is proposed to be filed, and thereafter such number of copies of such Registration Statement, each amendment and supplement thereto (in each case including all exhibits thereto), the prospectus included in such Registration Statement (including each preliminary prospectus) and such other documents in such quantities as Roche may reasonably request from time to time in order to facilitate the disposition of the Registered Shares; (b) use all reasonable efforts to register or qualify the Registered Shares under such other securities or blue sky laws of such jurisdiction as Roche reasonably requests and do any and all other acts and things as may be reasonably necessary or advisable to enable Roche to consummate the disposition in such jurisdictions of the shares of Common Stock owned by Roche; provided that the Company will not be required to (i) qualify generally to do business in any 5 6 jurisdiction where it would not otherwise be required to qualify but for this subsection (b), (ii) subject itself to taxation in any such jurisdiction or (iii) consent to general service of process in any such jurisdiction; (c) use all reasonable efforts to cause the Registered Shares to be registered with or approved by such other governmental agencies or authorities as may be necessary by virtue of the business and operations of the Company to enable Roche to consummate the disposition of such shares of Common Stock; (d) notify Roche, at any time when a prospectus relating thereto is required to be delivered under the 1933 Act, of the happening of any event as a result of which the prospectus included in such Registration Statement or amendment contains an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and the Company will prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of the Registered Shares, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; (e) enter into customary agreements (including an underwriting agreement in customary form) and take such other actions as are reasonably required in order to expedite or facilitate the disposition of the Registered Shares; (f) make available for inspection by Roche, any underwriter participating in any disposition pursuant to such registration, and any attorney, accountant or other agent retained by any Roche or any such underwriter (collectively, the "INSPECTORS"), all financial and other records, pertinent corporate documents and properties of the Company (collectively, the "RECORDS") as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the officers, directors and employees of the Company to supply all information reasonably requested by any such Inspector in connection with such registration; provided that (i) records and information obtained hereunder shall be used by such persons only to exercise their due diligence responsibility and (ii) records or information which the Company determines, in good faith, to be confidential shall not be disclosed by the Inspectors unless (x) the disclosure of such Records or information is necessary to avoid or correct a misstatement or omission in the Registration Statement or (y) the release of such Records or information is ordered pursuant to a subpoena or other order from a court or governmental authority of competent jurisdiction. Roche shall use reasonable efforts, prior to any such disclosure described in (x) above, to inform the Company that such disclosure is necessary to avoid or correct a misstatement or omission in the Registration Statement. Roche further agrees that it will, upon 6 7 learning that disclosure of such Records or information is sought in a court or governmental authority, give notice to the Company and allow the Company, at the expense of the Company, to undertake appropriate action to prevent disclosure of the Records or information deemed confidential; (g) use all reasonable efforts to obtain a comfort letter from the independent public accountants for the Company in customary form and covering such matters of the type customarily covered by comfort letters as Roche reasonably requests; (h) otherwise use all reasonable efforts to comply with all applicable rules and regulations of the SEC, and make generally available to its security holders, as soon as reasonably practicable, an earnings statement covering a period of twelve months, beginning within three months after the effective date of the registration, which earnings statement shall satisfy the provisions of Section 11(a) of the 1933 Act and Rule 158 thereunder; and (i) use all reasonable efforts to cause all Registered Shares to be listed on each securities exchange on which similar securities issued by the Company are listed. SECTION 3.03. Conditions to Offerings. The obligations of the Company to take the actions contemplated by Sections 3.01 and 3.02 with respect to an offering of shares of Common Stock shall be subject to the condition that Roche shall conform to all applicable requirements of the 1933 Act and the 1934 Act with respect to the offering and sale of securities and advise each underwriter, broker or dealer (all of whom may be freely designated by Roche) through which any of the Registered Shares are offered that the Registered Shares are part of a distribution that is subject to the prospectus delivery requirements of the 1933 Act. The Company may require Roche to furnish to the Company such information regarding Roche or the distribution of the Registered Shares as the Company may from time to time reasonably request in writing, in each case only as required by the 1933 Act or the rules and regulations thereunder or under state securities or Blue Sky laws. Roche agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3.02(d) hereof, Roche will forthwith discontinue disposition of Registered Shares pursuant to the registration covering such shares of Common Stock until Roche's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3.02(d) hereof. 7 8 SECTION 3.04. Additional Conditions. The Company's obligations pursuant to Section 3.01 shall be suspended, for an aggregate period of up to sixty days in any 12-month period, if (i) the fulfillment of such obligations would require the Company to make a disclosure that would, in the reasonable good faith judgment of the Company's board of directors, be detrimental to the Company and premature, or (ii) the Company has filed a registration statement with respect to Equity Securities to be distributed in an underwritten public offering and it is advised by its lead or managing underwriter that an offering by Roche of the Registered Shares would materially adversely affect the distribution of such Equity Securities. Such obligations shall be reinstated (x) in the case of clause (i) above, upon the making of such disclosure by the Company (or, if earlier, when such disclosure would either no longer be necessary for the fulfillment of such obligations or no longer be detrimental), and (y) in the case of clause (ii) above, upon the conclusion of any period (not exceeding 6 months) during which the Company would not, pursuant to the terms of its underwriting arrangements, be permitted to sell the Registered Securities for its own account. SECTION 3.05. Registration Expenses. All expenses incident to the performance of or compliance with this Article by the Company, including, without limitation, all fees and expenses of compliance with securities or blue sky laws (including reasonable fees and disbursements of counsel in connection with blue sky qualifications of the Registered Shares), rating agency fees, printing expenses, messenger and delivery expenses, internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the fees and expenses incurred in connection with the listing of the securities to be registered on each securities exchange on which similar securities issued by the Company are then listed, fees and disbursements of counsel for the Company and its independent certified public accountants (including the expenses of any comfort letters required by or incident to such performance), securities acts liability insurance (if the Company elects to obtain such insurance), the reasonable fees and expenses of any special experts retained by the Company in connection with such registration and the fees and expenses of other persons retained by the Company (all such expenses being herein called "REGISTRATION EXPENSES"), will be borne by the Company, provided that any such expenses (other than internal expenses) of a registration shall be paid by Roche if such registration is the third (or any greater number) that the Company undertakes at Roche's request within a twelve month period. The Company shall pay any registration or filing fees payable under any federal or state securities or Blue Sky laws, provided that any such fees of a registration shall be paid by Roche if (i) such registration is the second (or any greater number) that the Company undertakes at Roche's request within a twelve month period or (ii) the Company has paid such fees pursuant to this sentence in connection with four previous registrations. The Company will not have any responsibility for any of the 8 9 expenses of the holders of Registrable Securities incurred in connection with any registration hereunder including, without limitation, underwriting fees, discounts and commissions and transfer taxes, if any, attributable to the sale of Registrable Securities, counsel fees of such holders and travel costs. SECTION 3.06. Indemnification; Contribution. (a) Indemnification by the Company. The Company agrees to indemnify, to the fullest extent permitted by law, Roche, its directors and officers and each person who controls Roche (within the meaning of either the 1933 Act or the 1934 Act) against any and all losses, claims, damages, liabilities and expenses (including attorneys' fees) caused by any untrue or alleged untrue statement of material fact contained in any Registration Statement, prospectus or preliminary prospectus (each as amended and or supplemented, if the Company shall have furnished any amendments or supplements thereto), or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of a prospectus, in the light of the circumstances under which they were made) not misleading, provided that the Company shall not be required to indemnify any holder or its officers, directors or controlling persons for any losses, claims, damages, liabilities or expenses resulting from any such untrue statement or omission if such untrue statement or omission is made in reliance on and conformity with any information with respect to such holder furnished to the Company by such holder expressly for use therein. In connection with an underwritten offering, the Company will indemnify each underwriter thereof, the officers and directors of such underwriter, and each person who controls such underwriter (within the meaning of either the 1933 Act or 1934 Act) to the same extent as provided above with respect to the indemnification of Roche; provided that such underwriter agrees to indemnify the Company to the same extent as provided below with respect to the indemnification of the Company by Roche. (b) Indemnification by Roche. In connection with any registration in which Roche is participating, Roche will furnish to the Company in writing such information and affidavits with respect to Roche as the Company reasonably requests for use in connection with any such registration, prospectus, or preliminary prospectus and agrees to indemnify the Company, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Company (within the meaning of either the 1933 Act or of the 1934 Act) to the same extent as the foregoing indemnity from the Company to such holder, but only with respect to information relating to such holder furnished to the Company in writing by Roche expressly for use in the Registration Statement, the prospectus, any amendment or supplement thereto, or any preliminary prospectus. (c) Conduct of Indemnification Proceedings. In case any proceeding (including any governmental investigation) shall be instituted involving any 9 10 person in respect of which indemnity may be sought pursuant to Section 3.06(a) or Section 3.06(b) such person (hereinafter called the indemnified party) shall promptly notify the person against whom such indemnity may be sought (hereinafter called the indemnifying party) in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and the indemnified party shall have been advised by counsel that representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all such indemnified parties, and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the indemnified parties, such firm shall be designated in writing by the indemnified parties. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the third sentence of this Section 3.06(c), the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement in entered into more than 30 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request or reasonably objected in writing, on the basis of the standards set forth herein, to the propriety of such reimbursement prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. 10 11 (d) Contribution. If the indemnification provided for in this Section 3.06 from the indemnifying party is unavailable to an indemnified party hereunder in respect of any losses, claims, damages, liabilities or expenses referred to in this Section 3.06, then the indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified parties in connection with the actions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified parties shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such indemnifying party or indemnified parties, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in Section 3.06(c), any legal or other fees or expenses reasonably incurred by such party in connection with any investigation or proceeding. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 3.06(d) were determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to in the immediately preceding paragraph. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. If indemnification is available under this Section 3.06, the indemnifying parties shall indemnify each indemnified party to the full extent provided in Sections 3.06(a) and 3.06(b) without regard to the relative fault of said indemnifying party or indemnified party or any other equitable consideration provided for in this Section 3.06(d). SECTION 3.07. Rule 144. The Company covenants that it will file the reports required to be filed by it under the 1933 Act and the 1934 Act and the rules and regulations adopted by the SEC thereunder, and it will take such further action as Roche may reasonably request, all to the extent required from time to time to enable Roche to sell shares of Common Stock without registration under the 1933 Act within the limitation of the exemptions provided by (a) Rule 144 under the 1933 Act, as such Rule may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the SEC. Upon the request of 11 12 Roche, the Company will deliver to Roche a written statement as to whether it has complied with such requirements. SECTION 3.08. No Inconsistent Agreements; etc. The Company will not hereafter enter into any agreement with respect to its securities which is inconsistent with the rights granted to Roche in this Agreement. ARTICLE 4 COVENANTS SECTION 4.01. Disposition by Roche. In the event that Roche and its affiliates shall dispose, in one or a series of integrally related transactions, of all or substantially all of their beneficial ownership of Common Stock to one or more Persons (a "SUCCESSOR"), (a) Roche shall (i) in the event that immediately prior to such transactions Roche and its affiliates own over 50% of the Company, either make or cause such Successor to make adequate arrangement for the simultaneous or prompt subsequent receipt by the holders of Common Stock of consideration for their Common Stock which (A) in a transaction in which the consideration is composed entirely of either (1) cash or (2) equity traded on a U.S. national securities exchange, is in the same form and amount(s) per share of Common Stock as that received by Roche and its affiliates, and (B) in any other type of transaction, either (1) is in the same form(s) and amount(s) per share of Common Stock as that received by Roche and its affiliates, or (2) has a value per share of Common Stock not less than the weighted average value (determined as of the time of receipt by Roche and its affiliates) per share of Common Stock received by Roche and such affiliates, such value to be determined by an investment bank of nationally recognized standing appointed by a committee of Independent Directors (an "INVESTMENT BANK") and (ii) cause such Successor to agree to be bound by the obligations of Roche under Sections 4.01, 4.02, and 4.03 hereof; and (b) the Company shall agree that such Successor shall succeed to the rights of Roche under Section 3.03 of the Company's bylaws. SECTION 4.02. Business Combinations with Roche. Roche agrees to require, as a condition to consummation of any merger of the Company with Roche or an affiliate of Roche or a sale of all or substantially all of the assets of the Company to Roche or an affiliate of Roche, that (i) such merger or sale receive the favorable vote of a majority of the shares of Common Stock voted at any meeting or adjournment thereof not beneficially owned by Roche and its affiliates, provided that no PERSON (as such term is defined in Section 16(a) of the 1934 Act) or GROUP (as defined in Section 13(d) of the 1934 Act) shall be entitled 12 13 to cast more than 5% of the votes cast at such meeting, or, in the event such a favorable vote is not obtained, (ii) the value of the consideration to be received by the holders of Common Stock other than Roche and its affiliates in connection with such merger or sale shall be equal to or greater than the average of the means of the ranges of fair values for the Common Stock as determined by two Investment Banks. Roche also agrees that in the 90 days immediately preceding any proposal by Roche or an affiliate for a merger with the Company, it will not sell any shares of Common Stock, and it will cause its affiliates not to sell any shares of Common Stock. Roche further agrees that in the event of any merger of the Company with Roche or an affiliate of Roche or a sale of all or substantially all of the assets of the Company to Roche or an affiliate of Roche, each unvested option then outstanding under the Company's 1990 Stock Option/Stock Incentive Plan, as amended, the Company's 1994 Stock Option Plan, as amended, the Company's 1996 Stock Option/Stock Incentive Plan and the Company's 1999 Stock Option Plan or any other option plan of the Company shall (at the election of Roche in its sole discretion) either (x) be accelerated so that each such option shall become exerciseable immediately prior to the consummation of such transaction for the full number of shares of Common Stock covered by such option, (y) become exchangeable upon the consummation of such transaction for deferred cash compensation (vesting on the same schedule as the shares of Common Stock covered by such option) having a value equal to the product of (A) the number of shares of Common Stock covered by such option and (B) the amount which Roche, in its reasonable judgment, considers to be equivalent in value to the consideration per share received by holders of shares of Common Stock other than Roche and its affiliates in the transaction, minus the exercise price per share under such option or (z) be canceled in exchange for a replacement option to purchase stock of the surviving corporation or any successor thereto in any such transaction with the terms of such options to provide value equivalent to that of the canceled option, such equivalent value to be determined in the reasonable discretion of Roche. SECTION 4.03. Compulsory Acquisitions. If Roche and its affiliates shall have owned, for more than two months, beneficial ownership of Common Stock in excess of 90% of the outstanding Common Stock, then Roche shall as soon as reasonably practicable effect a merger of the Company with Roche or an affiliate of Roche (either with the vote provided for in clause (i) of Section 4.02 or with the valuation provided for in clause (ii) of Section 4.02). In such event, each unvested option then outstanding under the Company's 1990 Stock Option/Stock Incentive Plan, as amended, the Company's 1994 Stock Option Plan, as amended, the Company's 1996 Stock Option/Stock Incentive Plan and the Company's 1999 Stock Option Plan or any other option plan of the Company shall (at the election of Roche in its sole discretion) either be treated in the manner set forth in clause (x), clause (y) or clause (z) under Section 4.02 above. 13 14 SECTION 4.04. Tax Consolidation Provisions. (a) Common Stock Option. The Company hereby grants to Roche, on the terms and conditions set forth herein, a continuing right (the "COMMON STOCK OPTION") to purchase from the Company, at the times set forth herein, such number of shares of Common Stock as is necessary to allow Roche and its affiliates to maintain the then-current Ownership Percentage. The Common Stock Option shall be assignable, in whole or in part and from time to time, by Roche to any affiliate of Roche. The exercise price for the shares of Common Stock purchased pursuant to the Common Stock Option shall be the Market Price of the Common Stock as of the date of first delivery of notice of each exercise of the Common Stock Option by Roche (or its permitted assignee hereunder) to the Company. (b) Other Stock Option. The Company hereby grants to Roche, on the terms and conditions set forth herein, a continuing right (the "OTHER STOCK OPTION" and, together with the Common Stock Option, the "OPTIONS") to purchase from the Company, at the times set forth herein, such number of shares of Other Stock as is necessary to allow Roche and its affiliates to own 80 percent of each class of outstanding Other Stock. The Other Stock Option shall be assignable, in whole or in part and from time to time, by Roche to any affiliate of Roche. The exercise price for the shares of Other Stock purchased pursuant to the Other Stock Option shall be the Market Price of the Other Stock as of the date of first delivery of notice of each exercise of the Other Stock Option by Roche (or its permitted assignee hereunder) to the Company. (c) Notice. At least 20 business days prior to the issuance of any shares of Common Stock or the first date on which any event could occur that, in the absence of a full or partial exercise of the Common Stock Option, would result in a reduction in the Ownership Percentage, the Company will notify Roche in writing (a "COMMON STOCK OPTION NOTICE") of any plans that the Company has to issue such shares or the date on which such event could first occur. At least 20 business days prior to the issuance of any shares of Other Stock or the first date on which any event could occur that, in the absence of a full or partial exercise of the Other Stock Option, would result in Roche and its affiliates owning less than 80 percent of each class of outstanding Other Stock, the Company will notify Roche in writing (an "OTHER STOCK OPTION NOTICE" and, together with or separate from a Common Stock Option Notice, an "OPTION NOTICE") of any plans that the Company has to issue such shares or the date on which such event could first occur. Each Option Notice must specify the date on which the Company intends to issue such additional shares or on which such event could first occur (such 14 15 issuance or event being referred to herein as an "ISSUANCE EVENT" and the date of such issuance or event as an "ISSUANCE EVENT DATE"), the number of shares the Company intends to issue or may issue and the other terms and conditions of such Issuance Event. (d) Exercise. The Common Stock Option may be exercised by Roche (or any Roche affiliate to which all or any part of the Common Stock Option has been assigned) for a number of shares equal to or less than the number of shares that are necessary for Roche and its affiliates to maintain, in the aggregate, the Ownership Percentage. The Other Stock Option may be exercised by Roche (or any Roche affiliate to which all or any part of the Other Stock Option has been assigned) for a number of shares equal to or less than the number of shares that are necessary for Roche and its affiliates to own, in the aggregate, 80 percent of each class of outstanding Other Stock. Each Option may be exercised at any time after receipt of an applicable Option Notice and prior to the applicable Issuance Event Date by the delivery to the Company of a written notice to such effect specifying (i) the number of shares of Common Stock or Other Stock (as the case may be) to be purchased by Roche or any of its affiliates, and (ii) a calculation of the exercise price for such shares. Upon any such exercise of either Option, the Company will, prior to the applicable Issuance Event Date, deliver to Roche (or any Roche affiliate designated by Roche), against payment therefor, certificates (issued in the name of Roche or its permitted assignee hereunder, or as directed by Roche) representing the shares of Common Stock or Other Stock (as the case may be) being purchased upon such exercise. Payment for such shares shall be made by wire transfer or intrabank transfer to such account as shall be specified by the Company, for the full purchase price for such shares. (e) Effect of Failure to Exercise. Any failure by Roche to exercise either Option, or any exercise for less than all shares purchasable under either Option, in connection with any particular Issuance Event shall not affect Roche's right to exercise the relevant Option in connection with any subsequent Issuance Event; provided, however, that, in the case of the Common Stock Option, the Ownership Percentage following such Issuance Event in connection with which Roche so failed to exercise such Option in full or in part shall be recalculated as set forth in the definition thereof. (f) Notwithstanding anything to the contrary herein, the Company and Roche acknowledge that the procedures set forth above relating to the exercise of the Common Stock Option shall not apply where the Company is not capable of giving advance notice of the relevant Issuance Event. Roche and the Company agree that, in such case, the Common Stock Option shall be exercisable at such times and in such manner as Roche and the Company may from time to time agree, and otherwise by Roche in a reasonable time and manner. 15 16 (g) The Company will adopt, implement as soon as practicable (but not more than 60 days after the Offering), and maintain a comprehensive, long-term common stock repurchase program (the "COMMON STOCK REPURCHASE PROGRAM") for general corporate purposes. The Company agrees that, pursuant to the Common Stock Repurchase Program, prior to any issuance of shares of Common Stock by the Company, it shall have repurchased a number of shares of Common Stock such that, immediately after such issuance, Roche's Ownership Percentage is equal to or greater than Roche's lowest Ownership Percentage at any time after the Offering but prior to such issuance; provided that (i) nothing in this Section 4.04(g) shall require the Company to take any action that would, in the Company's reasonable determination, adversely affect the Company's accounting for its stock option and employee stock purchase plans, and (ii) the parties shall cooperate to effect repurchases in a manner that will not have a substantial adverse economic impact on the Company. It is understood that any reduction in the Company's cash position as a result of such repurchases is not a "substantial adverse economic impact." (h) The Company shall: (i) provide to Roche at the end of each month, and at such other times as Roche may request, information as to (A) the total number of shares of Common Stock repurchased by the Company in the last month and on a year-to-date basis, (B) the total number of shares of Common Stock previously issued to date, (C) the Company's current forecasts as to future issuances, and (D) such other information as Roche may request in connection with Roche's ownership and tax consolidation objectives; and (ii) notify Roche within one business day after the date in any month in which the total number of shares of Common Stock issued by the Company in such month equals or exceeds 500,000. SECTION 4.05. No Inconsistent Actions. The Company agrees not to take, and agrees to cause its directors to refrain from taking, any action which could impede or delay the exercise by Roche of any of its rights under this Agreement. 16 17 ARTICLE 5 MISCELLANEOUS SECTION 5.01. Effectiveness. This agreement shall become effective only upon the closing of the Offering. SECTION 5.02. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including telecopy or similar writing) and shall be given: If to the Company, to: Genentech, Inc. One DNA Way South San Francisco, CA 94080 Attention: Dr. Arthur D. Levinson Facsimile: 650-225-2929 If to Roche, to: Roche Holdings, Inc. 1201 North Orange Street Wilmington, DE 19801 Attention: Corporate Secretary Facsimile: 302-425-4713 with a copy to: Roche Holding AG CH 4070 Basel Switzerland Attention: Dr. Franz B. Humer Facsimile: 011-41-61-688-5030 with a further copy to: Davis Polk & Wardwell 450 Lexington Avenue New York, NY 10017 Attention: Peter R. Douglas, Esq. Facsimile: 212-450-4800 17 18 or such other address or telecopier number as such party may hereafter specify for the purpose by notice to the other party hereto. Each such notice, request or other communication shall be effective (i) if given by telecopier, when such telecopy is transmitted to the telecopier number specified in this Section and the appropriate answerback is received or (ii) if given by any other means, when delivered at the address specified in this Section. SECTION 5.03. Amendments; No Waivers. (a) Any provision of this Agreement may be amended or waived if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by Roche and the Company, or in the case of a waiver, by the party against whom the waiver is to be effective. (b) No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 5.04. Specific Performance. The Company acknowledges and agrees that Roche's and the Company's respective remedies at law for a breach or threatened breach of any of the provisions of this Agreement would be inadequate and, in recognition of that fact, agrees that, in the event of a breach or threatened breach by the Company or Roche of the provisions of this Agreement, in addition to any remedies at law, Roche and the Company, respectively, without posting any bond shall be entitled to obtain equitable relief in the form of specific performance, a temporary restraining order, a temporary or permanent injunction or any other equitable remedy which may then be available. SECTION 5.05. Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of the other party hereto except as provided herein. SECTION 5.06. Governing Law. This Agreement shall be construed in accordance with and governed by the law of the State of Delaware. SECTION 5.07. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 18 19 SECTION 5.08. Termination. This Agreement (other than Article 3 and Sections 4.01, 4.02, 4.03, 4.04(a), 4.04(b), 4.04(c), 4.04(d), 4.04(e), 4.04(f), and 4.05) will terminate at such time as Roche and its affiliates dispose of beneficial ownership of Common Stock of the Company which disposition has the effect of causing Parent's Voting Interest to be less than 40% (a "TERMINATION EVENT"). 19 20 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date first above written. GENENTECH, INC. By -------------------------------------- Name: Title: ROCHE HOLDINGS, INC. By -------------------------------------- Name: Title: 20 EX-10.2 8 EXHIBIT 10.2 1 EXHIBIT 10.2 AMENDED AND RESTATED AGREEMENT BETWEEN GENENTECH, INC. AND F. HOFFMANN-LA ROCHE LTD REGARDING COMMERCIALIZATION OF GENENTECH'S PRODUCTS OUTSIDE THE UNITED STATES 2 TABLE OF CONTENTS Whereas Clauses Article I - Definitions 1. Affiliate...................................................3 2. Agreement...................................................3 3. Asia........................................................3 4. Canada Products.............................................3 5. Clinical Requirements.......................................3 6. Collaborative Countries.....................................3 7. Commercial Requirements.....................................4 8. DNase.......................................................4 9. Dossier.....................................................4 10. Entry into Man .............................................4 11. Financial Appendix..........................................4 12. First Commercial Introduction...............................4 13. Effective Date..............................................4 14. GENENTECH...................................................4 15. Genentech Canada Ltd........................................4 16. Genentech Europe Limited ................................4 17. Roche Territory's Fully Burdened Manufacturing Cost.........5 18. Genentech Product...........................................5 19. Governance Agreement........................................5 20. IDEC Agreement..............................................5 21. IDEC Product................................................5 22. IGF-1 ......................................................5 23. In-Licensed Product ........................................5 24. Know-How ...................................................5 25. Manufacturing Technology....................................6 26. Net Sales...................................................6 27. NGF ........................................................6 28 Party.......................................................6 29. Patents.....................................................6 30. Phase II Completion Date....................................6 31. Phase III Trial.............................................6 32. Product.....................................................6 33. Registration................................................7 34. Restated Date ..............................................7 35. ROCHE.......................................................7 36. Roche Territory.............................................7
