-----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, CFfopuzNFok5EsqpHLwwkVWeTaP6LCLFlmDOFPt1gtMYv4kZP8sB6yAGGDK9p2Ii YNRZRo6M+v+WRkIUBIkrZg== 0000950123-00-002280.txt : 20000316 0000950123-00-002280.hdr.sgml : 20000316 ACCESSION NUMBER: 0000950123-00-002280 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20000315 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: 333-32014 FILM NUMBER: 569512 BUSINESS ADDRESS: STREET 1: 1 DNA WAY 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 #2 TO THE FORM S-3 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 15, 2000 REGISTRATION NO. 333-32014 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 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. Subject to Completion Dated March 14, 2000 PROSPECTUS 17,300,000 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 is listed on the New York Stock Exchange under the symbol "DNA". On March 14, 2000, the closing price of our common stock on that exchange was $181 1/8 per share. 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 1,700,000 shares of common stock to cover over-allotments. J.P. MORGAN & CO. GOLDMAN, SACHS & CO. MERRILL LYNCH & CO. WARBURG DILLON READ LLC LEHMAN BROTHERS ROBERTSON STEPHENS , 2000 3 TABLE OF CONTENTS
PAGE Prospectus Summary.......................... 1 Risk Factors................................ 9 Special Note Regarding Forward-Looking Statements................................ 14 Dividend Policy............................. 14 Price Range of Special Common Stock......... 15 Price Range of Common Stock................. 15 Selected Consolidated Financial Data........ 16 Management's Discussion and Analysis of Results of Operations and Financial Condition................................. 18 Business.................................... 29
PAGE Management.................................. 46 Relationship with Roche..................... 47 Selling Stockholder......................... 53 Material U.S. Federal Tax Considerations for Non-U.S. Holders of Common Stock.......... 54 Shares Eligible for Future Sale............. 56 Underwriting................................ 57 Legal Matters............................... 58 Experts..................................... 58 Where You Can Find More Information......... 58
------------------------- In this prospectus, "Genentech," "we," "us" and "our" refer to Genentech, Inc., "common stock" refers to Genentech's common stock, par value $.02 per share, and "special common stock" refers to Genentech's callable putable common stock, par value $.02 per share. In addition, all share and per share data and other information in this prospectus relating to our common stock and our special common stock gives effect to our two-for-one split of our common stock on November 2, 1999. 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) (somatropin (rDNA origin) for injectable suspension) encapsulated sustained-release growth hormone; Protropin(R) (somatrem for injection) growth hormone; Pulmozyme(R) (dornase alfa, recombinant) inhalation solution; Rituxan(R) (rituximab) antibody; TNKase(TM) (tenecteplase) second generation tissue plasminogen activator; 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, and the information incorporated herein by reference including the consolidated financial statements and the notes to those statements included in our annual report on Form 10-K for the year ended December 31, 1999. 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. Thirteen 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 1999, we had total revenues of $1,421.4 million and a net loss of $1,144.5 million. We manufacture and market seven products directly in the United States. In addition, we have received regulatory approval to market Nutropin Depot in the United States and we expect to launch this product in the first half of 2000. Our products are: - 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; - Pulmozyme(R) inhalation solution for the management of cystic fibrosis; and - Nutropin Depot(TM) encapsulated sustained-release growth hormone for the treatment of pediatric growth hormone deficiency. We receive royalties on sales of rituximab outside of the United States (excluding Japan), on sales of Pulmozyme and Herceptin outside of the United States and on sales of certain products in Canada from F. Hoffmann-La Roche Ltd, an affiliate of Roche Holdings, Inc., commonly known as Hoffmann-La Roche. We receive royalties on sales of growth hormone products and t-PA outside of the United States and Canada and on sales of rituximab in Japan through other licensees. We also receive worldwide royalties on seven additional licensed products that are marketed by other companies. Six of these products originated from our technology. We currently have 19 projects in our development pipeline, including two products or indications in preparation for Phase III clinical trials and six products or indications in Phase III clinical trials. We have two products, TNKase second generation t-PA and anti-IgE antibody, for which Phase III clinical trials have been completed. We have made regulatory filings to seek marketing approval in the United States and are awaiting regulatory clearance for TNKase and are preparing regulatory filings for anti-IgE. Our principal executive offices are located at 1 DNA Way, South San Francisco, California 94080-4990 and our telephone number is (650) 225-1000. Our worldwide web site address is www.gene.com. The information on our web site is not part of this prospectus. 