3 37. Scios Nova Agreement........................................7 38. Scios Product ..............................................7 39. Small Molecule Product......................................7 40. Trademark...................................................7 41. Valid Claim.................................................7 Article II - Licenses, Options, Know-How and Trademarks 1. Licenses for Canada Products and DNase......................7 2. Option for License for Other Products.......................8 3. Exercise of Option for License for Other Products...........9 4. License to Know-How and Option for License to Know-How...............................................10 5. License to Trademark and Option for License to Trademark..............................................11 6. Standard of Effort.........................................11 7. Reporting on Commercialization Progress....................11 8. License to Genentech.......................................12 9. Future In-Licenses.........................................13 10. IIbIIIa and Ras Farnesyltransferase Collaborations.........13 11. IIbIIIa Collaboration......................................13 Article III - Commercialization Committees 1. Commercialization Committee................................13 2. Management Committee.......................................14 3. Development Committee......................................14 4. Finance Committee..........................................14 Article IV - Development and Marketing 1. Development................................................14 2. Development Costs..........................................15 3. Marketing..................................................15 Article V - Production and Supply 1. Production of Product......................................15 2. Supply of Clinical Requirements........................... 15 3. Supply of Commercial Requirements..........................16 4. Supply Agreement...........................................16 5. Amendments to DNase Supply Agreement.......................16 6. Supply of Scios Product....................................18 7. Supply of IDEC Product.....................................19
4 8. Supply of In-Licensed Product..............................19 9. Supply of Small Molecule Product...........................19 10. Manufacturing Process and Facilities.......................19 11. Additional Capital Requirements............................20 12. Term of Supply Obligation..................................20 Article VI - Payments, Margins and Royalties 1. Payment for Product Requirements...........................20 2. Invoices and Method of Payment of Roche Territory's Fully Burdened Manufacturing Cost and Margin...........21 3. Royalties on Sales of DNase................................21 4. Royalties and Other Payments on Sale of Canada Products..............................................21 5. Royalties on Sale of Genentech Products....................22 6. Royalties and Other Payments on Sale of Scios Product...............................................22 7. Royalties and Other Payments on Sale of IDEC Product...............................................23 8. Royalties and Other Payments on Sale of In-Licensed Product...............................................24 9. Calculation of Aggregate Net Sales.........................24 10. Timing of Royalty Payments.................................24 11. Restrictions on Transfer of Funds..........................25 13. Records Regarding Royalties................................26 14. Royalty for Use of Trademark...............................26 15. Generic Competition........................................26 16. Royalty Term if ROCHE Becomes Minority Shareholder................................................26 Article VII - Transaction Provisions 1. General....................................................26 2. Personnel of Genentech Canada, Inc., Genentech Europe Limited and Genentech Ltd. (Japan)..............27 3. Records and Property Leases................................27 4. Transfer of Dossier and Registration.......................27 Article IX - Patents, Inventions and Trademarks 1. Sole Inventions............................................28 2. Joint Inventions...........................................28 3. Patent Infringement........................................29 4. Third Party Patents........................................30
5 5. Reporting on Patent Status.................................30 6. Trademark..................................................31 Article X - Confidentiality and Publications 1. Confidential Information...................................31 2. Publications...............................................31 3. Restrictions on Transfer of Proprietary Materials..........32 Article XI - Liability 1. No Liability...............................................32 2. Indemnification by ROCHE...................................32 3. Indemnification By GENENTECH...............................32 Article XII - Term and Termination 1. Term.......................................................33 2. Termination By ROCHE.......................................33 3. Termination By GENENTECH...................................34 4. Termination of Development/Commercialization...............34 5. Termination for Breach.....................................35 6. Certain Proceedings........................................36 7. Termination For Change in Ownership........................36 8. Survival of Terms..........................................36 Article XIII - Miscellaneous 1. Disclaimer of Certain Warranties...........................36 2. Entire Agreement, Amendment................................36 3. Failure to Enforce.........................................37 4. Force Majeure..............................................37 5. Arbitration................................................37 6. Notices....................................................38 7. Use of Names...............................................39 8. Successors and Assigns.....................................39 9. Headings...................................................39 10. Counterparts...............................................39 11. Severability...............................................39 12. Governing Law..............................................39 13. Relationship...............................................40
6 Appendix A - Financial Appendix...........................................41 Appendix B - Article II Countries.........................................42
7 AMENDED AND RESTATED AGREEMENT Effective as of the Effective Date and Amended and Restated as of the Restatement Date Among F. Hoffmann-La Roche Ltd, Grenzacherstrasse 124, CH 4070 Basel, Switzerland and Genentech, Inc., 1 DNA Way, South San Francisco, California, USA 94080, Genentech Europe Limited, Reid House, 31 Church Street, Hamilton, Bermuda HM FXV and Genentech Biopharmaceuticals Limited, Reid House, 31 Church Street, Hamilton, Bermuda HM FXV. WHEREAS, GENENTECH possesses rights outside the United States in and to certain pharmaceutical products; WHEREAS, GENENTECH wishes to have certain pharmaceutical products developed and marketed outside the United States; WHEREAS, ROCHE has considerable knowledge in developing, registering, manufacturing, formulating and filling, promoting, detailing, distributing and marketing pharmaceutical products in all of the significant countries outside the United States that utilize pharmaceutical products, has in place in those countries a well-experienced staff for performing these activities, and can perform these activities in a diligent and aggressive manner for GENENTECH's pharmaceutical products; WHEREAS, GENENTECH and ROCHE believe that this Agreement covering the development, registration, manufacture, supply, formulation and filling, promotion, detailing, distribution and marketing of certain of GENENTECH's products outside the United States will be desirable and compatible with both GENENTECH's and ROCHE's business objectives with respect to such products; 8 WHEREAS, GENENTECH believes that this Agreement would provide an economic benefit to GENENTECH and speed up availability of unmarketed pharmaceutical products of GENENTECH outside the United States and assist GENENTECH in defraying the substantial costs associated with the development of such products in the United States; WHEREAS, GENENTECH and ROCHE intend that this Agreement should cover the development, marketing and supply of certain GENENTECH pharmaceutical products outside the United States and that this Agreement supersedes the following agreements: Agreement Between F. Hoffmann-La Roche Ltd, Genentech, Inc. and Genentech Europe Limited Regarding Commercialization of DNase in Collaborative Countries; and Agreement Between F. Hoffmann-La Roche Ltd, Genentech, Inc., and Genentech Europe Limited Regarding Commercialization of DNase in Rest Of World; Agreement Among F. Hoffmann-La Roche Ltd, Nippon Roche K.K., Genentech, Inc., and Genentech Biopharmaceuticals Limited Regarding Commercialization of DNase in Japan; WHEREAS, GENENTECH and ROCHE intend that this Agreement should not cover the development, marketing and supply of certain GENENTECH or jointly developed pharmaceutical products and that this Agreement does not supersede the following Agreements: Supply Agreement Between F. Hoffmann-La Roche Ltd, Genentech, Inc. and Genentech Europe Limited Regarding DNase in Collaborative Countries, Rest of World and Japan ("DNASE SUPPLY AGREEMENT") except that the terms of such Agreement shall be expanded to include the supply of DNase in Canada; Joint Research and Development Agreement between F. Hoffmann-La Roche Ltd, Hoffmann-La Roche, Inc. and Genentech, Inc. Regarding LFA/ICAM Antagonists; the TNF-Receptor Fusion Protein Agreement between Genentech, Inc., F. Hoffmann-La Roche Ltd, and Hoffmann-La Roche, Inc. and the Development Agreement Between Genentech, Inc. and Hoffmann-La Roche, Inc., dated January 6, 1980 concerning interferon alpha and beta; Joint Research and Development Agreement between F. Hoffmann-La Roche Ltd. and Hoffmann-La Roche, Inc. and Genentech, Inc. Regarding IL-8 Molecules (expired); Small Molecule Screening and Collaboration Agreement between F. Hoffmann-La Roche Ltd. and Genentech, Inc.; Joint Research and Development Agreement among F. Hoffmann-La Roche Ltd, Hoffmann-La Roche Inc. and Genentech, Inc. regarding Anti-Coagulants effective February 10, 1995; and Agreement among F. Hoffmann-La Roche Ltd and Genentech, Inc. regarding Anti-Her2 effective July 6, 1998; WHEREAS, Roche Holding Ltd, a corporation organized under the laws of Switzerland, and Genentech, Inc. concluded, effective September 8, 1990, a Mutual Confidentiality Agreement (the "MUTUAL CONFIDENTIALITY AGREEMENT") covering the ongoing disclosure of all confidential scientific, financial, technical and business information of any nature in any tangible form of expression among Genentech, Inc. on 2 9 the one hand and Roche Holding Ltd and its subsidiaries and affiliates throughout the world, except Genentech, Inc., on the other hand. WHEREAS, Roche Holding Ltd and Genentech, Inc. concluded effective July 17, 1991 a Mutual Agreement for Supply of Research Material covering the ongoing transfer of proprietary materials, substances, reagents and the like among Genentech, Inc. on the one hand and Roche Holding Ltd and its subsidiaries and affiliates throughout the world, except Genentech, Inc., on the other hand. WHEREAS, GENENTECH and ROCHE amended this Agreement at a meeting in London on May 1, 1997 and made additional amendments with respect to the commercialization of the GP-IIbIIIa antagonist, designated Xubix, pursuant to a letter agreement dated May 29, 1998. NOW, THEREFORE, THE PARTIES HERETO AGREE AS FOLLOWS: ARTICLE I - DEFINITIONS 1. The term "AFFILIATE" shall mean -- (a) an organization fifty (50%) percent or more of the voting stock of which is owned and/or controlled directly or indirectly by either Party; (b) an organization which directly or indirectly owns and/or controls fifty percent (50%) or more of the voting stock of either Party; (c) an organization which is directly or indirectly under common control of either Party through common share holdings. The foregoing notwithstanding, neither Party shall be considered an Affiliate of the other Party or of any other Party's Affiliates. 2. The term "AGREEMENT" shall mean this Agreement, including all Appendices hereto, together with any valid amendments or modifications of the foregoing, and any agreements or plans entered into in connection with this Agreement. 3. The term "ASIA" shall mean the countries of Japan, Bangladesh, Myanmar, Cambodia, Indonesia, People's Republic of China, Hong Kong, Republic of Korea, Laos, Malaysia, Papua New Guinea, Philippines, Singapore, Sri Lanka, Republic of China (Taiwan) and Thailand and the territories and possessions of each. 4. The term "BULK PRODUCT" shall have the definition set forth in the definition of "Product." 3 10 5. The term "CANADA PRODUCTS" shall mean the pharmaceutical products Activase(R) tissue plasminogen activator, Protropin(R) and Nutropin(R) human growth hormone, Actimmune(R) interferon gamma and Pulmozyme(R) dornase alpha each as sold in Canada. 6. The term "CLAIMS" shall have the meaning set forth in Article XI, Sections 2 and 3 of this Agreement. 7. The term "CLINICAL REQUIREMENTS" shall mean those quantities of a Product reasonably required by a Party for the conduct of preclinical and clinical studies of such Product in that Party's Territory. The term Clinical Requirements as used herein with respect to a Party shall also include the Clinical Requirements of that Party's licensees, if any. 8. The term "COLLABORATIVE COUNTRIES" shall mean Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Ireland, Luxembourg, Netherlands, Norway, Portugal, Spain, Switzerland, Sweden, United Kingdom and any additional countries that may subsequently become members of the EU. 9. The term "COMMERCIAL REQUIREMENTS" shall mean those quantities of a Product reasonably required by a Party for promotion and sale of such Product in the its Territory. The term Commercial Requirements as used herein with respect to a Party shall also include the Commercial Requirements of that Party's licensees, if any. 10. The term "DEVELOPMENT COSTS" shall have the meaning set forth in the Financial Appendix. 11. The term "DNASE" shall mean the protein, DNase, as defined in the DNase Supply Agreement. 12. The term "DNASE SUPPLY AGREEMENT" shall have the meaning set forth in the preamble of this Agreement. 13. The term "DOSSIER" shall mean the document or documents filed with and approved by the government or health authority in a country in the Roche Territory for purposes of registration of a Product for sale in such country. 14. The term "EFFECTIVE DATE" shall mean the date that the Amendment and Restatement of Article Third of the Certificate of Incorporation of Genentech, Inc. amending the terms of the Redeemable Common Stock, par value $0.02, of GENENTECH became effective, i.e., October 25, 1995. 4 11 15. The term "ENTRY INTO MAN" shall mean the occurrence of Genentech's official decision to file an Investigational New Drug exemption application (an "IND") with the U.S. Food and Drug Administration. 16. The term "FINANCIAL APPENDIX" shall mean Appendix A to this Agreement. 17. The term "FINISHED PRODUCT" shall have the meaning set forth in the definition of "Product." 18. The term "FIRST COMMERCIAL INTRODUCTION" shall mean the first date upon which a Product is shipped commercially by ROCHE to an independent third party in a country in the Roche Territory, after formal marketing approval in that country, including any required price approval, has been granted from the relevant authority in that country for that Product. 19. The term "GENENTECH" shall mean Genentech, Inc. and, where appropriate, its affiliates. 20. The term "GENENTECH CANADA, INC." shall mean that Affiliate of Genentech, Inc. located at 1100 Burloak Drive, Fifth Floor, Burlington, Ontario L7L 6B2 and organized as Genentech Canada, Inc. under the laws of Canada. 21. The term "GENENTECH EUROPE LIMITED" shall mean that Affiliate of Genentech, Inc. located at 31 Church Street, Hamilton, Bermuda HM FX and organized as Genentech Europe Limited under the laws of Bermuda. 22. The term "GENENTECH'S FULLY BURDENED MANUFACTURING COST" shall have the meaning set forth in the Financial Appendix. 23. The term "GENENTECH PRODUCT" shall mean a Product for which GENENTECH (i) has an ownership interest outside the United States as of April 12, 1995 or (ii) thereafter has or acquires an ownership interest during the term of this Agreement but does not include Canada Products, DNase, IDEC Product, Scios Product and In-Licensed Products, human growth hormone products, tissue plasminogen activator products and interferon gamma products. 24. The term "GLOBAL DEVELOPMENT COSTS" shall have the meaning set forth in the Financial Appendix. 25. The term "GOVERNANCE AGREEMENT" shall mean the Governance Agreement entered into between Roche Holdings, Inc., a Delaware corporation, and Genentech, Inc. on September 7, 1990 as amended and restated on October 25, 1995 and as the same may be further amended by the Parties, or any agreement which supercedes or replaces that agreement. 5 12 26. The term "IDEC AGREEMENT" shall mean the Collaboration Agreement between Genentech, Inc. and IDEC Pharmaceuticals Corporation, effective as of March 16, 1995. 27. The term "IDEC PRODUCT" shall mean all of those products which are the subject of the IDEC Agreement. 28. The term "IND" shall have the meaning set forth in the definition of Entry Into Man. 29. The term "IIBIIIA AGREEMENT" shall mean the Joint Research and Development Agreement, dated January 7, 1993, between F. Hoffmann-La Roche Ltd, Hoffmann La-Roche Inc. and Genentech, Inc. regarding IIbIIIa Antagonists. 30. The term "IN-LICENSED PRODUCT" shall mean any Product to which, subsequent to April 12, 1995, GENENTECH acquires rights in the Roche Territory by means of a patent and/or knowhow license from a third party. 31. The term "KNOW-HOW" shall mean proprietary technical information, know-how, data, test results, knowledge, techniques, discoveries, inventions, specifications, designs, regulatory filings, and other information (whether or not patentable) which are now and, unless specified otherwise, hereafter during the term of this Agreement are in the possession or control of a Party and are specifically related to a Product or to the development, manufacture, use or sale of a Product of that Party; provided, however, that Know-How shall not include any of the foregoing (i) which are now or hereafter in the possession or control of a Party as a result of a license taken from a third party and which a Party is not free to transfer or license to the other Party or which a Party may transfer or license but such transfer or license would necessitate the payment of a fee or royalty to the licensor (unless provision is made hereunder for the payment of such fee or royalty) or (ii) which are generally ascertainable from publicly available information. 32. The term "MUTUAL CONFIDENTIALITY AGREEMENT" shall have the meaning set forth in the preamble of this Agreement. 33. The term "MANUFACTURING TECHNOLOGY" shall mean all Know-How of a Party then existing which is necessary to make or have made a Product in the manner that such Product is then manufactured by the Party to produce Clinical Requirements or to produce Commercial Requirements, as applicable. 34. The term "NET SALES" shall have the meaning set forth in the Financial Appendix. 6 13 35. The term "OPTION EXTENSION FEE" shall mean the nonrefundable amount of $10,000,000 U.S. which is to be paid to GENENTECH by ROCHE within ten (10) days of ROCHE's determination with respect to a Product not to exercise its option for a right and license under Article II, Section 2 (a) after the Phase II Completion Date for that Product. 36. The term "PARTY" shall mean either GENENTECH or ROCHE, and when used in the plural, shall mean both of them. 37. The term "PATENTS" shall mean any and all patent applications and patents (including inventor's certificates), including any substitutions, extensions, reissues, renewals, divisions, continuations or continuations-in-part thereof or therefor covering a Product, its administration, formulation or clinical use, which a Party now or hereafter during the term of this Agreement owns or controls or with respect to which a Party has the right to grant licenses or sublicenses without the payment of a fee or royalty (unless provision is made hereunder for the payment of such fee or royalty) to the licensor, but only to the extent they specifically cover a Product or the manufacture, use or sale of a Product. 38. The term "PHASE II COMPLETION DATE" shall mean the date by which GENENTECH, in its reasonable judgement, has clinical trial data and other information sufficient to undertake a Phase III Trial in the USA. 39. The term "PHASE III COMPLETION DATE" shall mean the date by which a Phase III Trial is completed with respect to a Product, and the results of that Phase III Trial are known, available and have been analyzed and, in Genentech's reasonable judgement, allow filing for a Biologics License Application or New Drug Application for that Product in the USA. 40. The term "PHASE III TRIAL" shall mean a controlled study in humans of the efficacy and safety of a Product which is prospectively designed to demonstrate statistically whether the Product is effective for use in a particular indication in a manner sufficient to obtain regulatory approval to market that Product or which is sufficient to permit a filing with the competent authorities for a Registration in the USA. 41. The term "PRODUCT" shall mean any human pharmaceutical formulation of a compound for which a Party has an ownership interest as of April 12, 1995 or thereafter acquires an ownership interest or rights by means of a patent or knowhow license during the term of this Agreement. In the case of GENENTECH, the term Product shall include Canada Products, Genentech Products, IDEC Product, Scios Product, In-Licensed Products and DNase. The term Product shall also include: (a) all bulk forms of a Product ("BULK PRODUCT"); (b) Product which has been vialed but is not finished or packaged ("VIALED 7 14 PRODUCT"); and (c) finished, packaged final dosage units of a Product ("FINISHED PRODUCT"). The term Product shall include not only the specific molecule involved but molecules derived from that molecule whether by addition or deletion of other chemical subunits. 42. The term "REGISTRATION" shall mean the official approval by the government or health authority or similar entity in one or more countries in the Roche Territory which is required for a Product to be offered for sale in that country or those countries, including such authorizations as may be required for the production, importation, pricing and sale of that Product to the extent they are needed for that Product to be offered for sale in that country or those countries. 43. The term "RESTATEMENT DATE " shall mean ______________, 1999. 44. The term "ROCHE" shall mean F. Hoffmann-La Roche Ltd and its Affiliates unless otherwise specified in this Agreement. 45. The term "ROCHE TERRITORY" shall mean all countries of the world except the United States and its territories and possessions. 46. The term "SCIOS NOVA AGREEMENT " shall mean the Collaboration Agreement between Genentech, Inc. and Scios Nova, Inc. effective as of December 30, 1994. 47. The term "SCIOS PRODUCT" shall mean all of those products which are the subject of the Scios Nova Agreement. 48. The term "SMALL MOLECULE PRODUCT" shall mean a synthetic molecule that is not a protein or peptide. 49. The term "TRADEMARK" shall mean the trademarks owned, registered, maintained or used by GENENTECH in connection with a Product. 50. The term "UNITED STATES" shall mean, unless otherwise indicated, the United States and its territories and possessions. 51. The term "VALID CLAIM" shall mean a subsisting claim of an issued and unexpired Patent that has not been held invalid, unpatentable or unenforceable by a decision of a governmental body or court of competent jurisdiction, that is unappealable or unappealed within the time allowed for appeal, and that has not been rendered unenforceable through disclaimer or otherwise. 52. The term "VIALED PRODUCT" shall have the meaning set forth in the definition of "Product." 8 15 53. The term "XUBIX" shall mean the specific IIaIIIb antagonist currently designated by the trademark Xubix, and any formulations thereof. ARTICLE II - LICENSES, OPTIONS, KNOW-HOW AND TRADEMARKS 1. License for Canada Products and DNase. (a) Subject to the terms and conditions of this Agreement, GENENTECH hereby grants to ROCHE a sole and exclusive right and license under GENENTECH's Patents, including the right to sublicense others with GENENTECH's prior consent, which consent shall not be unreasonably withheld, to register, use, sell and market (including the right to detail and promote) Canada Products in Canada and DNase in the Roche Territory. (b) Subject to the terms and conditions of this Agreement, GENENTECH hereby grants to ROCHE a sole and exclusive right and license under GENENTECH's Patents, including the right to sublicense others with GENENTECH's prior consent, which consent shall not be unreasonably withheld, for each Canada Product in Canada and DNase in the Roche Territory, dependent on the Parties' mutual agreement as to whether GENENTECH will supply Vialed Product or Bulk Product (i) to make and/or have made Finished Product from Vialed Product or (ii) to make and/or have made Vialed Product from Bulk Product. 2. Option for License for Other Products. (a) Subject to the terms and conditions of this Agreement, GENENTECH hereby grants to ROCHE an option on a Product-by-Product basis, exercisable for any Product at (i) such Product's Entry Into Man; (ii) at the first Phase II Completion Date for such Product, or (iii) if ROCHE has paid GENENTECH the Option Extension Fee, at the Phase III Completion Date for such Product for a sole and exclusive (to the extent available) right and license in the Roche Territory under GENENTECH's Patents and, to the extent sublicensable by GENENTECH, patents of third parties licensed to GENENTECH, including where available the right to sublicense others with GENENTECH's prior consent, which consent shall not be unreasonably withheld, to register, use, sell and market (including the right to detail and promote) each Genentech Product and, subject to the terms and conditions of the relevant license agreement, In-Licensed Product and IDEC Product or Scios Product and shall include the right for all indications. Such option shall be exercisable only once for each Product. If ROCHE does not pay the Option Extension Fee with respect to a Product, there shall be no additional option with respect to that Product beyond that associated with the Phase II Completion Date. 9 16 (b) Subject to the terms and conditions of this Agreement and contingent on ROCHE exercising its option under Section 2(a) of this Article II, GENENTECH hereby grants to ROCHE, an option, exercisable only once for any Product either at (i) such Product's Entry Into Man; (ii) at the first Phase II Completion Date for such Product, or (iii) at the Phase III Completion Date, for a sole and exclusive (to the extent available) right and license in the Roche Territory, under GENENTECH's Patents and, to the extent sublicensable by GENENTECH, patents of third parties licensed to GENENTECH, including where available, the right to sublicense others with GENENTECH's prior consent, which consent shall not be unreasonably withheld, for Genentech Product and, subject to the terms and conditions of the relevant license agreement, In-Licensed Product and IDEC Product to the extent GENENTECH is contractually able to do so under the IDEC Agreement and to Scios Product to the extent GENENTECH is contractually able to do so under the Scios Nova Agreement, to make Vialed Product from Bulk Product. Such option shall be exercisable only once for each Product. (c) The options described above may be exercised earlier than the time periods described if the Parties mutually agree. The options described above shall terminate on October 25, 2015 except as follows: (i) if Roche has paid an Option Extension Fee for a Product, Roche shall retain an option for that Product exercisable at the Phase III Completion Date for that Product; (ii) for a Product for which Entry Into Man has occurred but which has not yet reached the Phase II Completion Date, Roche shall continue to have an option exercisable at the Phase II Completion Date; and (iii) for any Product for which the 60 day period to exercise an option with respect to Entry Into Man or the Phase II Completion Date or the Phase III Completion Date has arisen, that option shall continue for the remaining portion of that 60 day period that is then unexpired. (d) The foregoing notwithstanding, if at any time prior to Entry Into Man of a Genentech Product or In-Licensed Product, GENENTECH decides to discontinue sole development of such a Product and to license a third party the rights to that Product, that Product shall be subject to the provisions of Section 3.07 of the Governance Agreement and shall no longer be subject to the provisions of this Agreement. If at any time upon or after Entry Into Man of a Genentech Product or In-Licensed Product, the occurrence of the first Phase II Completion Date for such a Product, or thereafter unless ROCHE has paid the Option Extension Fee, GENENTECH decides to discontinue sole development of such a Product and to license a third party the rights in the Roche Territory to that Product, that Product shall be subject to the provisions of Section 3.07 of the Governance Agreement provided, however, that if the parties do not enter into 10 17 an license agreement regarding such Product on the basis of Section 3.07 of the Governance Agreement, the terms of this Agreement (including but not limited to ROCHE's option rights) with regard those rights to such Product in the Roche Territory shall continue to remain in full force and effect. If ROCHE has paid the Option Extension Fee, GENENTECH shall have no rights to grant rights to third parties to that Product in the Roche Territory. Upon receipt of notification with respect to a Product as specified in the first sentence of Section 3 (a) of Article II, ROCHE shall make a good faith determination as to its interest in the Product in the Roche Territory. If ROCHE determines that it has no interest in maintaining its future option rights it will so inform GENENTECH so that GENENTECH may pursue other development and commercial arrangements with others with respect to that Product in the Roche Territory so that GENENTECH may realize the full commercial potential of such Product. 3. Exercise of Option for License for Other Products. (a) Upon each of the occurrences of Entry Into Man, the Phase II Completion Date and the Phase III Completion Date for a GENENTECH Product or an In-Licensed Product for which an option hereunder is still in effect, GENENTECH shall so notify ROCHE's primary contact on the Commercialization Committee established in Article III. In connection with such notice, GENENTECH shall provide ROCHE with all relevant information regarding the Product, including results of preclinical and clinical studies, third party rights (patent rights and royalty obligations), and manufacturing process and cost information not yet communicated to the Development Committee in accordance with this Section 3, but such information shall not include marketing or other commercial information other than market research information. At any time, ROCHE shall have the right to request reasonable additional non-marketing or noncommercial information. Within thirty (30) days of such notification and the receipt by ROCHE of all information specified herein, the Commercialization Committee shall meet to review such information and the results of such studies and any other relevant non-marketing or noncommercial information developed by or possessed by GENENTECH regarding that Product which ROCHE may request. After the notice to ROCHE's primary contact on the Commercialization Committee as specified above, GENENTECH and ROCHE shall jointly formulate a development plan with respect to the United States and Europe for the Product, the terms of which shall be negotiated in good faith by the Parties. Such plan shall address issues regarding initially envisioned indications and additional indications to be developed and shall be agreed upon ten (10) days prior to the expiry of the sixty (60) day period mentioned below. If ROCHE does not exercise its option hereunder, that development plan will not have any binding effect. Within sixty (60) days of the notice to ROCHE's primary contact on the Commercialization Committee as specified above and the receipt by ROCHE of all information specified herein, ROCHE shall either exercise in writing its option 11 18 for a license for such Product under Section 2 of this Article II or if ROCHE fails to so exercise, ROCHE shall be deemed to have irrevocably waived the option with respect to that particular option exercise period. If ROCHE fails to exercise its option for a license for such Product within 60 days of the notice to ROCHE of the Phase III Completion Date, GENENTECH thereafter shall be free to develop, make, have made, use, sell and market (including the right to promote and detail) such Product in the Roche Territory in any manner it chooses, including by means of a license to one or more third parties, and free of any restrictions under Section 3.07 of the Governance Agreement. (b) (1) Within forty-five (45) days of the Effective Date of this Agreement, the Commercialization Committee shall meet to review summary results of clinical data for any Genentech Product and In-Licensed Product for which there has been a Phase II Completion Date of the Effective Date and for IDEC Product and Scios Product. Within ninety (90) days of the commencement of such meeting, ROCHE shall either exercise in writing its option for a license for each such Product under Section 2 of this Article II or if ROCHE fails to so exercise, it shall be deemed to have irrevocably waived such option. If ROCHE waives its option for a license for a Product under Section 2 of this Article II, GENENTECH shall be free to develop, make, have made, use, sell and market (including the right to detail and promote) such Product in the Roche Territory in any manner it chooses including by means of a license to one or more third parties and free of any restrictions of Section 3.07 of the Governance Agreement. If ROCHE waives its option for a license for either IDEC Product or Scios Product pursuant to the foregoing, ROCHE shall have no further rights to any IDEC Product or Scios Product, as the case may be. (2) The right of ROCHE to any license hereunder to IDEC Product is subject to ROCHE's agreement to comply with all appropriate obligations of the IDEC Agreement for IDEC Product and any required consent of IDEC. The right of ROCHE to any license hereunder to Scios Product is subject to ROCHE's agreement to comply with all appropriate obligations of the Scios Nova Agreement for Scios Product and any required consent of Scios Nova. (c) Any information provided by GENENTECH to ROCHE for its evaluation with respect to exercising an option under this Article shall be returned to GENENTECH promptly if ROCHE decides not to exercise such option and such information shall be subject to the provisions of Article X below. 4. License to Know-How and Option for License to Know-How. (a) Subject to the terms and conditions of this Agreement, GENENTECH 12 19 hereby grants to ROCHE, for the term of this Agreement, a right and license, including the right to sublicense others with GENENTECH's prior consent, which consent shall not be unreasonably withheld, to use in Canada, GENENTECH Know-How specifically related to Canada Products and to use in the Roche Territory, GENENTECH Know-How specifically related to DNase (i) to register, use, sell and market (Including the right to detail and promote) such Products; and dependent on the Parties' mutual agreement as to whether GENENTECH will supply Vialed Product or Bulk Product (ii) to make and/or have made Finished Product from Vialed Product, or (iii) to make and/or have made Vialed Product from Bulk Product. (b) Subject to the terms and conditions of this Agreement and the exercise of the option for such Product under Section 2 of this Article II, GENENTECH hereby grants to ROCHE, for the term of this Agreement, a right and license, including the right to sublicense others with GENENTECH's prior consent, which consent shall not be unreasonably withheld, to use in the Roche Territory, GENENTECH Know-How specifically related to GENENTECH Products, In-Licensed Products, Scios Product or IDEC Product (i) to register, use, sell and market (Including the right to detail and promote) such Product; and dependent on the Parties mutual agreement as to whether GENENTECH will supply Vialed Product or Bulk Product (ii) to make and/or have made such Finished Product from such Vialed Product or (iii) to make and/or have made such Vialed Product from such Bulk Product. 5. License to Trademark and Option for License to Trademark. (a) Subject to the terms and conditions of this Agreement, GENENTECH grants to ROCHE a sole and exclusive right and license to use the appropriate Trademarks in Canada for Canada Products and in the Roche Territory for DNase including the right to sublicense others with GENENTECH's prior consent, which consent shall not be unreasonably withheld. ROCHE and its Affiliates shall use the appropriate Trademarks for such Products in Canada in the case of Canada Products or in each country in the Roche Territory in the case of DNase unless the Trademark is not available in such country. If the appropriate Trademark for such Product is not available in such country, ROCHE shall obtain GENENTECH's prior consent before using any other trademark for such Product in such country, which consent shall not be unreasonably withheld. (b) Subject to the terms and conditions of this Agreement and the exercise of the option for a Product under Section 2 of this Article II, GENENTECH grants to ROCHE a sole and exclusive right and license to use the Trademark for such Product in the Roche Territory including the right to sublicense others with GENENTECH's prior consent, which consent shall not be unreasonably withheld. 13 20 ROCHE and its Affiliates shall use the Trademark for such Product in each country in the Roche Territory unless the Trademark is not available in such country. If the Trademark for such Product is not available in such country, ROCHE shall obtain GENENTECH's prior consent before using any other trademark for the Product in such country, which consent shall not be unreasonably withheld. 6. Standard of Effort. ROCHE acknowledges that for those Products licensed to ROCHE hereunder, GENENTECH's sole opportunity to receive maximum potential revenue from sales of those Products in each country in the Roche Territory is solely dependent on ROCHE's efforts and that a failure to provide the level of effort specified herein is likely to have a significant adverse effect on potential revenues to GENENTECH which would be inimical to the purposes of this Agreement. Therefore, the exclusive licenses granted to ROCHE under this Article shall be conditioned on ROCHE using its "best efforts" in each country in the Roche Territory to take all steps necessary in an expeditious fashion to obtain regulatory approval to sell the Product and thereafter to sell the Product in a manner so as to maximize its revenue potential. "Best efforts" shall mean efforts, including the commitment of all necessary personnel and financial resources, in a timeframe equivalent to that used by ROCHE to develop, promote and sell ROCHE's major pharmaceutical products. 7. Reporting on Commercialization Progress. ROCHE shall keep GENENTECH informed of the progress of its efforts to develop, register, and market the Product licensed by it hereunder in each country in the Roche Territory. Such progress reports shall be made annually by November 30th of each year. For each country listed on Appendix B hereto, such progress reports shall specifically include information on -- (a) the status of, and plans for, clinical trials needed for registration of the Product, (b) the status of, and plans for, registering the Product for sale, and (c) the budgeted sales of the Product or the Net Sales of the Product if it is registered; (d) the Net Sales of the Product included in the business plan for the Product; and (e) summaries of promotional plans and market research. In addition, GENENTECH may make reasonable requests for, and ROCHE shall provide, specific information about efforts to register and sell the Products in 14 21 countries in the Roche Territory other than those set forth in Appendix B and about the aggregate Net Sales budgeted or included in the business plan for Products for all countries in the Roche Territory. 8. License to GENENTECH. Subject to the terms and conditions of this Agreement, ROCHE hereby grants, and shall cause Hoffmann-La Roche, Inc. to grant, to GENENTECH in the United States, a perpetual royalty-free, nonexclusive right and license under ROCHE's Patents and Know-How, to register, make, have made, use, sell and market (including the right to promote) in the United States (a) the Canada Products and DNase; and (b) any Genentech Product, In-Licensed Product, IDEC Product or Scios Product for which ROCHE exercises its option under Section 2 of this Article II. ROCHE shall not grant to any third party, and ROCHE shall cause Hoffmann-La Roche, Inc. not to grant to any third party, any license under ROCHE's Patents and Know-How in the United States to register, make, have made, use, sell and market (including the right to promote) any Product which is described in subsection (a) or (b) of this Section 8 without GENENTECH's prior written consent. 9. Future In-Licenses. With respect to future prospective in-licenses from third parties where GENENTECH is the prospective licensee and the license involves Products with rights in the Roche Territory, the Parties shall discuss in advance the nature of reasonable terms for the Roche Territory. Any final license agreement with respect to the Roche Territory shall be on terms mutually acceptable to both Parties, and the Parties shall discuss and agree to a worldwide development and commercialization strategy with respect to such a Product. 10. Ras Farnesyltransferase Collaboration. With respect to the Parties' current collaboration on ras farnesyltransferase inhibitors, GENENTECH will have the sole right outside of the Roche Territory, and ROCHE shall have the sole right in the Roche Territory to register, use, sell and market (including the right to detail and promote) all Products resulting from such collaboration. All research efforts and Development Costs for these Products shall be shared in an equal manner. Neither Party shall pay the other royalties for sales of any of these Products in its Territory. In the event that any of the existing agreements relating to such collaboration conflict with this Section 10 of Article II, the terms of this Section shall govern. 11. IIbIIIa Collaborations Other than Xubix Collaboration. With respect to the Parties' collaborations on IIbIIIa antagonists under the IIbIIIa Agreement other than the 15 22 collaboration on Xubix, GENENTECH will have the sole right outside of the Roche Territory, and ROCHE shall have the sole right in the Roche Territory to register, use, sell and market (including the right to detail and promote) all Products resulting from such collaborations. All research efforts and Global Development Costs for these Products shall be shared in an equal manner. Neither Party shall pay the other royalties for sales of any of these Products in its Territory. In the event that any of the existing agreements relating to these collaborations conflict with this Section 11 of Article II, the terms of this Section shall govern. 12. GP-IIbIIIa (Xubix) Collaboration. (a) ROCHE hereby grants to GENENTECH the option (the "OPT-IN OPTION") to participate and share in the development and commercialization of Xubix, exercisable at any time up to and within thirty (30) days after NDA approval of the first indication (acute or chronic therapy) in the United States. Such Opt-in Option shall be exercisable with respect to Xubix for all indications. Upon its exercise of the Opt-in Option, GENENTECH shall reimburse ROCHE for fifty percent (50%) of ROCHE's Development Costs for Xubix (including Phase III Development Costs) incurred by ROCHE from and after May 1, 1997 through the exercise date and for Phase III Development costs incurred prior to May 1, 1997 and shall pay the additional sum of $25 million U.S. Upon GENENTECH's exercise of the Opt-in Option, the Parties shall negotiate in good faith and enter into a more detailed commercialization and development agreement with respect to Xubix based on the provisions contained herein it being understood that any Development Costs incurred after such opt-in date shall be equally shared. (b) If GENENTECH exercises the Opt-in Option, GENENTECH and ROCHE will have semi-exclusive rights in the United States, with GENENTECH and ROCHE co-promoting Xubix and sharing net profits on a basis of sixty percent (60%) to GENENTECH and forty percent (40%) to ROCHE if the first indication for which marketing approval is sought is for acute therapy or on a basis of fifty percent (50%) to GENENTECH and fifty percent (50%) to ROCHE if the first indication for which marketing approval is sought is for chronic therapy. ROCHE shall have the sole right in the Roche Territory to register, use, sell and market (including the right to detail and promote) all Products resulting from such collaboration. (c) Upon ROCHE's filing of a NDA for the first indication (acute or chronic therapy) of Xubix in the United States if GENENTECH has not yet exercised its Opt-in Option, ROCHE shall provide GENENTECH with all 16 23 relevant information requested by Genentech regarding Xubix including results of preclinical and clinical studies. (d) Neither Party shall pay the other royalties for sales of any Xubix provided however, that ROCHE shall pay GENENTECH a six percent (6%) royalty on Net Sales of Xubix in any country in which Net Sales occur, in accordance with Article VI of this Agreement, if GENENTECH does not exercise the Opt-in Option. The royalty shall be paid in that country for the longer of (a) a period of ten (10) years from First Commercial Introduction of Xubix in that country or (b) until the last expiration of a valid claim of a Genentech Patent which the sale of Xubix would infringe in that country without the license granted in the IIbIIIa Agreement. If there are one or more products generically equivalent to Xubix which directly compete with Xubix in a country so that the generically equivalent products have a market share in that country of at least twenty-five percent (25%) of the market (in units) for Xubix, GENENTECH and ROCHE shall negotiate in good faith a modification to the royalty term or rate so that the royalty payable by ROCHE in that case is more economically viable. (e) In the event that any of the existing agreements relating to this collaboration conflict with this Section 12 of Article II, the terms of this Section shall govern. ARTICLE III - COMMERCIALIZATION COMMITTEES 1. Joint Commercialization Committee. Within fifteen (15) days of the Effective Date, the Parties shall form a Joint Commercialization Committee. The Joint Commercialization Committee shall be the (a) forum for communicating to ROCHE information about Products, including the results for a Product as of that Product's Entry Into Man, Phase II Completion Date and Phase III Completion Date as well as all other information about that Product in GENENTECH's possession at the time of such communication which is specifically relevant to ROCHE's decision whether to exercise its option for that Product (e.g., cost information, market research, etc.) and (b) for communicating to GENENTECH information about Products for which ROCHE has a license. The Joint Commercialization Committee shall meet initially with respect to a Product upon its Entry Into Man or earlier if the Parties mutually agree. The Joint Commercialization Committee shall also be the forum for ROCHE's communications, pursuant to Section 7 of Article II, above about ROCHE's development and sales and marketing efforts for each Product for which it has a license hereunder. The Joint Commercialization Committee shall be comprised of an equal number but not more than five nominees of ROCHE and GENENTECH respectively, appointed by their respective organizations. The chairman of the Joint Commercialization Committee will be designated by 17 24 GENENTECH. The chairman will call and chair meetings of the Joint Commercialization Committee which will be held at GENENTECH's facilities unless mutually agreed otherwise or by video conference where feasible. 2. Management Committee. Within ninety (90) days of the Effective Date, the Parties shall form a Management Committee comprised of three representatives from ROCHE, including its Chief Operating Officer or Head of the Pharma Division and three representatives from GENENTECH, including its Chief Executive Officer or Chief Operating Officer. The Management Committee shall meet at least once per year to review the development and commercialization status of all Products which are then subject to this Agreement and any other matters brought to the Committee's attention by the Commercialization Committee, the Finance Committee or the Development Committee. 3. Development Committee. Within sixty (60) days of the Effective Date, the Parties shall form a Development Committee comprised of three representatives from ROCHE and three representatives from GENENTECH. The Development Committee shall meet regularly but at least three (3) times a year to discuss the development of Products for which ROCHE has exercised its option under Article II. GENENTECH shall keep ROCHE informed through the Development Committee on projects and products for which an option of ROCHE is still in effect with an emphasis on those projects which are approaching Entry Into Man (i.e. potential Entry Into Man foreseen within the next four (4) months). The Development Committee shall direct and coordinate development efforts on a global basis for a Product for which ROCHE has exercised its option, consistent with the development plan required by Section 3 of Article II. The Development Committee shall meet initially with respect to a Product approaching its Entry Into Man, or earlier if the Parties mutually agree, and shall be responsible for formulating a joint development plan as required by Section 3 of Article II. Except as otherwise specifically provided in such plan with respect to a Product, GENENTECH will lead the planning of world-wide development strategies for its Products. All decisions related to GENENTECH's development efforts for a Product and GENENTECH's filings for approval of a Registration outside the Roche Territory shall be solely those of GENENTECH, except as otherwise specifically provided in such plan. All decisions related to ROCHE's development efforts for a Product for which ROCHE has exercised its option right and ROCHE's filing for approval of a Registration in the Roche Territory shall be solely those of ROCHE, except as otherwise specifically provided in such plan. The activities of a party in its territory shall not negatively impact the activities of the other party in its territory. 4. Joint Finance Committee. Within sixty (60) days of the Effective Date, the Parties shall form a Joint Finance Committee comprised of two representatives from ROCHE and two representatives from GENENTECH. The Joint Finance 18 25 Committee shall meet on an as needed basis to review and discuss financial activities and issues relating to this Agreement. 5. Review of Status. Within six (6) months of the Restatement Date, the Parties shall review the Committee structure and composition described above with a view to simplifying the Committee system where feasible. ARTICLE IV - DEVELOPMENT AND MARKETING 1. Development. Subject to the terms and conditions of this Agreement and the joint development plan with respect to a Product agreed to pursuant to Section 3 of Article II, GENENTECH shall be solely responsible for, and have full autonomy with respect to, the development of its Products outside of the Roche Territory and in the Roche Territory with respect to Products not licensed to ROCHE hereunder, and ROCHE shall be solely responsible for the development in the Roche Territory of those Products for which it has been granted a license under Section 2 of Article II and has exercised its option for a license under Section 3 of Article II. The Parties shall each have the Additional Indication Opt-Out Option referred to in the Financial Appendix with respect to each Product developed hereunder. 2. Development Costs Incurred prior to Opt-In. Except as set forth below, GENENTECH shall be reimbursed by ROCHE for fifty percent (50%) of all of GENENTECH's Development Costs incurred in connection with a Product prior to the date on which ROCHE has exercised its option for such license under Sections 2 and 3 of Article II. GENENTECH shall choose the method for reimbursement from among those set forth in the Financial Appendix. If ROCHE exercises its option for a license for a Product after notice of the Phase III Completion Date for that Product, GENENTECH will be reimbursed by ROCHE for fifty percent (50%) of all of GENENTECH's Development Costs incurred in connection with that Product prior to the date of GENENTECH'S notice to ROCHE of the Phase II Completion Date for that Product and seventy-five percent (75%) of all of GENENTECH's Development Costs incurred in connection with that Product after the date of the notice to ROCHE of the Phase II Completion Date and prior to the exercise of ROCHE's option for a license to the Product after receipt of the notice of the Phase III Completion Date. If ROCHE has paid an Option Extension Fee for a Product, $5,000,000 shall be credited against the Development Costs reimbursable by ROCHE at the time of the exercise of the option following receipt of notice of the Phase III Completion Date. 3. Development Costs after Opt-In. Except as noted below, GENENTECH and 19 26 ROCHE shall share the Global Development Costs incurred in connection with any development of a Product and incurred on or after the date on which ROCHE has been granted a license to such Product under Section 2 of Article II and has exercised its option for such license under Sections 2 and 3 of Article II. If ROCHE exercises its option for such Product during the exercise period after the date of such Product's Entry Into Man, ROCHE shall bear fifty percent (50%) of the Global Development Costs and GENENTECH shall bear fifty percent (50%) of the Global Development Costs for that Product. If ROCHE exercises its option for such Product during the exercise period after the Phase II Completion Date for such Product, ROCHE shall bear seventy-five percent (75%) of the Global Development Costs and GENENTECH shall bear twenty-five percent (25%) of the Global Development Costs for that Product. The exceptions to the foregoing are as follows: (a) Canada Products. With respect to Canada Products, GENENTECH shall be reimbursed by ROCHE for ten percent (10%) of all of GENENTECH's Development Costs incurred in connection with any development of a Canada Product and incurred on or after the date on which ROCHE has been granted a license to such Product under Section 1 of Article II. (b) IGF-1 Products. With respect to IGF-1 Products, ROCHE shall bear sixty percent (60%) of all Global Development Costs incurred in connection with any development of an IGF-1 Product for any diabetes indication on or after the date on which ROCHE has exercised its option for a license under Section 3 of Article II and GENENTECH shall bear forty percent (40%) of such Global Development Costs. (c) NGF Products. With respect to NGF Product, ROCHE shall bear sixty percent (60%) of all of Global Development Costs incurred in connection with any development of a NGF Product on or after the date on which ROCHE has exercised its option for a license under Section 3 of Article II and GENENTECH shall bear forty percent (40%) of such Global Development Costs, however any costs related to AIDS related neuropathies shall be fully borne by GENENTECH. (d) Additional Indications, New Formulations and New Dosing Schedules. With respect to any additional indications or new formulations or new dosing schedules for a Product other than the indication or formulation or dosing schedule for which the Product is being developed for initial Registration and where the additional indication or new formulation or new dosing schedule would require a separate Phase III Trial for Registration, 20 27 (i) if ROCHE exercises its option associated with the Phase II Completion Date, each Party shall bear 50% of the Global Development Costs incurred with respect to such additional indications and new formulations and new dosing schedules; and (ii) if ROCHE exercise its option associated with the Phase III Completion Date, ROCHE shall bear seventy-five percent (75%) and GENENTECH shall bear twenty-five percent (25%) of the Global Development Costs incurred with respect to such additional indications and new formulations and new dosing schedules. (e) Phase III Completion Date Option. If Roche exercises its option for a Product after notice of the Phase III Completion Date for that Product, no Global Development Costs will be shared for the completion of any clinical development or filing or preparation necessary for either Party's Registration for the indication which was the subject of the Phase III Trial related to the Phase III Completion Date. The determination of the amount of the Development Costs and the Global Development Costs, and the timing and mechanism for payment thereof, is set forth in the Financial Appendix. 4. Marketing. GENENTECH shall be solely responsible for and have full autonomy with respect to the marketing of its products in the United States and in the Roche Territory with respect to Products not licensed to ROCHE hereunder. Subject to the terms and conditions of this Agreement, ROCHE shall be solely responsible for the marketing in the Roche Territory of those Products for which it has been granted a license under Section 2 of Article II and has exercised its option for a license under Section 3 of Article II and for Canada Products and DNase. ARTICLE V - PRODUCTION AND SUPPLY 1. Production of Product. Except as provided in Sections 6, 7 and 8 of this Article V, GENENTECH, or Genentech Biopharmaceuticals Limited in the case of DNase as Vialed Product or Finished Product, or Genentech International Limited in the case of Genentech Products (except DNase) which are Vialed Product or Finished Product, shall be responsible for the manufacture of Clinical Requirements and Commercial Requirements of Bulk Product, Vialed Product or Finished Product, as the case may be, for which ROCHE has a license, for the Roche Territory. 