1 5 RECENT DEVELOPMENTS Since Roche's public offering of our common stock in October 1999, the following significant developments occurred with respect to our business: Product Development and Business Events - - In March 2000, we announced plans to collaborate with other major pharmaceutical manufacturers to test our single-bolus thrombolytic drug TNKase(TM) (Tenecteplase) in combination with various leading anti-thrombotic agents in the treatment of acute myocardial infarction, or heart attack, as part of four clinical trials involving nearly 9,000 patients. TNKase is currently under regulatory review by the U.S. Food and Drug Administration, or FDA, and the European Regulatory Authority for marketing approval for the treatment of heart attack. - - In February 2000, we entered into an agreement with Actelion Ltd. for the development and co-promotion in the United States of tezosentan, a small molecule that acts by blocking endothelin receptors. Tezosentan is a potential treatment for acute heart failure. We have paid Actelion an upfront fee of $15 million and agreed to make additional payments based upon the achievement of certain milestones. In addition, we have agreed to make a loan to Actelion which is convertible into its capital stock and to make a future equity investment in Actelion. We have also agreed with Actelion to co-promote TNKase, which is awaiting approval by the FDA. Actelion licensed tezosentan from Hoffmann-La Roche in 1998. - - In February 2000, Hoffmann-La Roche agreed to pay us $10 million in order to exercise its right, pursuant to the marketing and licensing agreement between Hoffmann-La Roche and us, to extend its option to license recombinant human monoclonal antibody to vascular endothelial growth factor, which is known as anti-VEGF. - - In December 1999, we received FDA approval for Nutropin Depot, the first long-acting dosage form of recombinant human growth hormone, for treatment of growth hormone deficiency in children. - - With Novartis Pharma AG, or Novartis, and Tanox, Inc., we announced in December 1999 positive results from Phase III clinical trials of anti-IgE in patients with allergic asthma and seasonal allergic rhinitis. Results from these trials were presented in March 2000 at the annual meeting of the American Academy of Allergy, Asthma and Immunology. We intend to file a biologics license application, or BLA, in the United States and file for regulatory approval in Europe by mid-year 2000. - - In December 1999, we decided to proceed with Phase III clinical trials of anti-VEGF in combination with chemotherapy in metastatic colorectal cancer and metastatic non-small cell lung cancer, based on positive results in Phase II studies. - - With XOMA Corporation, we announced in December 1999 the initiation of Phase III clinical trials of anti-CD11a (hu1124) monoclonal antibody in psoriasis. We expanded the anti-CD11a product development program to include solid organ transplant rejection, and we are planning for Phase I clinical trials for this indication. - - In December 1999, we announced a collaboration with Inspire Pharmaceuticals, Inc., or Inspire, to develop a therapy for respiratory disorders, including cystic fibrosis and chronic bronchitis. Regulatory and Legal Events - - On March 13, 2000, we voluntarily issued an important drug notification regarding a defect in the packaging of Pulmozyme. During a quality assurance inspection, we discovered that a small puncture may be present in approximately one of every 1,700 ampules of Pulmozyme, potentially causing the ampule to leak. We are working with the FDA and we are in the process of informing wholesalers, retailers and physicians. We believe that the possible leaks are unlikely to cause adverse health effects, but we are asking physicians to advise patients that ampules with leaks should not be used and should be returned to us. Our product complaint and adverse event reporting systems have not revealed evidence of a change in the safety pattern of Pulmozyme as a result of the packaging defect. We are advising physicians that ampules without leaks may continue to be used by patients. We have implemented corrective actions to prevent recurrence of this defect, and we do not foresee a disruption in the product supply. - - In our litigation against Bio-Technology General Corporation, which is known as BTG, a jury trial of certain of BTG's claims regarding the invalidity of our human growth hormone patents began on January 10, 2000 in U.S. District Court. On January 18, 2000, the jury returned a verdict in our favor on a certain factual issue underlying BTG's invalidity claim, but the District Court judge nevertheless entered judgment in favor of BTG and lifted the preliminary injunction that had been 2 6 in effect against BTG since 1995. On February 23, 2000, we filed a motion with the Federal Circuit requesting that the injunction against BTG be reinstated pending appeal and for an expedited appeal. On February 24, 2000, the Federal Circuit temporarily reinstated the injunction against BTG pending the Court's further review of the issues raised in our motion. In the event that the injunction is not maintained during the pendency of our appeal, or if our appeal is not successful, BTG could enter the United States market with its human growth hormone product. For more information and background on this litigation, see "Business--Competition" and "--Legal Proceedings." - - In the fourth quarter of 1999, we recorded a special charge of $180 million related to the settlement of the patent infringement lawsuits brought by the University of California relating to our human growth hormone products. We subsequently paid the University of California $150 million and made a $50 million contribution to the University of California toward construction of a biological sciences research building. The special charge reflects the amounts of these obligations less amounts previously recorded. The settlement resolves all outstanding litigation between Genentech and the University of California relating to our growth hormone products. 