21 28 2. Supply of Clinical Requirements. Except as provided in Sections 5, 6, 7 and 8 of this Article, GENENTECH shall use its best efforts to supply ROCHE with ROCHE's Clinical Requirements pursuant to a mutually agreeable and reasonable production schedule. GENENTECH shall not be obligated to supply Clinical Requirements to ROCHE other than in accordance with the quantities mutually agreed to and at the approximate dates of delivery mutually agreed to. All transportation and packing and similar costs shall be borne by ROCHE. Title and risk of loss shall pass to ROCHE upon delivery by GENENTECH FOB origin. The Parties shall agree on specifications for the Clinical Requirements, and the Clinical Requirements delivered by GENENTECH shall meet those specifications. GENENTECH shall not favor the supply of its own clinical requirements of a Product to it or its other licensees over ROCHE's Clinical Requirements. 3. Supply of Commercial Requirements. Except as provided in Sections 5, 6, 7 and 8 of this Article, GENENTECH, or Genentech Biopharmaceuticals Limited in the case of DNase as Vialed Product or Finished Product, or Genentech International Limited in the case of Genentech Products (except DNase) which are Vialed Product or Finished Product, shall supply ROCHE with ROCHE's Commercial Requirements pursuant to a mutually agreeable and reasonable production schedule for ROCHE's Commercial Requirements, and ROCHE agrees to purchase its Commercial Requirements from those entities. Those entities shall not be obligated to supply Commercial Requirements to ROCHE other than in accordance with the quantities mutually agreed to and at the approximate dates of delivery mutually agreed to. All transportation and packing and similar costs shall be borne by ROCHE. Title and risk of loss shall pass to ROCHE upon delivery by those entities to ROCHE, FOB origin. The Parties shall agree on specifications and procedures for the Commercial Requirements, and the Commercial Requirements delivered by those entities shall meet those specifications and procedures. Those entities shall not favor the supply of their own commercial requirements of Product to themselves or their other licensees over ROCHE's Commercial Requirements. 4. Supply Agreement. (a) Except as provided in Sections 5, 6, 7 and 8 of this Article, at the time that ROCHE exercises its option for a license for a Product under Section 2 of Article II, the Parties agree to negotiate and enter into a definitive Supply Agreement for such Product on a basis consistent with this Article and the other terms and conditions of this Agreement. (b) For Canada Products other than DNase, the Parties will negotiate and enter into a Supply Agreement consistent with this Article V and the other terms and conditions of this Agreement. 22 29 5. Amendments to DNase Supply Agreement. (a) GENENTECH's and Genentech Biopharmaceutical Limited's obligation to supply ROCHE with ROCHE's Clinical Requirements and Commercial Requirements of DNase in the Roche Territory, and ROCHE's agreement to purchase such Requirements from GENENTECH and Genentech Biopharmaceuticals Limited shall be governed by the DNase Supply Agreement as amended by this Section 5. The DNase Supply Agreement is amended as follows. (a) The definition of Collaborative Countries is amended to include Canada by striking Section 4 of Article I in its entirety and inserting in lieu thereof: "4. The term "COLLABORATIVE COUNTRIES" shall include those countries listed in Appendix D of the Collaborative Agreement and Canada.". (b) The definition of Rest of World Countries is amended to include Japan by striking Section 19 of Article I and inserting in lieu thereof: "19. The term "ROW COUNTRIES" shall include all countries except the Collaborative Countries and the United States.". (c) The inclusion of Canada and Japan in the DNase Supply Agreement and its effect on the provisions allocating DNase in the event of a product shortfall shall be addressed by striking Section 9(c)(i) of Article II and inserting in lieu thereof: "(i) the United States,". (d) In light of the changed marketing arrangement for DNase and to provide for an arm's length margin on GENENTECH's manufacture of DNase, Section 1 of Article III is stricken in its entirety and a new Section 1 is inserted in lieu thereof: "1. Payment for Clinical Requirements and Commercial Requirements. (a) All Vialed Product for Clinical Requirements shall be supplied by Genentech Biopharmaceutical Limited to ROCHE at Genentech Biopharmaceutical Limited's Fully Burdened Manufacturing Cost. (b) All Bulk Product for Commercial Requirements shall be supplied by Genentech Biopharmaceutical Limited to ROCHE at Genentech Biopharmaceutical Limited 's Fully Burdened Manufacturing Cost plus a margin of twenty percent (20%) on such Cost and all Vialed Product for Commercial Requirements shall be 23 30 supplied by Genentech Biopharmaceutical Limited to ROCHE at Genentech Biopharmaceutical Limited's Fully Burdened Manufacturing Cost plus a margin of twenty percent (20%) and -- (1) in the case of Commercial Requirements for use in a Collaborative Country, such other amounts as specified in Section 3 of Article VI of the Agreement Between Genentech, Inc. and F. Hoffmann-La Roche Ltd Regarding the Commercialization of Genentech's Products in the Roche Territory; or (2) in the case of Commercial Requirements for use in a ROW country, such other amounts as specified in Section 3 of Article VI of the Agreement Between Genentech, Inc. and F. Hoffmann-La Roche Ltd Regarding the Commercialization of Genentech's Products in the Roche Territory." (e) In light of the changed marketing arrangement for DNase and to extend Genentech Biopharmaceutical Limited's supply obligation to reflect such change, Section 1 of Article IV is stricken in its entirety and a new Section 1 is inserted in lieu thereof: "1. Term. (a) This Agreement shall enter into force and effect as of February 11, 1992. (b) The term of Genentech Biopharmaceutical Limited's obligation to supply ROCHE with Product and ROCHE's obligation to purchase Product from Genentech Biopharmaceutical Limited for use in each of the Collaborative Countries and ROW Countries shall continue only for so long as ROCHE is obligated to pay royalties under Section 3 of Article VI of the Agreement Between Genentech, Inc and F. Hoffmann-La Roche Ltd Regarding the Commercialization of Genentech's Products in the Roche Territory; provided, however, that when such term ends with respect to a Collaborative or ROW Country, ROCHE and Genentech Biopharmaceutical Limited shall discuss in good faith terms and conditions for a continuing supply of Product from Genentech Biopharmaceutical Limited to ROCHE at a world market price for use and sale in the Roche Territory.". 6. Supply of Scios Product. If ROCHE exercises its option for Scios Product under Section 2 of Article II of this Agreement, Scios Product will be supplied by Scios 24 31 Nova (or a third party contractor of Scios Nova) to ROCHE, and ROCHE agrees to purchase such Product from Scios Nova (or a third party contractor of Scios Nova), under the terms and conditions specified in the Scios Nova Agreement and such other terms and conditions as may be agreed to by GENENTECH and Scios Nova in a supply agreement yet to be negotiated. In the event that ROCHE has exercised its option for a license for the Scios Product prior to the negotiation and execution of such supply agreement, GENENTECH shall keep ROCHE fully informed of the negotiations regarding such supply agreement and shall invite a representative of ROCHE to participate in such discussions. 7. Supply of IDEC Product. If ROCHE exercises its option for IDEC Product under Section 2 of Article II of this Agreement, IDEC Product will be supplied in a manner consistent with the IDEC Agreement. 8. Supply of In-Licensed Product. If ROCHE exercises its option for a license for an In-Licensed Product under Section 2 of Article II of this Agreement and if the terms and conditions of the agreement between GENENTECH and the licensor covering the manufacture and supply of such In-Licensed Product provide that such licensor (or a third party contractor of such licensor) will be responsible for the manufacture and supply of such In-Licensed Product, then such In-Licensed Product will be supplied by such licensor (or a third party contractor of such licensor) to ROCHE, and ROCHE agrees to purchase such In-Licensed Product from such licensor (or a third party contractor of such licensor) under the terms and conditions specified in the agreement between GENENTECH and the licensor. In the event that ROCHE has exercised its option for such In-Licensed Product and a supply agreement has yet to be negotiated between GENENTECH and the licensor of such In-Licensed Product, GENENTECH shall keep ROCHE fully informed of the negotiations regarding such supply agreement and shall invite a representative of ROCHE to participate in discussions regarding a supply agreement. 9. Supply of Small Molecule Product. If ROCHE exercises its option for a license for a Product under Section 2 of Article II of this Agreement and if such Product is a Small Molecule Product, ROCHE shall be responsible for the manufacture and supply of GENENTECH's Clinical Requirements and Commercial Requirements of such Small Molecule Product. In such case, the terms and conditions herein applicable to GENENTECH when it is manufacturing and supplying Product to ROCHE shall be equally applicable to ROCHE when it is manufacturing and supplying Small Molecule Product to GENENTECH including, without limitation, those terms and conditions set forth in Sections 2, 3, 4, 9 and 10 of this Article and the Section 1 of Article VI. 25 32 10. Manufacturing Process and Facilities.. (a) Except as provided in Sections 6, 7, 8 and 9 of this Article, GENENTECH shall be solely responsible for the development of a manufacturing process and facilities for Products for which ROCHE has a license except Small Molecule Products. The fully burdened costs associated with the development of a manufacturing process specifically for such Product shall be considered part of the Development Costs and shall be shared as set forth in Section 3 of the Financial Appendix. (b) ROCHE shall be solely responsible for the development of a manufacturing process and facilities for Small Molecule Products for which ROCHE has a license. The fully burdened costs associated with the development of a manufacturing process specifically for such Small Molecule Product shall be shared by the Parties in proportion to their expected share of the worldwide market, in terms of revenues, for the Small Molecule Product for their Territory. For example, if GENENTECH's expected proportionate share in terms of revenues of the worldwide market is 33%, it shall bear 33% of the expense of developing a manufacturing process for that Small Molecule Product. 11. Additional Capital Requirements. Except as provided in Sections 6, 7 and 8 of this Article, if GENENTECH or ROCHE determines that additional dedicated manufacturing equipment, expansion or adaption of the then existing manufacturing facilities or manufacturing equipment, or construction of an additional manufacturing facility is needed to manufacture a Product to meet Clinical Requirements or Commercial Requirements for the other Party as provided herein, the manufacturing Party shall be solely responsible for the capital costs associated with such project. 12. Term of Supply Obligation. Except as provided in Sections 5, 6, 7 and 8 of this Article, each Party's obligation to provide the other Party with Product for use and sale in that Party's Territory shall continue only for so long as that Party is obligated to pay royalties hereunder for such Product. Thereafter ROCHE and GENENTECH shall discuss in good faith terms and conditions for a continuing supply of such Product from the manufacturing Party to other Party at a mutually agreeable market price for use and sale in that Party's Territory. 13. ROCHE Right to Manufacture. Notwithstanding anything to the contrary in this Agreement, and subject to the provisions relating to Costs of Idle Capacity in the Financial Appendix, ROCHE shall have the right to manufacture Bulk Product or Vialed Product (i) if ROCHE can demonstrate that it is able to manufacture Bulk Product or Vialed Product at a lower price than the supply price of GENENTECH, or (ii) if GENENTECH is not able to, or it is foreseeable that GENENTECH will not be in a position to, supply Roche's Commercial 26 33 Requirements in the Roche Territory, or (iii) if GENENTECH intends to have a third party toll manufacture Bulk Product or Vialed Product. In such case and if ROCHE so requests, GENENTECH shall provide ROCHE with all information and, at Roche' expense, support needed to enable ROCHE to manufacture Bulk Product or Vialed Product for use and sale in the Roche Territory and GENENTECH shall grant ROCHE the respective licenses necessary for ROCHE to effect its rights hereunder. ARTICLE VI - PAYMENTS, MARGINS AND ROYALTIES 1. Payment for Product Requirements. (a) Except for IDEC Product and Scios Product, unless the terms and conditions applicable to an In-Licensed Product provide otherwise, all Clinical Requirements shall be supplied by one Party to the other at the manufacturing Party's Fully Burdened Manufacturing Cost. (b) Except for IDEC Product and Scios Product, unless the terms and conditions applicable to an In-Licensed Product provide otherwise, all Commercial Requirements in the form of Vialed Product shall be supplied by GENENTECH to ROCHE at GENENTECH's Fully Burdened Manufacturing Cost plus a margin of twenty (20%) on such Cost. Except for IDEC Product and Scios Product, unless the terms and conditions applicable to an In-Licensed Product provide otherwise, if ROCHE is producing Vialed Product pursuant to the licenses granted in Sections 1 and 3 of Article II, then Bulk Product, necessary for the manufacture of Vialed Product and Finished Product for Commercial Requirements outside the United States, shall be supplied by GENENTECH to ROCHE at GENENTECH's Fully Burdened Manufacturing Cost plus a margin of twenty (20%) on such Cost. 2. Invoices and Method of Payment of GENENTECH's Fully Burdened Manufacturing Cost and Margin. GENENTECH shall invoice ROCHE for each shipment of Bulk Product or Vialed Product, as the case may be, and ROCHE shall pay such invoice on the terms and conditions set forth in the Financial Appendix. 3. Royalties on Sale of DNase. (a) ROCHE shall pay GENENTECH a royalty of twenty percent (20%) on Net Sales of DNase in each of the Collaborative Countries and Canada. (b) ROCHE shall pay GENENTECH a royalty of twelve and one-half percent (12.5%) on the first $100 million in aggregate Net Sales of DNase in 27 34 countries other than the Collaborative Countries and Canada and thereafter a royalty of fifteen percent (15%) on aggregate Net Sales of DNase in such countries in excess of $100 million. (c) The payment of royalties on DNase Net Sales in each country of the Roche Territory in (a) and (b) above shall continue until the latter to occur of (i) the last expiration of a Valid Claim of a GENENTECH Patent which the sale of that Product would infringe in that country but for the license granted herein or (ii) for a period of 25 years from the date of First Commercial Introduction in that country. 4. Royalties and Other Payments on Sale of Canada Products. (a) ROCHE shall pay GENENTECH a royalty of twenty percent (20%) on Net Sales of each Canada Product. The payment of royalties on each Canada Product's Net Sales shall continue until the latter to occur of (i) the last expiration of a Valid Claim of a GENENTECH Patent which the sale of that Product would infringe in that country but for the license granted herein or (ii) a period of 25 years from the Effective Date. (b) For each annual increase in Net Sales of Activase in Canada in excess of 110% of 1994 Net Sales of Activase in Canada, ROCHE agrees to make an additional payment to GENENTECH of ten percent (10%) of Net Sales of Activase in Canada for that year in excess of 1994 Net Sales. In no event shall the total of such annual payments exceed $27 million. 5. Royalties on Sale of Genentech Products. Except for Genentech Products for which ROCHE exercises its option granted under Section 2(b) of Article II after the Phase III Completion Date, ROCHE shall pay GENENTECH a royalty of twelve and one-half percent (12.5%) on the first $100 million in aggregate Net Sales of each Genentech Product in the Roche Territory and a royalty of fifteen percent (15%) on aggregate Net Sales of such Genentech Product in excess of $100 million. For Genentech Products for which ROCHE exercises its option granted under Section 2(b) of Article II after the Phase III Completion Date, ROCHE shall pay GENENTECH a royalty of fifteen percent (15%) on all Net Sales of such Genentech Product. If ROCHE has paid an Option Extension Fee for a Product, the amount of $5,000,000 shall be credited against royalties payable GENENTECH by ROCHE in the first calendar year of sales by ROCHE in which Net Sales of that product exceed $100 million U.S. The payment of royalties on each GENENTECH Product's Net Sales in each country of the Roche Territory shall continue until the latter to occur of (i) the last expiration of a Valid Claim of a GENENTECH Patent which the sale of that Product would infringe in that country but for the license granted herein or (ii) a period of 25 years from the date of First Commercial Introduction in that country. 28 35 6. Royalties and Other Payments on Sale of Scios Product. (a) ROCHE shall pay GENENTECH a royalty of twenty percent (20%) on annual Net Sales of Scios Product in each country of the Roche Territory for so long as GENENTECH is paying a royalty to Scios Nova under the Scios Nova Agreement in that country. Thereafter, ROCHE shall pay GENENTECH a royalty on Net Sales in that country of ten percent (10%) for aggregate annual Net Sales of up to and including $150 million in all countries in that year and of eight percent (8%) for aggregate annual Net Sales of over $150 million in all countries in that year, and such royalties shall be payable with respect to each country until the latter to occur of (i) the last expiration of a Valid Claim of a GENENTECH Patent which the sale of that Product would infringe in that country but for the license granted herein or (ii) a period of 25 years from the date of First Commercial Introduction in that country. (b) If ROCHE exercises its option pursuant to Sections 2 and 3 of Article II, within thirty (30) days thereafter ROCHE shall pay GENENTECH a one time fee of $25,000,000 in lieu of paying one-half-of the Development Costs for Scios Product. Such amount assumes that a second Phase III Trial will be required for Registration of Scios Product in the United States; if only one Phase III Trial is necessary, the Parties will negotiate a higher one time fee. GENENTECH is obligated to make certain one time milestone payments to Scios Nova, as set forth in the Scios Nova Agreement, upon Net Sales of $150 million in the Licensed Territory in any 12 month period (either $15 million or $7.5 million) or upon Regulatory Approval in Japan (either $5 million or $2.5 million) as those terms are used in the Scios Nova Agreement. ROCHE shall promptly reimburse GENENTECH for each such milestone GENENTECH pays to Scios Nova. (c) With respect to Canada, the Scios Nova Agreement provides that GENENTECH and Scios Nova will copromote Scios Product as part of a copromotion arrangement for the United States and Canada and that GENENTECH and Scios Nova will share Operating Profits and Losses on the sale of Scios Product as part of an arrangement to share Operating Profits and Losses for the United States and Canada. ROCHE's rights with respect to Scios Product are subject to such obligations regarding copromotion in Canada and the sharing of Operating Profits and Losses with respect to Canada. 7. Royalties and Other Payments on Sale of IDEC Product. (a) ROCHE shall pay GENENTECH a royalty of twenty percent (20%) on Net Sales of IDEC Product in each country of the Roche Territory for so long as GENENTECH is paying a royalty to IDEC under the IDEC Agreement in that country. Thereafter, ROCHE shall pay GENENTECH a royalty on Net Sales in 29 36 that country of ten percent (10%) for aggregate annual Net Sales of up to and including $75 million in all countries in that year and eight percent (8%) for aggregate annual Net Sales over $75 million in all countries in that year, and such royalties shall be payable with respect to each country until the latter to occur of (i) the last expiration of a Valid Claim of a GENENTECH Patent which the sale of that Product would infringe in that country but for the license granted herein or (ii) a period of 25 years from the date of First Commercial Introduction in that country. (b) If ROCHE exercises its option pursuant to Sections 2 and 3 of Article II, within thirty (30) days thereafter ROCHE shall pay GENENTECH a one time fee of $10 million in lieu of paying one-half of the Development Costs for IDEC Product incurred as of the Effective Date. Development Costs incurred after the Effective Date shall be subject to Section 2 of Article IV. In addition, GENENTECH is obligated to make certain one time milestone payments to IDEC, as set forth in the IDEC Agreement, upon Regulatory Approval in the First Major European Country ($10 million) and upon the Patent Milestone Event ($2.5 million) as those terms are used in the IDEC Agreement. ROCHE shall promptly reimburse GENENTECH for each such milestone which GENENTECH pays to IDEC. (c) GENENTECH has an option for a co-exclusive license for rights to IDEC Product in Asia for a payment of $2.5 million if such co-exclusive license becomes available to GENENTECH. If ROCHE exercises its option for a license for the IDEC Product under Section 2 of Article II and if ROCHE wishes GENENTECH to exercise the option for a co-exclusive license to IDEC Product in Asia should such license become available to GENENTECH, then ROCHE shall provide written notice of such to GENENTECH at the time of exercise of its option and pay $2.5 million to GENENTECH in conjunction therewith. (d) With respect to Canada, the IDEC Agreement provides that GENENTECH and IDEC will copromote IDEC Product as part of a copromotion arrangement for the United States and Canada and that GENENTECH and IDEC will share Operating Profits and Losses on the sale of IDEC Product as part of an arrangement to share Operating Profits and Losses for the United States and Canada. ROCHE's rights with respect to IDEC Product are subject to such obligations regarding copromotion in Canada and the sharing of Operating Profits and Losses with respect to Canada. 8. Royalties and Other Payments on Sale of In-Licensed Product. (a) If ROCHE exercises its option under Article II for an In-Licensed Product, the Parties will negotiate mutually agreeable financial terms for payments by ROCHE to GENENTECH. 30 37 (b) In general, if ROCHE exercises its option under Article II for an In-Licensed Product, ROCHE agrees to pay to GENENTECH a license fee or similar acquisition fee for rights in the Roche Territory and any milestone or similar payments related to the achievement of progress either in development, registration or sales of an In-Licensed Product or for other achievements in the Roche Territory. (c) The Parties acknowledge that the specific terms and conditions related to an In-Licensed Product cannot be anticipated and agree to negotiate in good faith the allocation of responsibility for such terms and conditions in a fair manner reflecting the benefit to be received by each from the In-Licensed Product. 9. Calculation of Aggregate Net Sales. The calculation of the aggregate Net Sales for determination of the applicable royalty percentage shall be that set forth in the Financial Appendix. 10. Timing of Royalty Payments. Payment of amounts specified in this Article shall be made within ninety (90) days of the end of each calendar quarter in which the sale was made except where payments are made to GENENTECH in consideration of royalty payments to be made to Scios Nova or IDEC in which case those payments shall be made within sixty (60) days of the end of each calendar quarter. For purposes of determining when a sale of a Product occurs, the sale shall be deemed to occur when an independent third party is invoiced for the Product. Any such payment that is not paid on or before the date such payment is due under this Agreement shall bear interest, to the extent permitted by applicable law, at the LIBOR rate of interest as reported by Data Stream from time to time, calculated on the number of days such payment is delinquent. ROCHE shall make all payments hereunder by bank wire transfer in immediately available funds to such account as GENENTECH shall designate before such payment is due, free and clear of any taxes, duties, levies, fees or charges, except for withholding taxes due on behalf of GENENTECH (to the extent applicable). ROCHE shall make any withholding payments due on behalf of GENENTECH and shall promptly provide GENENTECH with written documentation of any such payment sufficient to satisfy the reasonable requirements of an appropriate tax authority with respect to an application by GENENTECH for a foreign tax credit for such payment or for similar treatment. At the time of remittance of each payment described in this Article, ROCHE shall provide GENENTECH with a statement summarizing the Net Sales of the Product in each of country outside the United States in the reporting currency of each such country and the rate used to convert from each such country's currency to Swiss Francs and, in the case of the Scios Agreement and IDEC Agreement, with such other information as those Agreements require of GENENTECH. 31 38 11. Restrictions on Transfer of Funds. (a) If ROCHE ships Product into a country outside the United States for sale in that country and, at the time of shipment, such country has legal restrictions on the transfer of funds which prevent the prompt remittance of the part or all of the amount described in this Article, ROCHE shall be obligated to pay such amounts in immediately available funds to such account as GENENTECH shall designate. (b) If ROCHE ships Product into a country outside the United States for sale in that country and such country subsequently imposes legal restrictions on the transfer of funds which prevents the prompt remittance of part or all of the amount described in this Article with respect to that shipment of the Product in that country, ROCHE shall be obligated to -- (i) pay such portion of such amount as permitted by the law of such country in immediately available funds to such account as GENENTECH shall designate, and (ii) pay the remainder of such amount to such account as GENENTECH shall designate in a bank in such country. In such event, the Parties shall discuss in good faith the best means of utilizing the funds on deposit in such country. Shipments of the Product into such country after the imposition of legal restrictions on the transfer of funds shall be subject to subsection (a) of this Section. 13. Records Regarding Royalties. ROCHE agrees to keep for at least three (3) years, records of all sales of Product on a country-by-country basis in sufficient detail to permit GENENTECH to confirm the accuracy of the ROCHE's calculations with respect to payment of the amounts described in this Article. Once a year, at the request and the expense of GENENTECH and upon at least five (5) days' prior written notice, ROCHE shall permit its officially appointed world-wide auditor to examine its records in a manner sufficient to report to GENENTECH on the accuracy of ROCHE's calculations. Results of any such examination shall be made available to both Parties. If such examination reveals an underpayment of the amounts described in this Article by five percent (5%) or more, ROCHE shall pay all costs of such examination. In the event such examination concludes that additional amounts are owed, the additional amounts shall be paid within thirty (30) days of the date GENENTECH delivers to ROCHE such accountant's written report so concluding. In the event such examination concludes that there has been an overpayment with respect to such amounts, the excess shall be credited to ROCHE against future payment of the amounts 32 39 described in this Article. This Section shall survive any termination of royalty payments for a particular country for a period of six (6) years. 14. Royalty for Use of Trademark. At the end of the term for the payment of royalties as defined in this Article, ROCHE shall pay to GENENTECH a royalty for the use of each Trademark in each country in the Roche Territory at a rate of two percent (2%) of Net Sales by ROCHE in such country of the Product represented by the Trademark for so long as the Trademark is used. 15. Generic Competition. If there is one or more products generically equivalent to a Product which compete with that Product in a country so that the generically equivalent products have a market share in that country of at least twenty-five percent (25%) of the market (in units) for the Product, GENENTECH and ROCHE shall negotiate in good faith a modification to the royalty term or rate so that the royalty payable by ROCHE in that case is significantly more economically viable. 16. Royalty Term if ROCHE Becomes Minority Shareholder. Notwithstanding anything to the contrary herein, if ROCHE's equity ownership of GENENTECH securities is less than fifty percent (50%) of all such securities then outstanding, the term for the payment of royalties for a Product hereunder in each country shall be reduced to the latter to occur of (i) the last expiration of a Valid Claim of a GENENTECH Patent which the sale of that Product would infringe in that country but for the license granted herein or (ii) a period of ten (10) years from the date of First Commercial Introduction in that country. If at any time ROCHE's equity ownership of GENENTECH securities becomes less than fifty percent (50%) (the "Divestiture Date"), the term for the payment of royalties specified above shall become immediately applicable. If because of the immediate applicability of the shortened term for the payment of royalties for a Product, royalties would no longer be payable in a country, ROCHE shall continue to pay royalties on that Product in that country over the following period in a decreasing manner as follows:
Period % of applicable royalty ------ ----------------------- From Divestiture Date until 100 end of that calendar year First full calendar year following 80 Divestiture Date Second full calendar year following 60 Divestiture Date
33 40
Period % of applicable royalty ------ ----------------------- Third full calendar year following 40 Divestiture Date Fourth full calendar year following 20 Divestiture Date ` Fifth full calendar year following 0 Divestiture Date and thereafter
Thereafter, ROCHE shall have a fully paid-up license for such Product. ARTICLE VII - TRANSITION PROVISIONS 1. General. The Parties intend to effect a transfer of the operations of Genentech Canada Ltd, Genentech Europe Limited and Genentech Ltd. (Japan) to ROCHE in the manner described above and in the subsequent provisions of this Article VII. The Parties acknowledge that a number of actions must be taken to effect such transfers in an orderly manner so as to minimize disruption to those operations and attendant costs and maximize revenue receipt where such operations are generating or involved in generating revenue. The Parties acknowledge that while they will act expeditiously to take all such appropriate actions, a substantial period is likely to be required to complete all of such actions. Therefore, the Parties agree to effect such a transfer as quickly as possible but no later than January 1, 1996 and the provisions relating to such a transfer, including license grants, supply obligation, like relating to Canada, shall be effective when such transfer is completed and at a date to be mutually agreed to. 2. Personnel of Genentech Canada, Inc., Genentech Europe Limited and Genentech Ltd. (Japan). The Parties shall discuss and mutually agree with respect to the continuing status of the employees of Genentech Canada, Inc., Genentech Europe Limited and Genentech Ltd. (Japan). 3. Records and Property Leases. (a) Within ninety (90) days of the Effective Date of this Agreement, copies of the records of Genentech Canada, Inc., Genentech Europe Limited and Genentech Ltd. (Japan) relating to their operations and needed by ROCHE to assume those operations shall be made available to ROCHE. (b) Within ninety (90) days of the Effective Date of this Agreement, information regarding the real estate property leases of Genentech Canada, Inc., Genentech Europe Limited and Genentech Ltd. (Japan) shall be made available 34 41 to ROCHE and such leases shall promptly be assumed by ROCHE as well as any other liabilities of these entities which have arisen in the ordinary course of business except for a line of credit to Genentech Canada, Inc. used to purchase Activase rights. (c) Within ninety (90) days of the Effective Date of this Agreement, information regarding office equipment and the like to ROCHE. Within thirty (30) days after such information is made available ROCHE, ROCHE shall advise GENENTECH whether it wishes to purchase any or all of such equipment or the like. 4. Transfer of Dossier and Registration. The Dossiers for Canada Product, including all data, information, results, and documents with respect to pertinent Registrations in Canada, shall be transferred by GENENTECH to ROCHE, and ROCHE shall be entitled to use the Dossiers and all such data, information, results, and documents for its own purposes consistent with the terms of this Agreement. GENENTECH shall cooperate with ROCHE in a timely manner and in every proper way to effect the transfer of the pertinent Registration or Registrations exclusively to ROCHE and GENENTECH shall seek, and use its best efforts to obtain, the necessary authorization from the pertinent governmental authorities applicable to such transfer. ARTICLE IX - PATENTS, INVENTIONS AND TRADEMARKS 1. Sole Inventions. The Parties recognize that either Party may independently and separately make inventions in the course of this Agreement relating to a Product, its administration, formulation or clinical use. In such event, the Party making the invention shall be the sole owner of that invention and of any patent applications and patents thereon (including inventor's certificates) and shall be solely responsible for the filing, prosecution and maintenance of all such patent applications and patents and shall have sole authority to decide what actions in that regard it shall take. If the other Party wishes to have the Party owning the invention undertake actions which the Party owning the invention does not routinely undertake or which it has decided not to undertake, the other Party may request such Party to undertake such actions and if the other Party does undertake such actions, it shall be reimbursed for all internal and external costs it incurs relating to such actions. 2. Joint Inventions. Any inventions relating to a Product, its administration, formulation or clinical use arising from the Parties' efforts under this Agreement that are jointly made by both Parties (i.e., an invention in which one or more inventors from each Party, including individuals normally obliged to assign an 35 42 invention to a Party, have made an inventive contribution as determined by United States Patent Law), and any patent applications and patents thereon, shall be jointly owned by the Parties. With respect to any such joint invention, the Parties intend that after consultation with each other, the filing, prosecution and maintenance of any patent applications thereon will be under the control of the Party from whom the majority of the data underlying such patent application arises (the "Controlling Party"), and the Controlling Party shall have the right (but not the obligation) to undertake such filings, prosecutions and maintenance at its sole expense, provided that: (a) the Controlling Party notifies the non-Controlling Party within one (1) month after the filing of any priority patent application by the Controlling Party; (b) the Controlling Party informs the non-Controlling Party within eight (8) months from the filing of the priority application whether and in which countries it intends to file convention applications; (c) the Controlling Party provides the non-Controlling Party promptly with copies of all communications received from or filed in patent offices with respect to such filings; and (d) the Controlling Party provides the non-Controlling Party a reasonable time prior to taking or failing to take action that would affect the scope or validity of rights under any patent applications or patents (including but not limited to substantially narrowing or canceling any claim, abandoning any patent or not filing or perfecting the filing of any patent application in any country), with notice of such proposed action or inaction so that the non-Controlling Party has a reasonable opportunity to review and make comments. In the event that the Controlling Party breaches the foregoing obligations regarding updating and consultation, and such breach is not cured with thirty (30) days of a written notice from the non-Controlling Party to the Controlling Party describing such breach, or in the event that the Controlling Party fails to undertake the filing of a patent application within ninety (90) days of a written notice by the non-Controlling Party to the Controlling Party that the non-Controlling Party believes filing of such an application is appropriate, the non-Controlling Party may undertake such filing, prosecution and maintenance at its sole expense, in which case the Controlling Party shall assign all its rights to such invention to the non-Controlling Party, and any patent application and subsequently issued patent thereon shall be owned solely by the non-Controlling Party. 3. Patent Infringement. (a) In the event that GENENTECH or ROCHE become aware of any infringement by a third party of any GENENTECH Patents in the Roche Territory, whether solely or jointly held, each Party shall inform the other in writing of all available evidence and details available concerning such infringement. Before taking any action, the Parties shall consult with each other as to the best manner in which to proceed. Either Party which is the sole owner of a Patent shall have the sole right but not the obligation to bring, defend, and maintain any appropriate suit or action or to control the conduct thereof against the infringer. 36 43 However, if the Parties agree to equally share all expenses, they shall also share the recoveries due to any such action. If the Parties do not agree to share all expenses, the paying Party will receive all recoveries due to any such action. If one Party requests the other Party to join in such suit or action, the other Party shall cooperate and execute all papers and perform such other acts as may be reasonably required. (b) In the event that GENENTECH and/or ROCHE are sued or threatened with suit in the Roche Territory, by a third party who claims that the manufacture, use or sale of a Product is an infringement of one or more claims of a patent owned or controlled by the third party, GENENTECH and ROCHE shall each pay its own costs in defending such suit or threatened suit. If the settlement of a lawsuit or threatened lawsuit or other action or a judgment arising out of a lawsuit requires any payments to a third party or license from a third party in order to manufacture, use or sell Product in a country as a result of a dominating third party patent right, GENENTECH agrees to reduce the royalty for that Product in that country specified in this Agreement by one-half of the amount of any such payments, up to a maximum reduction of two percent (2%) of the royalty due on Net Sales of that Product in that country. In such case, there shall be no additional reduction in royalties on Net Sales of that Product for that country because of dominating third party patent rights. 4. Third Party Patents. (a) If either Party becomes aware of any patent or other appropriate intellectual property belonging to a third party which the Party reasonably believes that without a license thereto GENENTECH would infringe by virtue of its obligations under Article IV to manufacture and supply both clinical and commercial needs for Bulk Product or Vialed Product in the Roche Territory, the Party shall notify the other Party of such. The Parties shall thereafter discuss a means of resolving such potential infringement including taking a license to such patent or other intellectual property. If as a result of an agreement between the parties, GENENTECH acquires a license to such patent or other intellectual property, the associated intellectual property acquisition and licensing costs shall be deemed to be part of the GENENTECH's Fully Burdened Manufacturing Cost. (b) If GENENTECH insists that such a license is necessary but ROCHE does not agree, or if ROCHE is not willing to agree to terms for such a license that are acceptable to the third party patent or intellectual property owner, then ROCHE shall defend, indemnify and hold harmless GENENTECH from and against all third party costs, claims, suits, expenses (including reasonable attorney's fees) and damages arising out of or resulting from any infringement by GENENTECH of such patent or intellectual property which covers the manufacture of the Product. (c) If ROCHE insists that such a license is necessary but GENENTECH does not agree, or if GENENTECH is not willing to agree to terms for such a license that are acceptable to the third party patent or intellectual property owner, then GENENTECH shall defend, indemnify and hold harmless ROCHE from and against all third party costs, claims, suits, expenses (including reasonable attorney's fees) and damages arising out of or resulting from any infringement by ROCHE of such patent or intellectual property which covers the manufacture of the Product. 37 44 (c) If ROCHE insists that such a license is necessary but GENENTECH does not agree, or if GENENTECH is not willing to agree to terms for such a license that are acceptable to the third party patent or intellectual property owner, then GENENTECH shall defend, indemnify and hold harmless ROCHE from and against all third party costs, claims, suits, expenses (including reasonable attorney's fees) and damages arising out of or resulting from any infringement by ROCHE of such patent or intellectual property which covers the manufacture of the Product. 5. Reporting on Patent Status. GENENTECH shall keep ROCHE informed of its efforts to secure one or more Patents its owns in the Roche Territory with one or more valid claims covering as compositions (a) Canada Products and DNase, and (b) Genentech Products, IDEC Product, Scios Product and In-Licensed Product for which ROCHE has exercised its option under Section 2 of Article II, or its use or sale in the Roche Territory. Such reports shall be made at the end of each year beginning in the year of execution of this Agreement and shall include the expiration date of any such patent which. 6. Trademark. GENENTECH will register in each major country in the Roche Territory, at its own expense, at least one Trademark for each Product for which ROCHE has exercised its option under Section 2 of Article II and will maintain it in force. GENENTECH shall monitor for trademarks that may infringe such Trademark at its sole expense. ROCHE shall inform GENENTECH of any infringing trademarks in major countries in the Roche Territory of which ROCHE becomes aware. GENENTECH shall hold ROCHE harmless from all loss, expense or damage such as interruption and loss of sales, destruction and reprinting of packaging and promotional material, damages to the adverse party and other similar consequences if a third party succeeds in enjoining ROCHE from distributing and marketing a Product outside the United States to the extent that such loss, expense or damage results from the use of GENENTECH's Trademark. In such event, ROCHE shall make best efforts to mitigate any losses both prospectively and subsequently. ARTICLE X - CONFIDENTIALITY AND PUBLICATIONS 1. Confidential Information. The Parties acknowledge that during the course of this Agreement they may receive from each other information which is proprietary and confidential and of significant commercial value to the disclosing Party. 38 45 Such information shall specifically include all data provided to ROCHE for its evaluation in connection the exercise of any option under Section 2 of Article II. Such information as well as any Know-How, so long as such Know-How is not generally ascertainable from publicly available information, to the extent provided by the other Party, shall be deemed "Information" as that term is used in the Mutual Confidentiality Agreement entered into as of September 8, 1990 between Roche Holding Ltd and GENENTECH, Inc. (the "Mutual Confidentiality Agreement"), and the Parties agree that such Information shall be subject to the terms and provisions of the Mutual Confidentiality Agreement. 2. Publications. Notwithstanding Section 1 of this Article, ROCHE shall be free to publish the results of the development activities hereunder to the extent that such publication will not result in the disclosure of Information of GENENTECH. ROCHE shall submit to GENENTECH any such proposed publication at least thirty (30) days in advance to allow GENENTECH to review such planned publication. GENENTECH will promptly report any decisions regarding the existence of patentable inventions, and should any patentable inventions be identified, ROCHE agrees to delay disclosure for a reasonable time period to allow filing of such patent applications. In addition, GENENTECH shall have the authority to require deletion from any such planned publication of any Information of GENENTECH. 3. Restrictions on Transfer of Proprietary Materials. Each Party agrees, with respect to any proprietary materials, substances, reagents or the like (except Product) received from the other Party ("Materials") that such materials shall be subject to the provisions of Mutual Agreement for Supply of Research Material entered into between GENENTECH Inc. and Roche Holding Ltd as of July 17, 1991. ARTICLE XI - LIABILITY 1. No Liability. Neither Party shall be liable to the other Party for indirect, incidental or consequential damages arising out of the terms and conditions of this Agreement or with respect to that Party's performance hereunder or lack thereof. 2. Indemnification by ROCHE. ROCHE shall defend, indemnify and hold harmless GENENTECH from and against all third party costs, claims, suits, expenses (including reasonable attorneys' fees), assessments, fines and damages (collectively "CLAIMS") arising out of or resulting from ROCHE's manufacturing (if any), formulating (if any), filling (if any), finishing, packaging, labeling, distributing, selling or using after title to a Product has passed to ROCHE from GENENTECH. The foregoing indemnification shall not extend to any claims which arise or result from any defect in GENENTECH's manufacture, formulation 39 46 or fill of the Product. The foregoing indemnification shall be conditioned upon GENENTECH: (a) providing written notice to ROCHE within twenty (20) days after GENENTECH has been given written notice of such Claim; (b) permitting ROCHE the opportunity to assume full responsibility (at ROCHE's expenses) for the investigation and defense of any such Claim; and (c) not settling or compromising any such Claim without ROCHE's prior written consent. 3. Indemnification by GENENTECH. GENENTECH shall defend and indemnify and hold harmless ROCHE from and against all third party costs, claims, suits, expenses (including reasonable attorney's fees) assessments, fines and damages (collectively "Claims") arising out of or resulting from its manufacture, formulating, filling and testing prior to passage of title to the Product to ROCHE from GENENTECH and which gives rise to a defect which could not normally be detected by adequate quality control testing on the part of ROCHE. The foregoing indemnification shall not extend to any claims which arise or result from any defect in ROCHE's manufacture of the Product (if such manufacture occurs). The foregoing indemnification shall be conditioned upon ROCHE: (a) providing written notice to GENENTECH within twenty (20) days after ROCHE has been given written notice of such Claim, (b) permitting GENENTECH the opportunity to assume full responsibility (at GENENTECH's expenses) for the investigation and defense of any such Claim; and (c) not settling or compromising any such Claim without GENENTECH's prior written consent. ARTICLE XII - TERM AND TERMINATION 1. Term. This Agreement shall enter into force and effect as of the Effective Date. This Agreement shall expire as to a Product when royalties are no longer payable by ROCHE to GENENTECH with respect to such Product unless the Parties mutually agree to extend this Agreement with respect to such Product. Thereafter, ROCHE shall have a fully paid-up license for such Product. 2. Termination by ROCHE. (a) ROCHE shall have the right to terminate its license for a Product in the Roche Territory hereunder at any time upon thirty (30) days prior written notice to GENENTECH. If ROCHE terminates its license for a Product in the Roche Territory for other than safety reasons, ROCHE shall continue to remain liable for all of its obligations with respect to said Product, including its obligations with respect to payment of its portion of Global Development Costs, for a period of twelve (12) months from the date of the termination notice or six (6) months from the date of termination notice in the specific circumstance where GENENTECH or ROCHE has completed at least one Phase III Trial for that Product and the results of that Trial, either alone or in conjunction with any other Phase III Trial involving the Product, are insufficient to support a Registration of the Product in a country set forth on Appendix B, or if results of other preclinical or clinical trials establish that further development 40 47 would not provide data sufficient to support Registration of the Product in a country set forth on Appendix B. If GENENTECH enters in a license agreement with a third party with respect to such Product in the Roche Territory within twelve (12) months from the date of termination notice, ROCHE shall be relieved of its obligations to pay its share of Global Development Costs during that twelve month period to the extent the third party licensee is obligated to pay those same costs. GENENTECH shall use diligent efforts to have such costs borne by the third party licensee where it is reasonable to do so. (b) If ROCHE terminates its license for a Product in the Roche Territory based on a good faith determination, after consultation with appropriate regulatory authorities in the relevant country, that the Product cannot be approved for sale in one or more major countries in the Collaborative Countries because of issues related to the safety of the Product. ROCHE shall continue to remain liable for all obligations with respect to that Product to the extent they are incurred primarily to support Registration of that Product, for a period not to exceed six (6) months from the date of termination, in the Roche Territory. The Parties agree to attempt to wind down such obligations and the activities associated therewith as soon as possible after ROCHE has terminated its license because of safety issues. (c) If ROCHE terminates its license, (i) all rights and licenses granted to ROCHE herein with respect to such Product and supply obligations of GENENTECH hereunder shall automatically terminate as of the date of termination; (ii) the transfer and assignment to GENENTECH or GENENTECH's designee of the Dossier and the Registration and all associated data, information, results and documents for such Product in the Roche Territory shall be done promptly and GENENTECH shall thereafter have an nonexclusive license thereto as well as to all ROCHE Patents and Know-How related to such Product and generated by ROCHE under this Agreement; and (iii) the Parties shall discuss and agree on a transfer of stocks of such Product held by ROCHE. 3. Termination by GENENTECH (a) If ROCHE fails to exercise its "best efforts" to commercialize a Product in a country in the Roche Territory, GENENTECH shall have the right to request ROCHE to take remedial measures. If GENENTECH makes such a request and ROCHE thereafter does not exercise such "best efforts" within a period of six (6) 41 48 months after GENENTECH has requested ROCHE to take remedial measures or if ROCHE fails to meet the requirements of Article III, Section 6, then GENENTECH shall have the right (x) to terminate ROCHE's license hereunder with respect to such country if Registration for the Product has not been initiated or (y) to convert the license to a nonexclusive one if Registration has been initiated and (i) all rights and licenses granted to ROCHE herein and Product supply obligations of GENENTECH with respect to such Product in such country shall automatically terminate as of the date of termination; (ii) the transfer and assignment to GENENTECH or GENENTECH's designee of the Dossier and the Registration and all associated data, information, results and documents for such Product in such country shall be done promptly and GENENTECH shall thereafter have an nonexclusive license thereto in such country as well as to all ROCHE Patents and Know-how related to such Product and developed by ROCHE under this Agreement; and (iii) the Parties shall discuss and agree on a transfer of stocks of such Product held by ROCHE with respect to such country. 4. Termination of Development/Commercialization. (a) GENENTECH may terminate at any time its development and/or commercialization of Product for which ROCHE has exercised its option under Article II. If GENENTECH so terminates its development and/or commercialization of a Product and if GENENTECH decides to enter into an agreement with a third party with respect to rights to such Product in the United States, the provisions of Section 3.07 of the Governance Agreement shall apply. In such event, GENENTECH's obligation to manufacture and supply Clinical Requirements or Commercial Requirements of that Product to ROCHE shall terminate in the following manner: (1) If GENENTECH terminates for reasons related to the safety of the Product, such obligation shall terminate immediately. (2) If GENENTECH terminates for reasons other than safety, e.g., efficacy or cost effectiveness or the like, such obligation shall continue until the earlier to occur of two (2) years from the date of GENENTECH's notice to ROCHE of such termination or on the date ROCHE advises GENENTECH that no such further supply is required. ROCHE thereafter shall have the royalty-free right and license to produce and 42 49 supply all of ROCHE's Clinical Requirements and Commercial Requirements for use and sale in the Roche Territory. Upon such termination by GENENTECH, it shall promptly transfer all of the Manufacturing Technology for that Product to ROCHE. (b) ROCHE may terminate at any time its development and/or commercialization of a Small Molecule Product. In such event, ROCHE's obligation to manufacture and supply Clinical Requirements or Commercial Requirements of that Product to GENENTECH shall terminate in the following manner: (1) If ROCHE terminates for reasons related to the safety of the Product, such obligation shall terminate immediately. (2) If ROCHE terminates for reasons other than safety, e.g.., efficacy or cost effectiveness or the like, such obligation shall continue until the earlier to occur of two (2) years from the date of ROCHE's notice to GENENTECH of such termination or on the date GENENTECH advises ROCHE that no such further supply is required. GENENTECH shall thereafter have the royalty-free right and license to produce and supply all of its Clinical Requirements and Commercial Requirements for sale in the United States. Upon such termination by ROCHE, it shall promptly transfer all of the Manufacturing Technology for that Product to GENENTECH. 5. Termination for Breach. Except as provided in Section 3 of this Article, either Party may terminate this Agreement upon the failure of the other Party to comply with any of its material obligations contained in this Agreement or in the Governance Agreement. Such termination shall become effective at any time after providing sixty (60) days' written notice by the non-breaching Party specifying the breach and its intent to terminate the Agreement; provided that the breaching Party shall have an opportunity to cure any defect or omission during such sixty (60) day period. Should such cure be effected, such notice shall be null and void. Any other provision of this Agreement notwithstanding, termination of this Agreement for failure to comply with a material obligation shall be without prejudice to -- (a) any remedies which either Party may then or thereafter have hereunder or at law; and (b) either Party's right to obtain performance of any obligations provided for in this Agreement which survive termination by their terms or 43 50 by a fair interpretation of this Agreement. 6. Certain Proceedings. In the event any action or proceeding before any court or governmental agency or other regulatory or administrative agency or commission, by any governmental or other regulatory or administrative agency or commission or by any other person, successfully challenging this Agreement or the relations or actions of the Parties contemplated hereby or otherwise materially and adversely affecting the business or property (including the goodwill and business reputation and character) of a Party hereto, the Parties shall discuss an appropriate termination of this Agreement and the terms and conditions associated with such termination. 7. Termination For Change in Ownership. If at any time during the term of this Agreement, ROCHE's equity ownership of GENENTECH securities is less than fifty percent (50%) of all such securities then outstanding, ROCHE's right to exercise any unexercised options set forth in Article II above shall terminate immediately. 8. Survival of Terms. The foregoing notwithstanding, the provisions of Articles IX, X, XI, XII and XIII as well as any provisions which by their specific language or context are intended to or can be fairly read to survive termination of this Agreement, shall survive any termination of this Agreement for any reason. ARTICLE XIII - MISCELLANEOUS 1. Disclaimer of Certain Warranties. Information, reagents and materials (except Product) transferred from one Party to another in the course of this Agreement are supplied "as is" without warranties, express or implied, including any warranty of merchantability, title, freedom from infringement or fitness for a particular use. 2. Entire Agreement, Amendment. (a) Except as provided in subsection (b), this Agreement, as amended, constitutes the entire agreement between the Parties with respect to the subject matter hereof, supersedes all prior agreements, understandings and communications, oral or written, relating to the subject matter hereof (including but not limited to the minutes of the meeting between ROCHE and GENENTECH in London of May 1, 1997 and the letter agreement dated May 29, 1998, between ROCHE and GENENTECH with respect to Xubix), and shall not be modified, altered or amended except by mutual written agreement of the Parties. (b) This Agreement shall not supersede the DNase Supply Agreement except that the terms of such Agreement shall be expanded to include the supply of DNase in Canada. 44 51 (c) This Agreement shall not supersede any terms of the IIbIIIa Agreement unless specifically mentioned in Section 11 and 12 of Article II. 3. Failure to Enforce. The failure by either Party at any time or for any period of time to enforce any term or provision of this Agreement shall not be construed as a waiver of such term or provision or of the right of either Party to enforce each and every such term and provision. 4. Force Majeure. If either Party shall be delayed, interrupted in or prevented from the performance of any obligation hereunder by reason of Force Majeure including an act of God, fire, flood, war (declared or undeclared), public disaster, strike or labor differences, governmental enactment, rule or regulation, or any other cause beyond such Party's control, such Party shall not be liable to the other therefor and the time for performance of such obligation shall be extended for a period equal to the duration of the contingency which occasioned the delay, interruption or prevention. The Party invoking such Force Majeure rights must notify the other Party within a period of fifteen (15) days, from the first and the last day of the Force Majeure unless the Force Majeure renders such notification impossible in which case notification will be made as soon as possible. If the delay resulting from the Force Majeure exceeds six (6) months, both Parties shall consult each other to find an appropriate solution. 