3 7 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 $41.25 per share in cash and retired all of the shares of special common stock including those held by Roche. On July 23, 1999, Roche completed the sale of 44,000,000 shares of our common stock at $48.50 per share. On October 26, 1999, Roche completed the sale of 40,000,000 shares of our common stock at $71.75 per share. On January 19, 2000, Roche completed an offering of zero-coupon notes which are exchangeable for an aggregate of 6,517,309 shares of our common stock held by Roche. Roche currently owns 65.5% of our common stock. In July 1999, we entered into certain affiliation arrangements with Roche, amended our licensing and marketing agreement with Hoffmann-La Roche, and entered into a tax sharing agreement with Roche. Affiliation Arrangements Our board consists 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 Chief Executive Officer of Genentech, serves as the Genentech employee director and chairman of the board. However, under the affiliation agreement, Roche has the right to obtain proportional representation on our board at any time. Roche intends to continue to allow our current management to conduct our business and operations as we have done in the past. However, we cannot assure you that Roche will not implement a new business plan in the future. Except as follows, the affiliation arrangements do not limit Roche's ability to buy or sell our common stock. If Roche and its affiliates sell their majority ownership of shares of our common stock to a successor, Roche has agreed that it will cause the successor to purchase all shares of our common stock not held by Roche as follows: - with consideration, if that consideration is composed entirely of either cash or equity traded on a U.S. national securities exchange, in the same form and amounts per share as received by Roche and its affiliates; and - in all other cases, with consideration that has a value per share not less than the weighted average value per share received by Roche and its affiliates as determined by a nationally recognized investment bank. If Roche owns more than 90% of our common stock for more than two months, Roche has agreed that it will, as soon as reasonably practicable, effect a merger of Genentech with Roche or an affiliate of Roche. Roche has agreed, as a condition to any merger of Genentech with Roche or the sale of our assets to Roche, that either: - the merger or sale must be authorized by the favorable vote of a majority of non-Roche stockholders, provided no person will be entitled to cast more than 5% of the votes at the meeting; or - in the event such a favorable vote is not obtained, the value of the consideration to be received by non-Roche stockholders would be equal to or greater than the average of the means of the ranges of fair values for the common stock as determined by two nationally recognized investment banks. We have agreed not to approve, without the prior approval of the directors designated by Roche: - any acquisition, sale or other disposal of all or a portion of our business representing 10% or more of our assets, net income or revenues; - any issuance of capital stock except under certain circumstances; or - any repurchase or redemption of our capital stock other than a redemption required by the terms of any security and purchases made at fair market value in connection with any of our deferred compensation plans. 4 8 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 July 1999, we amended that agreement, the major provisions of which include: - extending Hoffmann-La Roche's option until at least 2015; - Hoffmann-La Roche may exercise its option to license our products upon the occurrence of any of the following: (1) our decision to file an Investigational New Drug exemption application, or IND, for a product, (2) completion of a Phase II trial for a product or (3) if Hoffmann-La Roche previously paid us a fee of $10 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 From the redemption of our special common stock in June 1999 until Roche completed its public offering of our common stock in October 1999, we were included in Roche's U.S. consolidated federal income tax group and included with Roche and/or one or more Roche subsidiaries in consolidated or combined income tax groups for certain state and local tax jurisdictions. Effective upon the consummation of the public offering on October 1999, we ceased to be a member of the consolidated federal income tax group (and certain consolidated or combined state or local income tax groups) of which Roche is the common parent. Genentech and Roche have entered into a tax sharing agreement. Pursuant to this agreement, Genentech and Roche are to make payments such that, with respect to the period during which Genentech is a member of a Roche consolidated or combined group, 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 if we had filed separate, stand-alone federal, state and local income tax returns as the common parent of an affiliated group of corporations filing consolidated or combined federal, state and local returns rather than a consolidated subsidiary of Roche. For more information about the tax sharing agreement, you should read "Relationship with Roche--Tax Sharing Agreement." 5 9 Roche's Right to Maintain its Percentage Ownership Interest in Our Stock We expect from time to time to issue additional shares of common stock in connection with our stock option and stock purchase plans, and we may issue additional shares for other purposes. The affiliation agreement requires us to, among other things, establish a stock repurchase program designed to maintain Roche's percentage ownership interest in our common stock if we issue or sell any shares. We are currently required to repurchase a sufficient number of shares to maintain Roche's ownership percentage at a level which is no lower than 2% below what it would have been had we not issued or sold any new shares since Roche's public offering of our common stock in July 1999. Specifically, the agreement provides 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 July 1999 offering but prior to the time of such issuance, except that we may issue shares up to an amount that would cause Roche's percentage ownership to be no more than 2% below the "Minimum Percentage." The Minimum Percentage equals the lowest number of shares of our common stock owned by Roche since the July 1999 offering divided by the number of shares of our common stock outstanding at the time of the July 1999 offering (which is 254,597,176 shares). Following this offering, upon receipt of a written request from Roche, we will be required to repurchase a number of shares of our common stock sufficient to raise Roche's percentage ownership interest in our common stock above the Minimum Percentage within 60 days of receipt of such notice. Notwithstanding the foregoing, we have agreed that so long as Roche holds greater than 50% of our outstanding common stock, prior to any issuance or sale of shares of our common stock by us, we will repurchase a sufficient number of shares of our common stock to maintain Roche's percentage ownership interest above 50%. In addition, Roche has a continuing option to buy our stock from us at prevailing market prices to maintain its percentage ownership interest in us. As of March 10, 2000, Roche owned approximately 65.5% of our common stock and will own approximately 58.9% of our common stock immediately after this offering. As of March 10, 2000, the Minimum Percentage was approximately 67.0% and will be approximately 60.2% immediately after this offering. For more information you should read "Relationship with Roche--Roche's Right to Maintain its Percentage Ownership Interest in Our Stock." 6 10 THE OFFERING COMMON STOCK OFFERED BY ROCHE........17,300,000 shares OVER-ALLOTMENT OPTION FROM ROCHE.....1,700,000 shares COMMON STOCK OUTSTANDING.............260,286,625 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 1,700,000 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 is as of March 10, 2000 and does not take into account 18,780,917 shares of common stock that may be issued upon exercise of outstanding stock options, of which options representing 4,340,232 shares of common stock were exercisable as of that date. 7 11 SUMMARY CONSOLIDATED FINANCIAL DATA The following table presents summary consolidated financial data for our company. The statement of operations data and balance sheet data presented in this table are derived from our consolidated financial statements and notes thereto, which are included in our annual report on Form 10-K for the year ended December 31, 1999, which is incorporated herein by reference.
--------------------------------- YEAR ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------- -------- -------- In millions, except per share data and percentages STATEMENT OF OPERATIONS DATA Total revenues.............................................. $ 1,421.4 $1,150.9 $1,016.7 Product sales............................................. 1,039.1 717.8 584.9 Royalties................................................. 189.3 229.6 241.1 Contract and other........................................ 103.6 114.8 121.6 Interest.................................................. 89.4 88.7 69.1 Total costs and expenses.................................... $ 2,762.3 $ 898.3 $ 846.9 Cost of sales............................................. 285.6 138.6 102.5 Research and development.................................. 367.3 396.2 470.9 Marketing, general and administrative..................... 467.9 358.9 269.9 Special charges Legal settlements...................................... 230.0 -- -- Related to redemption.................................. 1,207.7 -- -- Recurring charges related to redemption................... 198.4 -- -- Interest.................................................. 5.4 4.6 3.6 Income (loss) before taxes.................................. $(1,340.9) $ 252.6 $ 169.8 Income tax (benefit) provision.............................. (196.4) 70.7 40.8 Net income (loss)........................................... $(1,144.5) $ 181.9 $ 129.0 Effective tax rate (benefit)................................ (15)% 28% 24% Earnings (loss) per share Basic..................................................... $ (4.46) $ 0.72 $ 0.52 Diluted................................................... (4.46) 0.70 0.51 Weighted average shares outstanding Basic..................................................... 256.4 251.5 246.1 Diluted................................................... 256.4 259.7 252.8 Actual shares outstanding at period-end..................... 258.1 254.2 248.5 OTHER DATA Cash flow from operations................................... $ (7.4) $ 349.9 $ 118.3 Depreciation expense........................................ 80.9 72.7 58.9 Amortization expense........................................ 200.5 5.4 6.6 Capital expenditures........................................ 95.0 88.1 154.9
------------ AS OF DECEMBER 31, 1999 ------------ In millions BALANCE SHEET DATA Cash and cash equivalents, short-term investments and long-term marketable securities........................... $1,957.4 Working capital............................................. 842.4 Goodwill and other intangible assets........................ 3,082.0 Total assets................................................ 6,554.4 Long-term debt.............................................. 149.7 Total liabilities........................................... 1,271.6 Total stockholders' equity.................................. 5,282.8 Total liabilities and stockholders' equity.................. 6,554.4