5. Arbitration. In the event of any dispute, controversy or claim arising out of or relating to this Agreement, the Parties shall try to settle such disputes, controversies or claims amicably between themselves including referring such dispute, controversy or claim to the Chief Executive Officer of GENENTECH and a member of ROCHE's Executive Committee. If the Parties are unable to so settle such dispute, controversy or claim, then any such dispute, controversy or claim arising out of or relating to any provision of this Agreement or the interpretation, enforceability, performance, breach, termination or validity hereof, including, without limitation, this arbitration clause shall be solely and finally settled by arbitration in the manner specified in this Section. All arbitration proceedings shall be conducted in New York City. If ROCHE requests the commencement of such proceedings, the arbitration proceedings shall be conducted under the procedural rules of the American Arbitration Association. If GENENTECH requests the commencement of proceedings, arbitration proceedings shall be conducted under the procedural rules of the International Arbitration Rules of the Zurich Chamber of Commerce. In either case, proceedings in the arbitration shall conducted in the English language, and all documents not in English submitted by either party must be accompanied by a translation into English. The Party requesting arbitration shall serve upon the other 45 52 Party a written demand for arbitration stating the substance of the controversy, dispute or claim, and the contention of the Party requesting arbitration. Within sixty (60) days after the demand, the Parties shall select three (3) mutually acceptable arbitrators. The arbitrators are to act as neutral arbitrators and shall have no past, present or anticipated future affiliation with the Parties or any relationship with the Parties which would unduly influence the independence of an arbitrator. If the Parties are unable to agree upon three (3) mutually acceptable arbitrators, the arbitration agent under whose rules the arbitration is proceeding shall appoint three (3) arbitrators. No more than two arbitrators shall be citizens and/or residents of the United States or citizens and/or residents of Switzerland. The decision of the arbitrators shall be in writing setting forth the basis therefore. The arbitrators shall have the authority to award such remedies as they believe are appropriate in the circumstances, including, but not limited to, compensatory damages, consequential and incidental damages, interest, tort damages (but not punitive or similar damages) and specific performance and other equitable relief. The Parties shall abide by the award rendered in such arbitration proceeding, and such award may be enforced and executed upon in any court having jurisdiction over the Party against whom enforcement of such award is sought. The Parties shall divide equally the administrative charges, arbitrators's fees and related expenses of arbitration, but each Party shall pay its own attorney's fees incurred in connection with such arbitration; provided, however, if the arbitrators determine that one Party prevailed clearly and substantially over the other Party, then the non-prevailing party shall also pay the prevailing Party's reasonable attorney's fees and expert witness costs and arbitration costs. 6. Notices. Requests, notices and reports required or permitted under this Agreement shall be in writing and shall be sent by telefax or telecopier (with written confirmation) or express mail to the address set forth below or such other address as a Party may designate from time to time in accordance with this Section: to ROCHE: F. Hoffmann-La Roche Ltd Corporate Law Grenzacherstrasse 124 CH-4070 Basel, Switzerland to GENENTECH: Genentech, Inc. Corporate Secretary 1 DNA Way South San Francisco, California 94080 U.S.A. 7. Use of Names. Neither Party will use or refer to this Agreement in any 46 53 promotional activity, or use the marks of the other Party, without express prior written permission of the other Party. Either Party shall refrain from making any public announcement or disclosure of this Agreement and its terms without the prior written consent of the other Party except as required by law. 8. Successors and Assigns. Neither Party may assign this Agreement or any rights hereunder in any manner, whether by virtue of law or otherwise, without the prior written consent of the other Party, except that GENENTECH may assign part or all of its responsibilities and obligations under this Agreement to one or more wholly-owned subsidiaries of GENENTECH. 9. Headings. The section headings of this Agreement are for convenience only and are not a part of this Agreement. 10. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 11. Severability. The Parties hereby expressly state that it is not their intention to violate any applicable rule, law or regulation. If any of the provisions of this Agreement are held to be void or unenforceable with regard to any particular country by a court of competent jurisdiction, then, to the extent possible, such void or unenforceable provision shall be replaced by a valid and enforceable provision which will achieve as far as possible the economic business intentions of the Parties. The provisions held to be void or unenforceable shall remain, however, in full force and effect with regard to all other countries. 12. Governing Law. This Agreement shall be governed by and construed for all purposes in accordance with the laws of the State of New York. 13. Relationship. Neither ROCHE or GENENTECH is in any way the legal representative or agent of the other, nor authorized or empowered to assume any obligation of any kind, implied or expressed, on behalf of the other, without the express written consent of the other. IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their duly authorized representatives as of the Effective Date. 47 54 GENENTECH, INC. F. HOFFMANN-LA ROCHE LTD By By --------------------------------- -------------------------------------- Title Title ------------------------------ ----------------------------------- By -------------------------------------- Title ----------------------------------- GENENTECH EUROPE LIMITED By --------------------------------- Title ------------------------------ GENENTECH BIOPHARMACEUTICALS LIMITED By --------------------------------- Title ------------------------------ GENENTECH INTERNATIONAL LIMITED By --------------------------------- Title ------------------------------ 48 55 APPENDIX A AMENDED AND RESTATED FINANCIAL APPENDIX 49 56 FINANCIAL APPENDIX TO THE AMENDED AND RESTATED AGREEMENT This document is the Financial Appendix to the Amended and Restated Agreement (the "License Agreement") effective as of the Effective Date, and amended and restated as of the Restatement Date, between F. Hoffmann-La Roche Ltd (ROCHE) and Genentech, Inc., Genentech Europe Limited, Genentech Biopharmaceuticals Limited and Genentech International Limited (GENENTECH) and contains the financial definitions and descriptions of their applicable to the License Agreements. 1. DEFINITIONS NET SALES - Shall mean the gross invoice price for sales of the product to third parties less deductions of returns (including withdrawals and recalls), rebates (price reductions including Medicare or similar types of rebates), volume (quantity) discounts granted at the time of invoicing, sales taxes and other taxes directly linked to sales, as computed in the central ROCHE Sales Statistics (referred to as Markis) for the countries concerned. In addition to this above computed adjusted gross invoice price, for all other expenses like Sales Deductions (outward freights, transportation insurance, packing materials for dispatch of goods, custom duties), Sales Expenses (discounts granted later than at the time for invoicing), Cash Discounts and other direct expenses, there shall be a lump sum deduction of three percent (3%). COSTS OF SALES - Shall mean GENENTECH's Fully Burdened Manufacturing Costs determined in accordance with GENENTECH accounting policy which is based on U.S. GAAP as applied by GENENTECH. GENENTECH'S FULLY BURDENED MANUFACTURING COST - shall mean GENENTECH's consolidated fully burdened manufacturing costs (as defined in GENENTECH's Accounting Policies) of Bulk Product, Vialed Product or Finished Product, as the case may be, which in summary shall comprise the sum of: a) The cost of goods produced for clinical or commercial use as determined in accordance with U.S. generally accepted accounting principles as applied by GENENTECH including, but not limited to, direct labor and material and product testing costs as well as allocable overhead; b) All of GENENTECH'S allocable intellectually property acquisition, licensing and royalty costs paid to third parties upon the sale of Product by ROCHE to third parties (unless any such cost is specifically identified as the sole cost of GENENTECH in the License Agreement); c) Any other costs borne by GENENTECH for transport, customs clearance and storage of product (if necessary) at the request of ROCHE (i.e., freight, duty, insurance and warehousing). 50 57 DEVELOPMENT COSTS - shall mean the development costs actually incurred by GENENTECH after the date of GENENTECH's decision to bring a product into development through the date of marketing approval or termination of development efforts of the final indication for which marketing approval in any country is sought. Such costs shall comprise those costs, both direct and indirect (i.e. fully burdened costs), required to obtain the authorization and/or ability to manufacture, formulate, fill, ship and/or sell the product in commercial quantities to the third parties. Such Development Costs shall include but are not limited to costs of development including cost of studies on the toxicological, pharmacokinetical, metabolical or clinical aspects of the product conducted internally or by individual investigators, or consultants necessary for the purpose of obtaining and/or maintaining approval in any country of the product, process development and scale up costs, qualification lots, costs for preparing, submitting, reviewing or developing data or information for the purpose of submission to the U.S. Food and Drug Administration or other governmental authority to obtain and/or maintain approval in any country. These costs shall include expenses for data management, statistical designs and studies, document preparation, and other administration expenses associated with the clinical testing program. Development Costs shall include all such Costs incurred by GENENTECH up to the product's Entry Into Man or Phase II Completion Date, as applicable. Development Costs after the product's Entry Into Man or Phase II Completion Date, as applicable, shall be limited to all such Costs incurred by GENENTECH thereafter (i) to the extent such Costs result in the development of data, information, processes, materials or the like which are used by ROCHE in a filing for a Registration or for the commercialization of that Product and (ii) to the extent such costs are incurred in any development of a process or processes used to manufacture the Product for supply to ROCHE. In determining Development Costs, GENENTECH will use its Project Cost System. GLOBAL DEVELOPMENT COST - Shall mean the costs specifically attributable to the development of a Product and actually incurred after the date of decision to bring a Product into development (which date shall usually be: -for a Genentech Product, the official decision of Genentech's Executive Committee to develop a product - for Roche Product a formal decision point which corresponds to Genentech's official decision by the Executive Committee) through the date of marketing approval or termination of development efforts of the final indication for which marketing approval is sought in the USA and/or the Collaborative Countries. For illustration purposes, Global Development Costs for Product shall include IND enabling toxicology costs but shall not include optimization of lead candidates. Such costs shall comprise those costs, both direct and indirect including Allocable Overhead (i.e. fully burdened costs), required to obtain the authorization to manufacture, formulate, fill, ship and/or sell a Product in commercial quantities in the USA and/or the Collaborative Countries to third parties. Such Global Development Costs shall include but are not limited to costs of development including cost of studies on the toxicological, pharmacokinetical, 51 58 metabolical or clinical aspects of a Product conducted internally or by individual investigators or consultants, manufacturing process development and scale up costs, qualification lots, costs for preparing, submitting, reviewing or developing data or information necessary for the purpose of submission to the FDA, EMEA or other governmental authority in order to obtain and/or maintain approval of a Product in the USA and/or the Collaborative Countries. These costs shall include expenses for data management, statistical designs and studies, document preparation, and other administration expenses associated with the clinical testing program. These costs shall include costs incurred in geographical areas other than USA and/or the Collaborative Countries (e.g.: Canada, South Africa and Brazil) only to the extent that the activities related with such costs are specifically planned (and specifically included in the mutually approved global development plan and budget) to be incurred in such geographical areas for the purpose of generating data or information required to obtain the above mentioned authorization in the USA and/or the Collaborative Countries. These costs shall not include Patent costs, pre-registration marketing costs (e.g. trademark costs, advertising agency selection costs, pre-marketing studies), post-registration clinical and marketing studies which are not conducted as part of the global development plan. In determining Global Development Cost, each Party will use its applicable project cost system with the purpose of tracking costs as much as possible on a product indication- by-product indication basis. ALLOCABLE OVERHEAD - Shall mean costs incurred by a Party or for its account which are attributable to a Party's supervisory services, occupancy costs, corporate bonus (to the extent not charged directly), and its payroll, information systems, human resources or purchasing functions and which are allocated to company departments based on a space occupied or headcount or other activity-based method. Allocable Overhead shall not include any costs attributable to general corporate activities including, by way of example, executive management, investor relations, business development, legal affairs and finance. 2. TRANSFER PRICE OF PRODUCT FROM GENENTECH TO ROCHE Transfer Price of Product from GENENTECH to ROCHE - The total amount due GENENTECH for the transfer of product from GENENTECH to ROCHE shall be the amount defined below: The first installment payment shall be GENENTECH's Cost of Sales plus a margin of twenty (20%) of the Cost of Sales of the Product. Such margin shall be calculated on Cost of Sale exclusive of the sum of (a) GENENTECH's allocable intellectual property acquisition, licensing and royalty costs paid to third parties upon the sale of product by 52 59 ROCHE to third parties and (b) any other costs borne by GENENTECH for transport, customs clearance and storage of product at the request of ROCHE. Such installment will be billed to ROCHE in U.S. Dollars. Payment of the first installment shall be made by ROCHE to GENENTECH in U.S. Dollars within thirty (30) days after shipment. The second installment payment to GENENTECH shall be the payment defined in Article VI, Sections 3, 4, 5, 6, 7 and 8 of the License Agreement. 3. REIMBURSEMENT OF GENENTECH DEVELOPMENT COSTS Development Costs incurred prior to ROCHE's exercise of its option for a product -- Thirty days prior to the date by which ROCHE must exercise its option for a product , GENENTECH shall choose one of the following methods for reimbursement of Development Costs incurred prior to exercise of such option, the choice being subject to ROCHE's consent which shall not be unreasonably withheld: A.) Lump sum payment equal to fifty percent (50%) of the cumulative Development Costs incurred prior to ROCHE's exercise of such option, due thirty days after ROCHE's exercise of such option, or B.) Quarterly payments, due 30 days after invoicing from GENENTECH, equal to one hundred and fifty percent (150%) of the Development Costs incurred after ROCHE's exercise of a Product option until such the cumulative amount paid thereunder equals fifty percent (50%) of the cumulative Development Costs incurred prior to ROCHE's exercise of such option plus interest at LIBOR from the date of such option exercise. GENENTECH shall invoice ROCHE for the amount due hereunder within 30 days of the end of each quarter. Development Costs incurred after ROCHE's exercise of a Product Option - Quarterly payments, due 30 days after invoicing from GENENTECH, equal to fifty percent (50%), in the event ROCHE exercised its option for such Product within the exercise period after such Product's Entry Into Man, or seventy-five percent (75%), in the event ROCHE exercised its option for such Product within the allowable period after a Phase II Completion Date for such Product, of GENENTECH's Development Costs incurred after ROCHE's exercise of a Product option. GENENTECH shall invoice ROCHE for the amount due hereunder within 30 days of the end of each quarter. For products which GENENTECH can only license Canadian rights to ROCHE, the fifty percent (50%) reimbursement of Development Costs provided in this Section 3 of this Appendix shall be reduced to ten percent (10%). For IGF-1 Products for any diabetes indication, the fifty percent (50%) reimbursement of Development Costs provided in this section 3 of this Appendix shall be increased to sixty percent (60%). For NGF Products, the fifty percent (50%) reimbursement of Development Costs 53 60 provided in this section 3 of this Appendix shall be reduced to forty percent (40%). 4. SHARING AND REIMBURSEMENT OF GLOBAL DEVELOPMENT COSTS a) Global Development Costs incurred prior to a Party's exercise of its option for a Product - Unless specifically otherwise stated in Part 2 of this Appendix, the following shall apply: Lump sum payment equal to fifty percent (50%) of the cumulative Global Development Cost incurred prior to the opting party's exercise of such option, during thirty days after the opting party's exercise of such option and receipt of an invoice from the licensor. b) Global Development Cost incurred after a party's exercise of its option for a Product shall be shared as shown in Part 2 of this Financial Appendix. The global development plan and budget as agreed by the Commercialization Committee for such Product shall be the reference for sharing Global Development Cost. The parties shall share development costs provided that they relate to activities which have been planned for and budgeted either in a global development plan and budget agreed between the parties before the Option Date or in one of the subsequently jointly agreed updates of such global development plan and budget after the Option Date. In the case of I) activities or costs which have not been planned and budgeted but have actually been incurred by a Party or ii) actual costs of planned activities which have significantly exceeded (more than 10%) the amount budgeted, the Commercialization Committee shall decide whether and/or how such additional costs shall be shared between the parties. On a quarterly calendar basis and after the opting party's exercise of such option, within 30 days after the end of each calendar quarter, each party shall provide the other with an invoice for the amount of Global Development Cost it has incurred and which is due for reimbursement by such other party for such quarter, using the cost sharing rate as specified in Part 2 of this Appendix for such Product. Such amount shall be expressed in U.S. dollars and payable within 30 days from receipt of such invoice. Such invoice shall be accompanied by a report specifying such Global Development Costs on a product indication-by-product indication basis and providing details per activity as specified by the Commercialization Committee and show in local currency and U.S. dollars in a manner consistent with the amounts budgeted for such activities. Whenever for the purpose of calculating conversation of Global Development Costs from any foreign currency into U.S. dollars shall be required, such conversion shall be made using the average quarterly rate of exchange at the 54 61 time for such currencies as retrieved from the Reuters System for the countries concerned. 5. BUDGET AND BUSINESS PLAN ROCHE shall provide GENENTECH within 30 days of availability in final form, ROCHE's budget (prepared annually and covering a one year period) and Business Plans (prepared annually and covering at least a three (3) year period) for each Product for which ROCHE has exercised its option under Article II of the Agreement. 6. AUDITS AND INTERIM REVIEWS Audit work will be performed in the following manner. If deemed necessary by either ROCHE or GENENTECH, an audit by independent certified public accountants may be requested. Such audits will be at the sole expense of the requesting Party and will be performed by the officially appointed auditor of the Party audited. If GENENTECH requests audit work of the ROCHE accounts, the audit will be performed by ROCHE's appointed worldwide auditor which is currently Price Waterhouse, LLP. If ROCHE requests audit work of the GENENTECH accounts, the audit will be performed by the independent auditor appointed by GENENTECH which is currently Ernst & Young, LLP. 7. STATE OF ACCOUNTING AND REIMBURSEMENT Determination of Development Costs shall be made retroactive to the date of GENENTECH's decision to bring each product into development for all product other than those product indications marketed in the United States as of June 30, 1995. There shall be no reimbursement of Development Costs incurred prior to July 1, 1995 for any indication marketed in the United States as of June 30, 1995 or for Pulmozyme for COPD. 55 62 Reimbursement of Development Costs owned to GENENTECH under section 3 of this Appendix for Products which have reached ROCHE's product option exercise date as of the effective date of this agreement shall be due 60 days after the exercise of such option. Royalties due GENENTECH under the License Agreement will commence as set forth in the Agreement. Recognizing that ROCHE prepares complete accounts for its activities in the GENRO collaboration only on June 30th and December 31st of each year, the GENRO Finance Committee (as currently constituted) will agree on an appropriate basis to settle profit sharing under the current arrangement from July 1, 1995 to such items the operation of Genentech Europe Ltd. are transferred to ROCHE in accordance with Article VII, section 1, of the License Agreement. 56 63 FINANCIAL APPENDIX PART 2 When inconsistent with Part 1, terms and conditions of Part 2 shall supersede those as defined in Part 1. 1) Sharing of Global Development Costs after Option Global Development Costs shall be shared fifty percent by ROCHE and fifty percent by GENENTECH. 57 64 APPENDIX A FINANCIAL APPENDIX TO THE AMENDED AND RESTATED AGREEMENT This document is the Financial Appendix to the Amended and Restated Agreement (the "License Agreement") effective as of the Effective Date, and amended and restated as of the Restatement Date, between F. Hoffmann-La Roche Ltd. (ROCHE) and Genentech, Inc., Genentech Europe Limited, Genentech Biopharmaceuticals Limited and Genentech International Limited (GENENTECH) and contains the financial definitions and descriptions applicable to the License Agreement. When inconsistent with the License Agreement, terms and conditions of the License Agreement shall prevail upon those as defined herein. Terms not defined in this Financial Appendix shall have the meanings set forth in the License Agreement. 1. DEFINITIONS ADJUSTED GROSS SALES - Shall mean the gross sales amount invoiced by either Party, their Affiliates, or sublicensees for a Product to non-Affiliated third party purchasers in the Territory less, to the extent such amounts are included in the amount of gross sales invoiced, deductions of returns (including withdrawals and recalls), rebates (price reductions including Medicaid and similar types of rebates, e.g., chargebacks or retroactive price reductions), volume (quantity) discounts, discounts granted at the time of invoicing, sales taxes and other taxes directly linked to the gross sales amount as computed on a product-by-product basis and reported in the central ROCHE sales statistics for the countries concerned. NET SALES - Shall mean the amount calculated by subtracting from the amount of Adjusted Gross Sales a lump sum deduction of three percent (3 %) for those sales related deductions which are not accounted for on a product-by-product basis, to the extent not already included in the determination of the Adjusted Gross Sales (such costs shall include but are not limited to costs of outward freights, postage charges, transportation insurance, packaging materials for dispatch of goods, custom duties, discounts granted later than at the time of invoicing, cash discounts and other direct sales expenses). COSTS OF GOODS - For Bulk Product, semi-finished (e.g. Vialed Product), or Finished Product, as the case may be, shall be the sum of : i) Fully Burdened Manufacturing Cost (FBMC) ; ii) Outbound Costs Financial Appendix to the Amended and Restated Agreement 1 65 In the event Product is supplied for clinical or commercial purposes, such Cost of Goods shall not include item i) above to the extent it has already been considered or charged within Genentech's Development Costs or Global Development Costs. FULLY BURDENED MANUFACTURING COST - (FBMC) - Shall mean GENENTECH's fully burdened manufacturing costs of Bulk Product, semi-finished, or Finished Product, as the case may be, shipped for clinical or commercial use and determined in accordance with generally accepted accounting principles as applied by GENENTECH. Such FBMC shall include direct labor, materials, product testing costs (including QC and QA bulk testing and in-process testing e.g. adventitious virus and mycoplasma testing), and Allocable Overhead for manufacturing or contracting for each stage of the manufacturing process of the product shipped. GENENTECH will discuss annually with ROCHE the main drivers of estimated and actual FBMC such as yields and Failures. Four years after the launch of the Product the Parties will agree on an annual standard cost for the bulk material manufactured to be charged. Such standard cost will consider yields, success factors (Failures) and other pertinent data. In any case, yield losses and Failures which go beyond what could be reasonably expected and/or justified in this area of technology shall remain the sole costs of GENENTECH. Such FMBC shall not include any costs associated with expired products to the extent that the actual quantity of material purchased is at least equal to the amount of the firm orders. (Firm orders shall be ROCHE's latest production quantity request prior to each manufacturing campaign of GENENTECH.) GENENTECH agrees to consider the worldwide sales and production needs when establishing its manufacturing campaign plans. A supply agreement to be entered between the Parties shall determine which and when forecasts shall become firm orders. Such FBMC shall not include any costs associated with all of GENENTECH's allocable intellectual property acquisition, licensing and royalty costs payable by GENENTECH to third parties in relation with the manufacturing formulation, filling, use or sale of a Product. Such FBMC shall not include any costs associated with process development, scale up costs, qualification lots and any other costs if they are included in Genentech's Development Costs or Global Development Cost. OUTBOUND COSTS - Shall mean any outbound costs borne by GENENTECH at the request of ROCHE including but not limited to transport, customs clearance and storage of Product (i.e., freight, duty, insurance and warehousing). ALLOCABLE OVERHEAD - Shall mean costs incurred by a Party or for its account which are attributable to a Party's supervisory services, occupancy costs, corporate bonus (to the extent not charged directly), and its payroll, information systems, human resources or purchasing functions Financial Appendix to the Amended and Restated Agreement 2 66 and which are allocated to company departments based on a space occupied or headcount or other activity-based method. Allocable Overhead shall not include any costs attributable to general corporate activities including, by way of example, executive management, investor relations, business development, legal affairs and finance. TRANSFER OF MANUFACTURING - In the case where ROCHE assumes manufacturing for its supply requirements pursuant to Article V, Section 13 (i) of the License Agreement, ROCHE will reimburse GENENTECH for 100 % of the costs incurred by GENENTECH in making the transfer including overhead and for the cost of Idle Capacity as describe in the next section. COST OF IDLE CAPACITY --- The principle of cost of Idle Capacity shall only apply in the case of Article V, Section 13 (i) of the License Agreement and for a period of four (4) years from notification by ROCHE that it will assume manufacturing. The Cost of Idle Capacity (CIC) shall be determined and charged to ROCHE as follows: i) ROCHE will be charged other operating costs calculated as follows: (capacity utilized by ROCHE prior to ROCHE's notification minus capacity actually used for the supply for the ROCHE Territory) divided by (total capacity utilized by the Parties for the Product(s) prior to ROCHE's notification minus capacity actually used for the supply of Product(s) for GENENTECH's and ROCHE's Territory) multiplied by depreciation, plant maintenance cost and other fixed manufacturing cost related to the total capacity utilized for Product(s) prior to ROCHE's notification. The result of this method of accounting for idle capacity is to ensure that GENENTECH charges ROCHE the share of depreciation, plant maintenance cost and other fixed manufacturing cost related to the capacity for the supply of the Product(s) for the ROCHE Territory utilized prior to ROCHE's notification but actually not utilized after ROCHE assumes manufacturing. (ii) GENENTECH shall notify the Joint Finance Committee (JFC) prospectively of any such charge hereunder, including the calculation thereof, in writing. The JFC shall review any such calculated charge hereunder and shall be entitled to receive from GENENTECH such financial and other information as Financial Appendix to the Amended and Restated Agreement 3 67 the JFC shall reasonably deem necessary in order to confirm (or correct) the calculated charge. (iii) To the extent feasible and reasonable, GENENTECH will make best efforts to use idle capacity for its own products that are not Products under the Agreement, with the effect that the idle plant cost charge to ROCHE set forth herein is reduced dollar for dollar for the portion of capacity actually used by GENENTECH in such fashion. FAILURES - Shall mean Bulk Product, semi-finished, or Finished Product, as the case may be, that: 1. does not meet the specifications, or 2. was not manufactured or tested in accordance with the procedures, or 3. was not manufactured in accordance with cGMPs. Only those tests listed in the specifications may be used to determine conformity. THIRD PARTY ROYALTIES - Shall mean all of GENENTECH's allocable intellectual property acquisition, licensing and royalty costs paid to third parties upon the sale of Product by ROCHE to third parties (unless any such cost is specifically identified as the sole cost of GENENTECH in the License Agreement) , such royalties being payable to third parties as a result of licenses from third parties for the manufacture, formulation, filling, use or sale of a Product. Each Party shall bear the full cost related to Third Party Royalties for the units of Product sold in its Territory. Procedures for converting from foreign currencies and paying such royalty to the other Party shall be as described below in section 6. GENENTECH shall provide ROCHE the details of such Third Party Royalties obligations including but not limited to the name of the third party, the rate, the duration and the "Net Sales" basis for calculation of such payment. Such information shall be periodically updated for changes (as need be) by GENENTECH or at ROCHE's request. DEVELOPMENT COSTS - With respect to GENENTECH whether as part of Genentech's Development Costs or as part of Global Development Costs, shall mean the development costs actually incurred by GENENTECH after the date of GENENTECH's decision to bring a Product into development (for illustration purposes Development Costs for Product shall include IND enabling toxicology costs but shall not include optimization of lead candidates ) through the date of marketing approval or termination of development efforts of the final indication for which marketing approval in any country is sought. Such costs shall comprise those costs, both direct and indirect (i.e. fully burdened costs), required to obtain the authorization and/or ability to manufacture, formulate, fill, ship and/or sell the Product in commercial quantities to the third parties. Such Development Costs shall include but are not limited to costs of development including cost of studies on the toxicological, pharmacokinetical, metabolical or clinical aspects Financial Appendix to the Amended and Restated Agreement 4 68 of the Product conducted internally or by individual investigators, or consultants necessary for the purpose of obtaining and/or maintaining approval in any country of the Product, process development and scale up costs, qualification lots, costs for preparing, submitting, reviewing or developing data or information for the purpose of submission to the U.S. Food and Drug Administration or other governmental authority to obtain and/or maintain approval in any country. These costs shall include expenses for data management, statistical designs and studies, document preparation, and other administration expenses associated with the clinical testing program. These costs shall not include Patent costs, pre-Registration marketing costs (e.g. trademark costs, advertising agency selection costs, pre-marketing studies), post-Registration clinical studies which are not enabling for Registration of the Product and post-Registration marketing studies. GENENTECH'S DEVELOPMENT COSTS - shall include all such Costs incurred by GENENTECH up to ROCHE's exercise of its option for a Product at Entry Into Man or Phase II or Phase III Completion Date, as applicable. In determining Development Costs, GENENTECH will use its Project Cost System with the purpose of tracking costs as much as possible on a product indication-by-product indication basis. GLOBAL DEVELOPMENT COSTS - Shall mean the costs specifically attributable to the development of a Product and actually incurred after the date of ROCHE's decision to exercise its option for a GENENTECH or an In-Licensed Product through the date of marketing approval or termination of development efforts of the final indication or formulation or dosing for which marketing approval is sought in the USA and/or the Collaborative Countries. Such costs shall comprise those costs, both direct and indirect including Allocable Overhead (i.e. fully burdened costs), required to obtain the authorization to manufacture, formulate, fill, ship and/or sell a Product in commercial quantities in the USA and/or the Collaborative Countries to third parties. Such Global Development Costs shall include but are not limited to costs of development including cost of studies on the toxicological, pharmacokinetical, metabolical or clinical aspects of a Product conducted internally or by individual investigators or consultants, manufacturing process development and scale up costs, qualification lots, costs for preparing, submitting, reviewing or developing data or information necessary for the purpose of submission to the FDA, EMEA or other governmental authority in order to obtain and/or maintain approval of a Product in the USA and/or the Collaborative Countries. These costs shall include expenses for data management, statistical designs and studies, document preparation, and other administration expenses associated with the clinical testing program. Financial Appendix to the Amended and Restated Agreement 5 69 These costs shall include costs incurred in geographical areas other than USA and/or the Collaborative Countries (e.g.: Canada, South Africa and Brazil) only to the extent that the activities related with such costs are specifically planned (and specifically included in the mutually approved global development plan and budget) to be incurred in such geographical areas for the purpose of generating data or information required to obtain the above mentioned authorization in the USA and/or the Collaborative Countries. These costs shall not include Patent costs, pre-registration marketing costs (e.g. trademark costs, advertising agency selection costs, pre-marketing studies), post-registration clinical and marketing studies which are not conducted as part of the global development plan. In determining Global Development Costs, each Party will use its applicable project cost system with the purpose of tracking costs as much as possible on a product indication-by-product indication basis. As the case may be, Global Development Costs shall exclude for a Product development costs attributable to specific indications for which one Party has opted out as described in the next section for such Product as updated from time to time. ADDITIONAL INDICATION OPT OUT I OPT BACK IN - When ROCHE opts in for a Product, it will opt in for all indications for such Product. Each Party has the right to opt out of the development of an additional indication for a Product beyond the initial indication for that Product at one of the following three decision points: a) Executive Committee decision of GENENTECH to develop an indication or the equivalent ROCHE decision as defined above b) End of Phase II c) A formal decision point in phase III defined in the clinical study protocol and agreed upon by the parties Prior to such opt out decision, the Parties shall have a good faith discussion about the reasons and consequences of the opt out The Party electing to opt out will provide the other Party with sixty days notice prior to its election and will be obligated to pay its share of the cost of all ongoing clinical and preclinical studies and its share of other development costs already committed to third parties as of the date of such notice. Thereafter the Party electing to opt out will not share any costs or benefits of such indication. Financial Appendix to Amended and Restated Agreement 6 70 In the event that a Party which previously opted out of an indication wishes to regain its rights to such indication then it may regain such rights by electing to do so at the latest within thirty days of a formal decision to file for approval for that indication and by paying within thirty days, two hundred percent of the Global Development Costs it would have otherwise incurred if it had not opted out for such indication during the period of opt out and by thereafter assuming from the opt back in date its ongoing obligations as if no opt out had occurred. 2) PLANNING AND BUDGETING OF GLOBAL DEVELOPMENT COSTS For a Product for which ROCHE has exercised its option, the Parties shall agree on a global development plan and budget on an indication-by-indication basis. Such plan and budget shall i) identify activities and costs to be incurred, by calendar quarter, ii) provide details of activities in a manner to be specified by the Joint Development Committee and in a manner consistent with the cost systems of each Party, iii) be updated whenever needed, at least on a quarterly basis and when development of indications additional to the initial indication shall be envisaged. 3. REIMBURSEMENT OF DEVELOPMENT COSTS SHARING AND REIMBURSEMENT OF Genentech's Development Costs - Thirty days prior to the date by which ROCHE must exercise its option for a Product, GENENTECH shall choose one of the following methods for reimbursement of Development Costs incurred prior to exercise of such option, the choice being subject to ROCHE's consent which shall not be unreasonably withheld: A.) Lump sum payment for the appropriate percentage of the cumulative Genentech's Development Costs incurred prior to ROCHE's exercise of such option, due thirty days after ROCHE's exercise of such option, or B.) Quarterly payments, due 30 days after invoicing from GENENTECH, equal to one hundred and fifty percent (150%) of the Global Development Costs GENENTECH incurred after ROCHE's exercise of a Product option until such the cumulative amount paid thereunder equals the appropriate percentage of the cumulative Genentech's Development Costs incurred prior to ROCHE's exercise of such option plus interest at LIBOR from the date of such option exercise. GENENTECH shall invoice ROCHE for the amount due hereunder within 30 days of the end of each quarter. For products which GENENTECH can only license Canadian rights to ROCHE, the appropriate percentage reimbursement of Genentech's Development Costs provided in this Section 3 of this Appendix shall be reduced to ten percent (10%). Financial Appendix to the Amended and Restated Agreement 7 71 SHARING AND REIMBURSEMENT OF GLOBAL DEVELOPMENT COSTS - The global development plan and budget as agreed by the JCC for such Product shall be the reference for sharing Global Development Costs. The Parties shall share development costs provided that they relate to activities which have been planned for and budgeted either in a global development plan and budget agreed between the Parties before the Option Exercise or in one of the subsequently jointly agreed updates of such global development plan and budget after the Option Exercise. In the case of i) activities or costs which have not been planned and budgeted but have actually been incurred by a Party or ii) actual costs of planned activities which have significantly exceeded (more than 10%) the amount budgeted, the JCC shall decide whether and/or how such additional costs shall be shared between the Parties. On a quarterly calendar basis, within 30 days after the end of each calendar quarter, each Party shall provide the other with an invoice for the amount of Global Development Costs it has incurred and which is due for reimbursement by such other Party for such quarter. The cost sharing shall be that provided for in the License Agreement or in this Financial Appendix. Such amount shall be expressed in US Dollars and payable within 30 days from receipt of such invoice. Such invoice shall be accompanied by a report specifying such Global Development Costs on a product indication-by-product indication basis and providing details per activity as specified by the JCC and show in local currency and US Dollars in a manner consistent with the amounts budgeted for such activities. As the case may be, development costs attributable to specific indications for which one Party has opted out pursuant to an Additional Indication Opt Out shall not be included in the global development plan and budget for such Product. Whenever for the purpose of calculating conversation of Global Development Costs from any foreign currency into US Dollars shall be required, such conversion shall be made using the average quarterly rate of exchange at the time for such currencies as retrieved from the Reuters System for the countries concerned. 4. SALES BUSINESS PLAN AND BUDGET ROCHE shall provide GENENTECH within 30 days of availability in final form its sales budget (prepared annually and covering a one year period, month by month) and sales business plan (prepared annually and covering at least a three year period) for each Product for which it has exercised its option for commercialization in the Roche Territory under the License Agreement. 5. SUPPLY PRICE OF PRODUCT The total amount due for the supply of Product between the Parties shall be the amount defined below: Financial Appendix to the Amended and Restated Agreement 8 72 SUPPLY OF CLINICAL REQUIREMENTS - The sales price of Product for clinical purposes shall be the FBMC for such Clinical Requirements. Product manufactured as qualification lots and supplied for clinical purposes shall only be charged to the extent not included in Genentech's Development Costs or Global Development Costs. SUPPLY OF COMMERCIAL REQUIREMENTS - The sales price of Product for commercial purposes shall be GENENTECH's Cost of Goods plus a mark-up of twenty percent (20%) on FBMC. For the ROCHE Territory, such sales price will be billed to ROCHE and paid as follows: a) The amount corresponding to FBMC + 20 % mark-up will be invoiced in US Dollars and paid by ROCHE in such currency within 30 days after shipment. (b) Unless otherwise agreed upon in writing between the Parties, the amount corresponding to Outbound Costs will be billed in US Dollars on a quarterly basis and paid by ROCHE in such currency within 30 days of receipt of the invoice. Product manufactured as qualification lots and supplied for commercial purposes shall only be charged to the extent not included in Genentech's Development Costs or Global Development Costs. 6. TIMING AND PAYMENT OF ROYALTIES BETWEEN THE PARTIES TIMING - Payment of Royalties due GENENTECH shall be made within ninety (90) days of the end of each calendar quarter in which the sale was made. For purposes of determining when a sale of a Product occurs, the sale shall be deemed to occur when a non-Affiliated third party is invoiced for the Product. Payment of Royalties due to third parties will be made ten days prior to the date the royalties are due to the third party under their respective licenses. Any royalty payment that is not paid on or before the date such payment is due under the License Agreement shall bear interest, to the extent permitted by applicable law, at the LIBOR rate of interest as reported from time to time by a qualified source that is mutually acceptable to the Parties, calculated on the number of days such payment is delinquent. PAYMENT --- WITHHOLDING TAXES - Unless otherwise agreed in writing between the Parties, payments of royalties shall be made in US Dollars, by wire transfer in immediately available funds to such account GENENTECH shall designate before such payment is due, free and clear of any taxes, duties, levies, fees or charges, except for withholding taxes due on behalf of GENENTECH (to the extent applicable). ROCHE shall make any withholding payments due on behalf of GENENTECH and shall promptly provide GENENTECH with written documentation of any such payment sufficient to satisfy the reasonable requirements of an appropriate tax authority Financial Appendix to the Amended and Restated Agreement 9 73 with respect to an application by GENENTECH for a foreign tax credit for such payment or for similar treatment. ROYALTY REPORTING AND ROYALTY CALCULATION - Within thirty days after the end of each calendar quarter, ROCHE shall provide GENENTECH with a statement summarizing the monthly Net Sales of the Product in each country in the reporting currency of each such country as well as the rate used to convert from each such country's currency to Swiss Francs. Whenever for the purpose of calculating royalties conversion from any foreign currency shall be required, the amount of such Net Sales in foreign currencies shall be converted into Swiss Francs using the average monthly rate of exchange at the time for such currencies as retrieved from the Reuters System, or another qualified source that is mutually acceptable to the Parties. The amount of royalties due for payment to GENENTECH and calculated in Swiss Francs shall be translated into US Dollar at the rate retrieved from the Reuters System during the morning of the "day two" before the value date of such payment. The corresponding amount in US Dollars will then be communicated to the bank for payment on the value date. 7. AUDIT AND INTERIM REVIEWS Audit work will be performed in the following manner and according to the specifications of the Article "Records Regarding Royalties" of the 1995 Agreement: If deemed necessary by either ROCHE or GENENTECH , an audit by independent certified public accountants may be requested. Such audit will be at the sole expense of the requesting Party and will be performed by the officially appointed auditor of the Party audited. If GENENTECH requests audit work of the ROCHE accounts, the audit will be performed by ROCHE's appointed worldwide auditor which is currently Price Waterhouse, LLP. If ROCHE requests audit work of the GENENTECH accounts, the audit will be performed by the independent auditor appointed by GENENTECH which is currently Ernst & Young LLP. Financial Appendix to Amended and Restated Agreement 10 74 APPENDIX B ARTICLE II COUNTRIES Germany Italy France United Kingdom Spain Japan Canada Mexico Brazil Argentina People's Republic of China Turkey South Korea Australia 58 EX-10.3 9 EXHIBIT 10.3 1 EXHIBIT 10.3 TAX SHARING AGREEMENT THIS TAX SHARING AGREEMENT (the "Agreement") is dated as of June __, 1999 and executed effective as of the effective date (defined in Section 1.4 of this Agreement), by and between ROCHE HOLDINGS, INC., a Delaware Corporation, hereinafter referred to as "RHI", and GENENTECH, INC., a Delaware Corporation, hereinafter referred to as "GNE". W I T N E S S E T H : WHEREAS, RHI has obtained control of at least 80% of the stock value and 80% of the voting power of GNE, permitting RHI and GNE under IRC Section 1504(a) the privilege of filing a U.S. consolidated tax return and certain state and local combined reports; and WHEREAS, RHI will, from the above effective date, exercise that privilege and include the taxable income, losses, credits, etc. of GNE as a fully consolidated subsidiary in all of its consolidated federal and combined state and local tax filings, payments, estimates, and other matters as are required by law or in which it determines such inclusion is appropriate; NOW, THEREFORE, in consideration of the foregoing and the mutual promises and agreements contained herein, RHI and GNE hereby agree as follows: ARTICLE I DEFINED TERMS; PREPARATION OF TAX RETURNS AND TAX ESTIMATES SECTION 1.1 Defined Terms. As used in this Agreement: "RHI Group" means, for U.S. federal tax purposes, the affiliated group (within the meaning of IRC Section 1504(a)) filing a consolidated return of which RHI (or any successor corporation) is the common parent, and for state and local tax purposes, RHI and/or any subsidiaries of RHI (direct or indirect and past, current or future) includible in a group filing a consolidated or combined return. "GNE Group" means GNE and its subsidiaries (direct or indirect and past, current or future). "GNE Consolidated Group" means, for U.S. federal tax purposes, the member or members of the GNE Group that are includible in the consolidated return filed by the RHI Group, and for state or local tax purposes, the member or members of the GNE Group that are includible in a group that (i) also includes RHI or at least one subsidiary of RHI (other than a member of the GNE Group) as a member and (ii) files a consolidated or combined return. SECTION 1.2 Preparation of Proforma Tax Returns. GNE will be responsible for the preparation of a proforma Form 1120 for the GNE Consolidated Group for U.S. federal tax purposes, as well as proforma tax returns for the GNE Consolidated Group for all applicable state and local combined filings, reporting on such proforma returns the GNE Consolidated Group's items of income, gain, expense, deduction, loss, credit, carryforwards, carrybacks 1 2 and other such tax reporting items pursuant to the Stand-Alone Method (as defined below). Once prepared, such proforma returns will be delivered by GNE to RHI for its approval or recomputation in accordance with the provisions of Article IV of this Agreement. SECTION 1.3. State and Local Tax Returns - Separate and Combined Filings. GNE will continue to prepare and directly file, or cause to be prepared and filed, state and local tax returns, extensions, and payments of tax liability in any state or locality in which RHI does not file a combined return, and in which GNE determines that one or more members of the GNE Group has a nexus. GNE further acknowledges that the state combined returns which are currently applicable to this Section (and thus will be filed with RHI on a combined RHI Group basis) are those in California; Colorado; Illinois; Kansas; Minnesota; and New Hampshire; however, GNE also acknowledges that RHI reserves the right to commence additional state or local combined filings in the future based on RHI's tax planning or tax strategies for the RHI Group, or where such a combined state or local filing becomes necessary in order to comply with state or local tax requirements. SECTION 1.4. Preparation of Federal/State/Local Tax Estimates. GNE will be responsible for the computation pursuant to the Stand-Alone Method (as defined below) and submission to RHI for its approval or recomputation (in accordance with Article IV of this Agreement) of the GNE Consolidated Group's quarterly estimated tax liability (including the estimate of any final amount due on the tax return extension due dates), based on the GNE Consolidated Group's items of income, gain, deduction, loss, credit, etc. SECTION 1.5. Effective Date. This Agreement shall be effective as of the first day (the "Consolidation Date") on which GNE is a member of the RHI Group and shall govern all taxable periods of the members of the RHI Group and/or the GNE Group that are open as of such day and all subsequent taxable periods. ARTICLE II STAND-ALONE METHOD SECTION 2.1. Stand-Alone Method. GNE shall prepare all of the proforma tax returns of the GNE Consolidated Group, and RHI and GNE shall make all other computations and determinations under this Agreement relating to the GNE Consolidated Group or any of its members, using the "Stand-Alone Method." The Stand-Alone Method is the method that would apply to the GNE Consolidated Group if it never were a part of the RHI Group, but instead filed its own consolidated or combined return under the applicable provisions of federal, state or local tax law and regulations dealing with such returns (provided, however, that transactions between (x) a member of the GNE Group and (y) a member of the RHI Group that is not a member of the GNE Group, shall be accounted for pursuant to the provisions of the regulations under IRC Section 1502 that govern intercompany transactions). Under the Stand-Alone Method, (a) the income, gains, expenses, deductions, losses and credits in any taxable period of any member of the RHI Group that is not a member of the GNE Consolidated Group shall be disregarded, (b) the income, gains, expenses, deductions, losses and credits in any taxable period of any member of the GNE Consolidated Group shall be taken into account, (c) all computations shall be made in conformity with the positions, elections and accounting methods used by RHI in preparing the consolidated and combined 2 3 returns of the RHI Group, (d) the highest marginal tax rate to which the GNE Consolidated Group could be subject under applicable federal, state or local law shall be deemed to be the only tax rate to which such group is subject under such law, (e) subject to (c) and (d), all computations and other determinations shall be made in accordance with the federal, state and local tax laws and regulations applying to consolidated or combined groups (including, in the case of any company that becomes or ceases to be a member of the GNE Consolidated Group, the laws and regulations applicable to a company that becomes or ceases to be a member of a consolidated or combined group), as well as all other relevant federal, state and local tax laws and regulations. RHI shall determine, in its sole discretion, the proper interpretation and application of the Stand-Alone Method as it relates to any and all items and calculations reflected in the computation of the GNE Consolidated Group's proforma tax liability, an overpayment or refund of such liability, a recomputation of such liability (together with any related interest, penalty or additional amount) upon a subsequent adjustment of the RHI Group's tax liability, or a carryforward or carryback of a loss, credit or other tax attribute of the GNE Consolidated Group or any member thereof to a taxable period beginning prior to the Consolidation Date or to a separate return year, and in the event of a disagreement between RHI and GNE as to such matters, RHI's determination shall be final and binding. ARTICLE III PAYMENT OF TAX LIABILITIES AND RECEIPT OF REFUNDS SECTION 3.1. Payment of Tax Liabilities. After the initial computation by GNE of a GNE Consolidated Group tax liability and the approval or recomputation of such tax liability by RHI pursuant to Article IV, GNE will remit to RHI by federal bank wire the amount of such tax liability as so approved or recomputed. SECTION 3.2. Date of Payment. GNE shall remit to RHI the amounts necessary under Section 3.1 of this Agreement at least one business day prior to the applicable federal/state/local due dates as required by the specific federal/state/local law which necessitated the computation. For example, GNE shall remit to RHI payments for quarterly estimated Federal tax no later than April 14, June 14, September 14, and December 14 of each calendar year. SECTION 3.3. Tax Overpayments and Refunds. If GNE determines that it has overpaid a GNE Consolidated Group tax liability to RHI or is entitled to a refund from RHI of such a tax liability on account of a carryback of a tax attribute, GNE may request a refund or the offset of such overpayment against future tax liabilities. Upon approval or recomputation by RHI in accordance with Article IV of the amount requested as a refund or offset, RHI will refund or allow as an offset the amount so approved or recomputed (and, in the case of a refund, will pay interest thereon which is computed pursuant to the Stand-Alone Method (which method includes the applicable federal, state or local tax laws and regulations which govern the computation of such interest)). Refund claims made by GNE under Section 6.3 shall be governed by principles corresponding to those set forth in the previous sentence. SECTION 3.4. Limitation to GNE of RHI Group Tax Liabilities/Benefits. The liability of the members of the GNE Group to RHI for payments of tax under this Agreement shall include, and be exclusively limited to, tax liabilities of the GNE Consolidated Group computed pursuant to the Stand-Alone Method. In addition, the ability of the members of the GNE 3 4 Group to claim tax benefits from RHI is exclusively limited to tax benefits of the GNE Consolidated Group computed pursuant to the Stand-Alone Method. Under no circumstances shall any member of the GNE Group be held liable for the tax liability of the consolidated/combined RHI Group, or of any of its individual members; provided, that a GNE Group member may be held liable for a tax of the consolidated/combined RHI Group to the extent that such tax is attributable (determined using the Stand-Alone Method) to the members of the GNE Consolidated Group and GNE has not previously made a payment to RHI equal to such attributable portion of such tax. In addition, under no circumstances will any member of the GNE Group be the beneficiary of tax benefits which accrue to any member of the RHI Group that is not a member of the GNE Group, or to the RHI Group as a whole as a result of the RHI Group's consolidated/combined tax filings. ARTICLE IV SUBMISSION OF TAX DATA TO RHI; RHI APPROVAL AND RECOMPUTATION RIGHTS SECTION 4.1 Submission of Data; RHI Approval and Recomputation Rights. GNE will submit to RHI for its review the proforma GNE Consolidated Group tax returns, quarterly estimates and refund or carryback claims (including refund claims made under Section 6.3) prepared by GNE under this Agreement. Any such proforma filing will include all official forms, consents, elections, riders, and other such documents that may be required or appropriate for such proforma filing. RHI may approve, or may adjust or modify, any of the computations reflected on a proforma filing submitted by GNE. In the case of any such adjustment or modification by RHI, RHI shall recompute GNE's liability to RHI, or RHI's liability to GNE, in accordance with such adjustment or modification, and such recomputation shall be binding on GNE. RHI will prepare the final RHI Group returns or estimated tax filings utilizing the data and proforma filings submitted by GNE (as adjusted or modified by RHI pursuant to this Section 4.1 or Section 4.2) and by RHI's other includible subsidiaries, and thereafter RHI will submit such returns or filings directly to the appropriate taxing authority. SECTION 4.2 Adjustment of Tax Data. In order to comply with applicable laws and regulations or for any other reason which RHI, in its sole discretion, deems to be necessary, RHI reserves the right to adjust and change the tax data as submitted by GNE on the GNE Consolidated Group proforma returns prior to, and for purposes of, inclusion of that data in any consolidated/combined RHI Group tax filing. This right of adjustment of RHI includes, but is not limited to, any or all income, gain, expense, deduction, loss or credit items as shown on the GNE proforma returns, and may be made by RHI for any reason which it deems necessary. SECTION 4.3 Timeliness of Submission. In order to permit RHI sufficient time to prepare the final Group tax returns and estimates, GNE will submit the data under Section 4.1 of this Agreement to RHI no later than the following dates: o tax returns: 30 days prior to the governmental due date; o tax estimates and extensions: 7 days prior to the tax payment due date. SECTION 4.4 Group Tax Planning and Strategies. GNE agrees to provide to RHI upon its request any and all financial and tax data relating to any GNE Group member that is 4 5 necessary in order to allow RHI to develop tax planning opportunities and overall tax strategies for the RHI Group. In addition, it is expected that, upon request, GNE will participate in tax planning meetings and discussions with RHI from time to time. SECTION 4.5 Representation to Outside Governmental Bodies. RHI will develop and oversee implementation of all positions on behalf of the RHI Group regarding