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 2000 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 58.9% of our outstanding common stock. Roche may in the future, through open market purchases or otherwise, acquire additional shares of our common stock. As our majority stockholder, Roche controls the outcome of actions requiring the approval of our stockholders. Our bylaws provide, among other things, that the composition of our board of directors shall consist of two Roche directors, three independent directors nominated by a nominating committee and one Genentech employee nominated by the nominating committee. As long as Roche owns in excess of 50% of our common stock, Roche directors will comprise two of the three members of the nominating committee. However, at any time until Roche owns less than 5% of our stock, Roche will have the 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, 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. The affiliation agreement with Roche requires us to, among other things, establish a stock repurchase program designed to maintain Roche's percentage ownership interest in our common stock. While the dollar amounts associated with these future purchases cannot currently be estimated, such stock repurchases could have a material adverse impact on our liquidity. For more information, see "Relationship with Roche--Roche's Right to Maintain its Percentage Ownership Interest in Our Stock." Our certificate of incorporation includes provisions relating to competition by Roche with us, allocations of corporate opportunities, transactions with interested parties and intercompany agreements and provisions limiting the liability of certain people. Our certificate of incorporation provides that any person purchasing or acquiring an interest in shares of our capital stock shall be deemed to have consented to the provisions in the certificate of incorporation relating to competition with Roche, conflicts of interest, corporate opportunities and intercompany agreements, and such consent may restrict such person's ability to challenge transactions carried out in compliance with such provisions. Persons who are directors and/or officers of 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. WE DEPEND ON SKILLED PERSONNEL AND KEY RELATIONSHIPS The success of our business depends, in large part, on our continued ability to attract and retain highly qualified management, scientific, manufacturing and sales and marketing personnel, and on our ability to develop and maintain important relationships with leading research institutions and key distributors. Competition for such personnel and relationships is intense. In connection with the redemption of our special common stock, two of our existing employee stock option plans terminated and a number of employee options, including many of those held by senior management, were canceled. We have issued new employee stock options to attract and retain employees. However, certain provisions of our affiliation agreement with Roche are designed to enable Roche to maintain its percentage ownership interest in our common stock, which may limit our flexibility as to the number of shares we are able to grant under our stock option plans. We cannot assure you that we will be able to attract or retain such personnel or maintain such relationships. WE FACE GROWING AND NEW COMPETITION We face growing competition in two of our therapeutic markets and expect new 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) (reteplase); the resulting adverse effect on sales could be material. Retavase received approval from the FDA in October 1996 for the treatment of acute myocardial infarction. There is also an increasing use of mechanical reperfusion in lieu of thrombolytic therapy for the treatment of acute myocardial infarction, which we expect to continue. 10 14 Second, in the growth hormone market, we continue to face increased competition from five other companies with growth hormone products, although one company is 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, is expected to file a revised BLA in 2000 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 RECORDED SUBSTANTIAL GOODWILL AND OTHER INTANGIBLES, THE AMORTIZATION OF WHICH WILL ADVERSELY AFFECT OUR EARNINGS As a result of the redemption of our special common stock, Roche owned all of our outstanding common stock, requiring push-down accounting under generally accepted accounting principles. Push-down accounting required us to establish a new accounting basis for our assets and liabilities, based on Roche's cost in acquiring all of our stock. In other words, Roche's cost of acquiring Genentech was "pushed down" to us and reflected on our financial statements. Push-down accounting required us to record goodwill and other intangible assets of approximately $1,706.0 million and $1,499.0 million, respectively, during the second quarter of 1999. The amortization of this goodwill and other intangible assets will have a significant negative impact 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 "Management's Discussion and Analysis of Results of Operations and Financial Condition" and the "Redemption of Our Special Common Stock" note in the notes to our consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 1999, which is incorporated herein by reference. 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; - the timing of non-U.S. approvals, if any, for products licensed to Hoffmann-La Roche and other licensees; 11 15 - 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 investment 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 special charges of $230.0 million in 1999. WE MAY INCUR MATERIAL PRODUCT LIABILITY COSTS The testing and marketing of medical products entail an inherent risk of product liability. We maintain limited product liability insurance coverage. Our business may be materially and adversely affected by a successful product liability claim in excess of our insurance coverage. We cannot assure you that product liability insurance coverage will continue to be available to us in the future on reasonable terms or at all. OUR PRODUCTS ARE SUBJECT TO GOVERNMENTAL REGULATIONS AND APPROVALS The pharmaceutical industry is subject to stringent regulation with respect to product safety and efficacy by various federal, state and local authorities. Of particular significance are the FDA's requirements covering