federal, state and local tax legislation, regulations and all other related governmental actions which could affect the RHI Group. All direct and indirect contacts with any federal, state and local official or agency which could affect the RHI Group shall be coordinated by RHI. SECTION 4.6 Access to Consolidated and Combined Tax Returns, and GNE Proforma Returns. Under no circumstances will GNE be given copies of, or access to, the RHI Group's consolidated and combined tax filings in which any member of the GNE Group is a member. In addition, no other RHI subsidiary (except Roche Consulting Corporation) will be given a copy of, or be given access to, GNE's proforma tax returns and other financial data submitted to RHI under Section 4.1 of this Agreement. ARTICLE V TAX EXAMINATIONS SECTION 5.1 Pre-Acquisition Year Tax Examinations. For any federal, state and/or local tax examinations of one or more members of the GNE Group for tax periods beginning prior to the effective date of this Agreement, GNE will conduct or cause the applicable GNE Group member to conduct such examinations with the applicable taxing authority, provided that GNE will timely notify RHI of the commencement of any such examination and, with respect to any examination which RHI determines may affect or involve an issue relating to a computation reflected on a return of the RHI Group or a member thereof, will (or, as applicable, will cause the applicable member of the GNE Group to) (x) timely and fully inform RHI of developments relating to such examination, (y) consult regularly with RHI as to the conduct of such examination, and (z) not settle, fail to appeal or otherwise compromise any issue raised in such examination without RHI's prior consent. SECTION 5.2 Post-Acquisition Year Tax Examinations. In accordance with any federal, state and/or local tax examination conducted of the RHI Group in which a GNE Group member was a member of the consolidated/combined RHI Group tax filing, GNE and the applicable GNE Group member or members will cooperate fully with RHI and/or its representatives to provide any additional tax data, requested documentation, physical access, and/or financial information which, in the discretion of RHI, is necessary to provide to governmental personnel. RHI will have the sole authority to select and close such Post-Acquisition year tax examinations for all federal, state and/or local RHI Group consolidated/combined tax filings. SECTION 5.3 GNE Tax Examination Adjustments. If any adjustment is made to a consolidated or combined return of the RHI Group, after the filing thereof, in which income or loss of the members of the GNE Consolidated Group is included, then at the time of the Final Determination of such adjustment, GNE shall pay to RHI or RHI shall pay to GNE, as the case may be, (x) the difference between (I) all payments of tax liability of the GNE Consolidated Group actually made by GNE under Article III with respect to the taxable 5 6 period covered by such consolidated or combined return (less any related refunds previously paid by RHI), and (II) all payments that would have been made under Article III taking such adjustment into account, together with (y) any applicable interest, penalties or additional amounts computed pursuant to the Stand-Alone Method. "Final Determination" means (1) with respect to federal taxes, a "determination" as defined in IRC Section 1313(a) or execution of an IRS Form 870AD and, with respect to state or local taxes, any final determination of liability in respect of a tax that, under applicable law, is not subject to further appeal, review or modification through proceedings or otherwise (including the expiration of a statute of limitations or a period for the filing of claims for refunds, amended returns or appeals from adverse determinations) or (2) the payment of tax by any member of the RHI Group with respect to any item disallowed or adjusted by a taxing authority (including, without limitation, a court or other judicial body), provided that RHI determines that no action should be taken to recoup such payment. SECTION 5.4 R&D Tax Credit. Promptly after the date hereof, GNE will notify the Internal Revenue Service that GNE is withdrawing its present position relating to the calculation and allocation of research and development tax credits and will take all other appropriate actions to terminate its position with the Internal Revenue Service. To the extent necessary and permitted by law, GNE will file amended returns for all open taxable periods beginning prior to the Consolidation Date, which amended returns shall adopt the methodology relating to the research and development tax credits that is currently used by the RHI Group. ARTICLE VI CARRYFORWARDS AND CARRYBACKS OF ATTRIBUTES TO AND FROM SEPARATE RETURN YEARS SECTION 6.1 Pre-Consolidation Tax Attribute Carryforwards. Any deduction, loss, credit or tax attribute incurred by the GNE Consolidated Group in a tax period beginning prior to the Consolidation Date, a carryforward of which is still available to the GNE Consolidated Group as of that date, shall be carried forward by the GNE Consolidated Group to the extent and in the manner dictated by the Stand-Alone Method for purposes of computing GNE's tax liability payable to RHI under Article III of this Agreement. SECTION 6.2 Tax Attribute Carrybacks to Pre-Consolidation Periods. Any deduction, loss, credit or tax attribute incurred by the GNE Consolidated Group in a period beginning after the Consolidation Date shall be carried back to taxable periods of the GNE Consolidated Group beginning before the Consolidation Date to the extent and in the manner dictated by the Stand-Alone Method. Section 3.3 shall govern any claim by GNE for a refund from RHI on account of such a carryback; provided, that GNE shall be entitled to such a refund from RHI only once GNE has taken all available steps under federal, state or local law to obtain such refund from the applicable taxing authority and, in such a case, only to the extent of the excess of (x) the refund as computed pursuant to the Stand-Alone Method over (y) any refund actually received by GNE from the applicable taxing authority; and provided further, that at the time GNE requests such a refund from RHI, GNE shall provide RHI with appropriate information (including copies of correspondence with the applicable taxing authority) relating to GNE's entitlement to a refund under this sentence, and GNE shall thereafter provide such additional related information as RHI requests. 6 7 SECTION 6.3 Carrybacks and Carryforwards of Tax Attributes to Separate Return Years. In the case of any company that becomes or ceases to be a member of the GNE Consolidated Group, the portion of any deduction, loss, credit or tax attribute incurred by the GNE Consolidated Group in a taxable period in which such company is a member of the group that is attributable to such company shall be carried back or forward to taxable periods of such company in which it is not a member of such group to the extent and in the manner dictated by the Stand-Alone Method. GNE may, on behalf of such company, file with RHI a pro forma refund claim on account of such a carryback or carryforward, provided, however, that GNE's entitlement to receive such a refund from RHI on behalf of such company shall be limited as set forth in the next two sentences. In the case of a carryback, GNE shall be entitled to a refund only once the applicable company has taken all available steps under federal, state or local law to obtain a refund from the applicable taxing authority and, in such a case, only to the extent of the excess of (x) the refund as computed pursuant to the Stand-Alone Method over (y) any refund actually received by the company from the applicable taxing authority. In the case of a carryforward, GNE shall be entitled to a refund only to the extent of the excess of (1) the applicable company's actual tax liability reflected on the return that the company files with the applicable taxing authority for the relevant taxable period (as such liability is adjusted by RHI upon a review by it of the computations reflected on such return) over (2) the company's tax liability for such taxable period, as computed pursuant to the Stand-Alone Method. At the time that GNE requests a refund from RHI under this Section 6.3, GNE shall provide RHI with appropriate information (including, in the case of a carryback, copies of correspondence with the applicable taxing authority regarding a refund, and in the case of a carryforward, the applicable company's return for the applicable period and supporting workpapers) relating to GNE's entitlement to such refund, and GNE shall thereafter provide such additional related information as RHI requests. In addition to the rules set forth in this Section, Section 3.3 shall govern any such refund claimed by GNE from RHI. ARTICLE VII CARRYFORWARDS AND CARRYBACKS OF ATTRIBUTES, OTHER THAN TO AND FROM SEPARATE RETURN YEARS SECTION 7.1 Carryforwards and Carrybacks of GNE Consolidated Group Tax Attributes for Purposes of Pro Forma Returns. In the event a GNE Consolidated Group proforma return includes losses, deductions, credits or other tax attributes which were limited to the GNE Consolidated Group on its proforma return (and hence can only be carried back or carried forward), that tax attribute shall remain the property of the GNE Consolidated Group for utilization in a future GNE Consolidated Group proforma return as a carryforward, or for utilization in a prior GNE Consolidated Group return as a carryback, in conformity with the Stand-Alone Method. Section 3.3 shall govern any claim by GNE of a refund on account of such a carryback. SECTION 7.2 Utilization of Tax Attributes by RHI on RHI Group Return. Notwithstanding Sections 7.1 of this Agreement, RHI is entitled to fully utilize currently any tax attributes arising from a GNE Consolidated Group proforma return on the corresponding RHI Group consolidated/combined return, and RHI will separately track whether that tax attribute may be carried back or carried forward on an RHI Group-wide basis. Under no circumstances, 7 8 however, will the utilization by RHI of a GNE Consolidated Group tax attribute affect the GNE Consolidated Group's ability to utilize that attribute on the GNE Consolidated Group's own proforma return. For example, a current GNE Consolidated Group tax loss which RHI is able to utilize currently on an RHI Group consolidated/combined basis, will be refunded by RHI to GNE at such time when the GNE Consolidated Group is able to utilize that loss as either a carryforward or carryback on a proforma return. ARTICLE VIII SUCCESSORS SECTION 8.1 Successors. This agreement shall be binding on an inure to the benefit of any successor, by merger, acquisition of assets or otherwise, to any current or future member of the RHI Group and/or the GNE Group (including, but not limited to any successor to such a member succeeding to the tax attributes of such member under Section 381 of the Internal Revenue Code), to the same extent as if such successor had been an original party hereto. ARTICLE IX AUTHORIZATION, ETC. SECTION 9.1 Authorization, etc. RHI is entering into this Agreement on behalf of itself and the other members (current and future) of the RHI Group (other than those RHI Group members that are also members of the GNE Group), and GNE is entering into this Agreement on behalf of itself and the other members (current and future) of the GNE Group. RHI and GNE each hereby represents and warrants that it has the power and authority, on behalf of itself and, respectively, the other members (current and future) of the RHI Group (other than those RHI Group members that are also members of the GNE Group), and the other members (current and future) of the GNE Group, to execute, deliver and perform this Agreement, that this Agreement has been duly authorized by all necessary corporate action on the part of such party, that this Agreement constitutes a legal, valid and binding obligation of each such party and that the execution, delivery and performance of this Agreement by such party does not contravene or conflict with any provision of law or of its charter or bylaws or any agreement, instrument or order binding on such party. ARTICLE X GOVERNING LAW SECTION 10.1 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without giving effect to the laws and 8 9 principles relating to conflicts of law. ARTICLE XI COUNTERPARTS SECTION 11.1 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Agreement. ARTICLE XII WAIVERS AND AMENDMENTS SECTION 12.1 Waivers and Amendments. This Agreement shall not be waived, amended or otherwise modified except in writing, duly executed by all of the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. GENENTECH, INC. By --------------------------- Title: ROCHE HOLDINGS, INC. By --------------------------- Title: 9 EX-10.4 10 1999 STOCK PLAN 1 EXHIBIT 10.4 GENENTECH, INC. 1999 STOCK PLAN 1. Purposes of the Plan. The purposes of this 1999 Stock Plan are: - to attract and retain the best available personnel for positions of substantial responsibility, - to provide additional incentive to Employees and Consultants, and - to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights may also be granted under the Plan. 2. Definitions. As used herein, the following definitions shall apply: (a) "Administrator" means the Board or any of its Committees as shall be administering the Plan, in accordance with Section 4 of the Plan. (b) "Applicable Laws" means the requirements relating to the administration of stock option plans under U. S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Options or Stock Purchase Rights are, or will be, granted under the Plan. (c) "Board" means the Board of Directors of the Company. (d) "Code" means the Internal Revenue Code of 1986, as amended. (e) "Committee" means a committee of Board members appointed by the Board in accordance with Section 4 of the Plan. (f) "Common Stock" means the common stock of the Company. (g) "Company" means Genentech, Inc., a Delaware corporation. (h) "Consultant" means any person, including an advisor, engaged by the Company or Subsidiary to render services to such entity but shall not include an Employee. (i) "Disability" means total and permanent disability as defined in Section 22(e)(3) of the Code. 2 (j) "Employee" means any person, including Officers, employed by the Company or Subsidiary of the Company. An individual shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, then three (3) months following the 91st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a member of the Company's Board of Directors nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (k) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (l) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system on the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator. (m) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (n) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (o) "Notice of Grant" means a written or electronic notice evidencing certain terms and conditions of an individual Option or Stock Purchase Right grant. The Notice of Grant is part of the Option Agreement. -2- 3 (p) "Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (q) "Option" means a stock option granted pursuant to the Plan. (r) "Option Agreement" means an agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (s) "Optioned Stock" means the Common Stock subject to an Option or Stock Purchase Right. (t) "Optionee" means the holder of an outstanding Option or Stock Purchase Right granted under the Plan. (u) "Parent" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (v) "Plan" means this 1999 Stock Plan. (w) "Restricted Stock" means shares of Common Stock acquired pursuant to a grant of Stock Purchase Rights under Section 11 of the Plan. (x) "Restricted Stock Purchase Agreement" means a written agreement between the Company and the Optionee evidencing the terms and restrictions applying to stock purchased under a Stock Purchase Right. The Restricted Stock Purchase Agreement is subject to the terms and conditions of the Plan and the Notice of Grant. (y) "Retirement" means a Service Provider who leaves the employment of the Company after reaching age sixty-five (65). (z) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. (aa) "Section 16(b) " means Section 16(b) of the Exchange Act. (bb) "Service Provider" means an Employee or Consultant. (cc) "Share" means a share of the Common Stock, as adjusted in accordance with Section 13 of the Plan. (dd) "Stock Purchase Right" means the right to purchase Common Stock pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant. (ee) "Subsidiary" means a "subsidiary corporation", whether now or hereafter existing, as defined in Section 424(f) of the Code. -3- 4 3. Stock Subject to the Plan. Subject to the provisions of Section 13 of the Plan, the maximum aggregate number of Shares that may be optioned and sold under the Plan is 7,500,000 Shares. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option or Stock Purchase Right expires or becomes unexercisable without having been exercised in full, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated); provided, however, that Shares that have actually been issued under the Plan, whether upon exercise of an Option or Right, shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if Shares of Restricted Stock are repurchased by the Company at their original purchase price, such Shares shall become available for future grant under the Plan. 4. Administration of the Plan. (a) Procedure. (i) Multiple Administrative Bodies. The Plan may be administered by different Committees with respect to different groups of Service Providers. (ii) Section 162(m). To the extent that the Administrator determines it to be desirable to qualify Options granted hereunder as "performance-based compensation" within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more "outside directors" within the meaning of Section 162(m) of the Code. (iii) Rule 16b-3. To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3. (iv) Other Administration. Other than as provided above, the Plan shall be administered by (A) the Board or (B) a Committee, which committee shall be constituted to satisfy Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value; (ii) to select the Service Providers to whom Options and Stock Purchase Rights may be granted hereunder; (iii) to determine the number of shares of Common Stock to be covered by each Option and Stock Purchase Right granted hereunder; (iv) to approve forms of agreement for use under the Plan; -4- 5 (v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Option or Stock Purchase Right granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options or Stock Purchase Rights may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or Stock Purchase Right or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vi) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan; (vii) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred treatment under foreign laws; (viii) to modify or amend each Option or Stock Purchase Right (subject to Section 15(c) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Options longer than is otherwise provided for in the Plan; (ix) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option or Stock Purchase Right that number of Shares having a Fair Market Value equal to (or less than) the minimum amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by an Optionee to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable; (x) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option or Stock Purchase Right previously granted by the Administrator; (xi) to make all other determinations deemed necessary or advisable for administering the Plan. (c) Effect of Administrator's Decision. The Administrator's decisions, determinations and interpretations shall be final and binding on all Optionees and any other holders of Options or Stock Purchase Rights. 5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may be granted to Service Providers. Incentive Stock Options may be granted only to Employees. -5- 6 6. Limitations. (a) Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. (b) Neither the Plan nor any Option or Stock Purchase Right shall confer upon an Optionee any right with respect to continuing the Optionee's relationship as a Service Provider with the Company, nor shall they interfere in any way with the Optionee's right or the Company's right to terminate such relationship at any time, with or without cause. (c) The following limitations shall apply to grants of Options: (i) No Service Provider shall be granted, in any fiscal year of the Company, Options to purchase more than 500,000 Shares. (ii) In connection with his or her initial service, a Service Provider may be granted Options to purchase up to an additional 250,000 Shares which shall not count against the limit set forth in subsection (i) above. (iii) The foregoing limitations shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 13. 7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless terminated earlier under Section 15 of the Plan. 8. Term of Option. The term of each Option shall be stated in the Option Agreement. In the case of an Incentive Stock Option, the term shall be ten (10) years from the date of grant or such shorter term as may be provided in the Option Agreement. Moreover, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement. -6- 7 9. Option Exercise Price and Consideration. (a) Exercise Price. The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Administrator, subject to the following: (i) In the case of an Incentive Stock Option, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be determined by the Administrator. In the case of a Nonstatutory Stock Option intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price of less than 100% of the Fair Market Value per Share on the date of grant pursuant to a merger or other corporate transaction. (b) Waiting Period and Exercise Dates. At the time an Option is granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions that must be satisfied before the Option may be exercised. (c) Form of Consideration. The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of: (i) cash; (ii) check; (iii) promissory note; (iv) other Shares which (A) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; (v) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; (vi) a reduction in the amount of any Company liability to the Optionee, including any liability attributable to the Optionee's participation in any Company-sponsored deferred compensation program or arrangement; (vii) any combination of the foregoing methods of payment; or -7- 8 (viii) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws. 10. Exercise of Option. (a) Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. Unless the Administrator provides in writing otherwise, vesting of Options granted hereunder shall be tolled during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 13 of the Plan. Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Relationship as a Service Provider. If an Optionee ceases to be a Service Provider, other than upon the Optionee's death, Disability, or Retirement, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three (3) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (c) Disability of Optionee. If an Optionee ceases to be a Service Provider as a result of the Optionee's Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent the Option is vested on the date Optionee ceases to be a Service Provider (but in no event later than the expiration of the term of such Option -8- 9 as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the date the Optionee ceases to be a Service Provider. If, on the date Optionee ceases to be a Service Provider, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after Optionee ceases to be a Service Provider, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) Death or Retirement of Optionee. Unless otherwise provided by the Administrator, immediately upon Optionee's death or Retirement, the Option shall automatically accelerate and become fully-vested for all of the Shares covered by such Option, and the expiration date of the Option shall automatically be extended to the expiration date of the Option term specified in the Option Agreement. If an Optionee dies while a Service Provider, the Option may be exercised by the Optionee's designated beneficiary, provided such beneficiary has been designated prior to Optionee's death in a form acceptable by the Administrator. If no such beneficiary has been designated by the Optionee, then such Option may be exercised by the personal representative of the Optionee's estate or by the person or persons to whom the Option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution. In the event Optionee ceases to be a Service Provider by reason of Retirement, the Option may be exercised by Optionee. If the Option is not exercised following Optionee's death or Retirement within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (e) Buyout Provisions. The Administrator may at any time offer to buy out for a payment in cash or Shares an Option previously granted based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. 11. Stock Purchase Rights. (a) Rights to Purchase. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing or electronically, by means of a Notice of Grant, of the terms, conditions and restrictions related to the offer, including the number of Shares that the offeree shall be entitled to purchase, the price to be paid, and the time within which the offeree must accept such offer. The offer shall be accepted by execution of a Restricted Stock Purchase Agreement in the form determined by the Administrator. (b) Repurchase Option. Unless the Administrator determines otherwise, the Restricted Stock Purchase Agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's service with the Company for any reason (including death or Disability). The purchase price for Shares repurchased pursuant to the Restricted Stock Purchase Agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at a rate or under such conditions as shall be determined by the Administrator and set forth in the Restricted Stock Purchase Agreement. -9- 10 (c) Other Provisions. The Restricted Stock Purchase Agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. (d) Rights as a Shareholder. Once the Stock Purchase Right is exercised, the purchaser shall have the rights equivalent to those of a shareholder, and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 13 of the Plan. 12. Transferability of Options and Stock Purchase Rights. Unless determined otherwise by the Administrator, an Option or Stock Purchase Right may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. If the Administrator makes an Option or Stock Purchase Right transferable, such Option or Stock Purchase Right shall contain such additional terms and conditions as the Administrator deems appropriate. 13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option and Stock Purchase Right, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options or Stock Purchase Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, as well as the price per share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option or Stock Purchase Right. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to have the right to exercise his or her Option until ten (10) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Option or Stock -10- 11 Purchase Right shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option or Stock Purchase Right will terminate immediately prior to the consummation of such proposed action. (c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option and Stock Purchase Right shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option or Stock Purchase Right, the Optionee shall fully vest in and have the right to exercise the Option or Stock Purchase Right as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option or Stock Purchase Right becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee in writing or electronically that the Option or Stock Purchase Right shall be fully vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option or Stock Purchase Right shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option or Stock Purchase Right shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option or Stock Purchase Right immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock subject to the Option or Stock Purchase Right, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. 14. Date of Grant. The date of grant of an Option or Stock Purchase Right shall be, for all purposes, the date on which the Administrator makes the determination granting such Option or Stock Purchase Right, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Optionee within a reasonable time after the date of such grant. 15. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan. (b) Shareholder Approval. The Company shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws. -11- 12 (c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to Options granted under the Plan prior to the date of such termination. 16. Conditions Upon Issuance of Shares. (a) Legal Compliance. Shares shall not be issued pursuant to the exercise of an Option or Stock Purchase Right unless the exercise of such Option or Stock Purchase Right and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise of an Option or Stock Purchase Right, the Company may require the person exercising such Option or Stock Purchase Right to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 17. Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 18. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 19. Shareholder Approval. The Plan shall be subject to approval by the shareholders of the Company within twelve (12) months after the date the Plan is adopted. Such shareholder approval shall be obtained in the manner and to the degree required under Applicable Laws. -12- EX-15.1 11 EXHIBIT 15.1 1 EXHIBIT 15.1 July 15, 1999 The Board of Directors and Stockholders Genentech, Inc. We are aware of the inclusion in Amendment No. 3 to the Registration Statement (Form S-3 No. 333-80601) of Genentech, Inc. for the registration of shares of its common stock of our report dated April 9, 1999 relating to the unaudited condensed consolidated interim financial statements of Genentech, Inc. for the quarter ended March 31, 1999. Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a part the registration statement prepared or certified by accountants within the meaning of Section 7 or 11 of the Securities Act of 1933. Very truly yours, /s/ ERNST & YOUNG LLP --------------------- ERNST & YOUNG LLP EX-23.1 12 EXHIBIT 23.1 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated January 20, 1999, in Amendment No. 3 to the Registration Statement (Form S-3 No. 333-80601) of Genentech, Inc. for the registration of shares of its common stock. /s/ ERNST & YOUNG LLP --------------------- ERNST & YOUNG LLP San Jose, California July 15, 1999 -----END PRIVACY-ENHANCED MESSAGE-----