research and development, testing, manufacturing, quality control, labeling and promotion of drugs for human use. A pharmaceutical product cannot be marketed in the United States until it has been approved by the FDA, and then can only be marketed for the indications and claims approved by the FDA. As a result of these requirements, the length of time, the level of expenditures and the laboratory and clinical information required for approval of a New Drug Application, or NDA, or a BLA, are substantial and can require a number of years. In addition, after any of our products receives regulatory approval, it is subject to ongoing FDA regulation, including, for example, changes to its label and product recall. We cannot be sure that we can obtain necessary regulatory 12 16 approvals on a timely basis, if at all, for any of the products we are developing or that we can maintain necessary regulatory approvals for our existing products, and all of the following could have a material adverse effect on our business: - significant delays in obtaining or failing to obtain required approvals; - loss of or changes to previously obtained approvals; and - failing to comply with existing or future regulatory requirements. Moreover, it is possible that the current regulatory framework could change or additional regulations could arise at any stage during our product development, which may affect our ability to obtain approval of our products. DIFFICULTIES OR DELAYS IN PRODUCT MANUFACTURING COULD HARM OUR BUSINESS We currently produce all of our products at our manufacturing facility located in South San Francisco, California. We expect to gain licensure of a new manufacturing facility in Vacaville, California by the end of the second quarter of 2000. Problems with any of our manufacturing processes could result in product defects, which could require us to delay shipment of products or recall products previously shipped. In addition, any prolonged interruption in the operations of our manufacturing facilities could result in cancellations of shipments. A number of factors could cause interruptions, including equipment malfunctions or failures, or damage to a facility due to natural disasters or otherwise. Because our manufacturing processes are highly complex and are subject to a lengthy FDA approval process, we cannot assure you that alternative qualified production capacity would be available on a timely basis or at all. Difficulties or delays in our manufacturing could increase our costs, cause us to lose revenue or market share and damage our reputation. OUR STOCK PRICE, LIKE THAT OF MANY BIOTECHNOLOGY COMPANIES, IS HIGHLY VOLATILE The market prices for securities of biotechnology companies in general have been highly volatile and may continue to be highly volatile in the future. In addition, due to the absence of the put and call that were associated with our special common stock and the reduction in the number of shares of our publicly traded stock, the market price of our common stock has been and may continue to be more volatile than our special common stock was in the past. 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. A VARIETY OF FACTORS COULD ADVERSELY AFFECT OUR CASH POSITION Factors that could adversely affect our cash position include, but are not limited to, future levels of our product sales, royalty and contract revenues, expenses, in-licensing activities, including the timing and amount of related development funding or milestone payments, acquisitions, capital expenditures and the amount of any stock repurchased under any stock repurchase program. The affiliation agreement with Roche requires us to, among other things, establish a stock repurchase program designed to maintain Roche's percentage ownership interest in our common stock. While the dollar amounts associated with these future purchases cannot currently be estimated, such stock repurchases could have a material adverse effect on our cash position and may have the effect of limiting our ability to use our capital stock as consideration for acquisitions. For more information you should read "Relationship with Roche--Right to Maintain its Percentage Ownership Interest in Our Stock." 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; - our consumer business; 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." 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. 14 18 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 $41.25 per share in cash and retired all of the shares of special common stock including those held by Roche. We completed a two-for-one split of our common stock, effected in the form of a stock dividend, on November 2, 1999. The prices per share below give effect to that stock split.
---------------- HIGH LOW ---- --- 1997 First Quarter............................................. $29 $26 5/8 Second Quarter............................................ 29 5/8 28 1/4 Third Quarter............................................. 29 15/32 28 1/4 Fourth Quarter............................................ 30 5/16 28 3/4 1998 First Quarter............................................. $36 1/4 $29 5/8 Second Quarter............................................ 36 7/8 32 7/8 Third Quarter............................................. 36 11/32 31 25/32 Fourth Quarter............................................ 39 3/4 34 1/16 1999 First Quarter............................................. $44 15/32 $37 1/4 Second Quarter (through June 16).......................... 45 40 31/32
PRICE RANGE OF COMMON STOCK Since July 20, 1999, our common stock has traded on the New York Stock Exchange under the symbol "DNA". The following table sets forth the high and low reported sale prices for our common stock for the periods indicated. We completed a two-for-one split of our common stock, effected in the form of a stock dividend, on November 2, 1999. The prices per share below give effect to that stock split.
----------------- HIGH LOW ---- ---- 1999 Third Quarter (beginning July 20)......................... $ 89 3/4 $ 58 1/4 Fourth Quarter............................................ 143 66 7/8 2000 First Quarter (through March 14, 2000).................... $245 $117
15 19 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," included elsewhere in this prospectus, and the consolidated financial statements and related notes thereto included in our annual report on Form 10-K for the year ended December 31, 1999, which is incorporated herein by reference. The statement of operations data for the years ended December 31, 1999, 1998 and 1997 and the balance sheet data as of December 31, 1999 and 1998 are derived from, and qualified by reference to, our audited consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 1999, which is incorporated herein by reference, and should be read in conjunction with those consolidated financial statements and related notes.
----------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1999 1998 1997 1996 1995 --------- -------- -------- ------ ------ In millions, except per share data and percentages STATEMENT OF OPERATIONS DATA Total revenues....................................... $ 1,421.4 $1,150.9 $1,016.7 $968.7 $917.8 Product sales...................................... 1,039.1 717.8 584.9 582.8 635.3 Royalties.......................................... 189.3 229.6 241.1 214.7 190.8 Contract and other................................. 103.6 114.8 121.6 107.0 31.2 Interest........................................... 89.4 88.7 69.1 64.2 60.5 Total costs and expenses............................. $ 2,762.3 $ 898.3 $ 846.9 $820.8 $745.6 Cost of sales...................................... 285.6 138.6 102.5 104.5 97.9 Research and development........................... 367.3 396.2 470.9 471.1 363.0 Marketing, general and administrative.............. 467.9 358.9 269.9 240.1 251.7 Special charges Legal settlements............................... 230.0 -- -- -- 25.0 Related to redemption........................... 1,207.7 -- -- -- -- Recurring charges related to redemption............ 198.4 -- -- -- -- Interest........................................... 5.4 4.6 3.6 5.1 8.0 Income (loss) before taxes........................... $(1,340.9) $ 252.6 $ 169.8 $147.9 $172.2 Income tax (benefit) provision....................... (196.4) 70.7 40.8 29.6 25.8 Net income (loss).................................... $(1,144.5) $ 181.9 $ 129.0 $118.3 $146.4 Effective tax rate (benefit)......................... (15)% 28% 24% 20% 15% Earnings (loss) per share Basic.............................................. $ (4.46) $ 0.72 $ 0.52 $ 0.49 $ 0.62 Diluted............................................ (4.46) 0.70 0.51 0.48 0.60 Weighted average shares outstanding Basic.............................................. 256.4 251.5 246.1 241.2 236.5 Diluted............................................ 256.4 259.7 252.8 247.9 243.5 Actual shares outstanding at period-end.............. 258.1 254.2 248.5 242.9 238.5 OTHER DATA Depreciation expense................................. $ 80.9 $ 72.7 $ 58.9 $ 57.6 $ 53.3 Amortization expense................................. 200.5 5.4 6.6 4.5 5.1 Capital expenditures................................. 95.0 88.1 154.9 141.8 70.2
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 legal settlements in 1999 relate to (1) a $50 million settlement in April 1999 with respect to past human growth hormone promotional practices and (2) $180 million related to the settlement of the patent infringement lawsuits brought by the University of California relating to our human growth hormone products. 16 20
-------------------------------------------------------- AS OF DECEMBER 31, -------------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- In millions BALANCE SHEET DATA Cash and cash equivalents, short-term investments and long-term marketable securities............ $1,957.4 $1,604.6 $1,286.5 $1,159.1 $1,096.8 Accounts receivable.............................. 214.8 149.7 189.2 197.6 172.2 Inventories...................................... 275.2 148.6 116.0 91.9 93.6 Working capital.................................. 842.4 950.6 904.4 705.1 812.0 Property, plant and equipment, net............... 730.1 700.2 683.3 586.2 503.7 Other intangible and long-term assets............ 1,654.4 196.3 177.2 149.2 105.5 Total assets..................................... 6,554.4 2,855.4 2,507.6 2,226.4 2,011.0 Total current liabilities........................ 484.1 291.3 289.6 250.0 233.4 Long-term debt................................... 149.7 150.0 150.0 150.0 150.0 Total liabilities................................ 1,271.6 511.6 476.4 425.3 408.9 Total stockholders' equity....................... 5,282.8 2,343.8 2,031.2 1,801.1 1,602.0 Total liabilities and stockholders' equity....... 6,554.4 2,855.4 2,507.6 2,226.4 2,011.0
17 21 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, and we are manufacturing and preparing to market Nutropin Depot. We receive royalties on sales of rituximab outside of the United States (excluding Japan), on sales of Pulmozyme and Herceptin outside of the United States and on sales of certain products in Canada from Hoffmann-La Roche. We receive royalties on sales of growth hormone products and t-PA outside of the United States and Canada and on sales of rituximab in Japan through other licensees. We also receive worldwide royalties on seven additional licensed products that are marketed by other companies. Six of these products originated from our technology. 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 $41.25 per share in cash with funds deposited by Roche for that purpose. We refer to this event as the "Redemption." As a result of the Redemption, Roche's percentage ownership of our outstanding common stock increased from 65% to 100%. Consequently, under U.S. generally accepted accounting principles, we were required to use push-down accounting to reflect in our financial statements the amounts paid for our stock in excess of our net book value. Push-down accounting required us to record $1,706.0 million of goodwill and $1,499.0 million of other intangible assets on our balance sheet in the second quarter of 1999. Also, as a result of push-down accounting, we recorded special charges related to the Redemption of $1,207.7 million in 1999. For more information about special charges and push-down accounting, you should read "--Special Charges" below and the "Redemption of Our Special Common Stock" note in the notes to our consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 1999, which is incorporated herein by reference. PUBLIC OFFERINGS On July 23, 1999 and October 26, 1999, Roche completed public offerings of our common stock. As a result, Roche's percentage ownership of our outstanding common stock was reduced to approximately 66.1% at December 31, 1999. We did not receive any of the net proceeds from the offerings. Our common stock began trading on the New York Stock Exchange under the symbol DNA on July 20, 1999. STOCK SPLIT On November 2, 1999, we effected a two-for-one stock split of our common stock in the form of a dividend of one share of our common stock for each share held at the close of business on October 29, 1999. Our stock began trading on a split-adjusted basis on November 3, 1999. All information in this prospectus relating to the number of shares, price per share and per share amounts of common stock and special common stock gives effect to the split. 18 22 COMPARISON OF YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 Pro forma results exclude special charges related to the Redemption and legal settlements, recurring charges and other items related to the Redemption, and their related tax effects. These charges are further discussed below in "--Special Charges" and "--Recurring Charges Related to Redemption."
---------------------------------------------------------------- YEAR ENDED DECEMBER 31, REVENUES ------------------------------------------ ANNUAL % CHANGE 1999 ------------------- -------------------- PRO FORMA ACTUAL PRO FORMA 1998 1997 99/98 98/97 -------- --------- -------- -------- --------- ----- In millions Revenues................................... $1,421.4 $1,401.0 $1,150.9 $1,016.7 22% 13%
Total Revenues: Total revenues for 1999 reached $1,421.4 million, a 24% increase from 1998 primarily due to higher product sales. Pro forma revenues for 1999 were $1,401.0 million, reflecting an increase of 22% from 1998 driven by higher product sales. Revenues for 1998 increased 13% from 1997. This increase was also attributable to higher product sales. These increases are further discussed below.
------------------------------------------------------------ YEAR ENDED DECEMBER 31, PRODUCT SALES -------------------------------------- ANNUAL % CHANGE 1999 ------------------- -------------------- PRO FORMA ACTUAL PRO FORMA 1998 1997 99/98 98/97 -------- --------- ------ ------ --------- ----- In millions Herceptin..................................... $ 188.4 $ 188.4 $ 30.5 -- 518% -- Rituxan....................................... 279.4 279.4 162.6 $ 5.5 72 2,856% Activase...................................... 236.0 236.0 213.0 260.7 11 (18) Protropin, Nutropin and Nutropin AQ........... 221.2 221.2 214.0 223.6 3 (4) Pulmozyme..................................... 111.4 111.4 93.8 91.6 19 2 Actimmune..................................... 2.7 2.7 3.9 3.5 (31) 11 -------- -------- ------ ------ Total product sales...................... $1,039.1 $1,039.1 $717.8 $584.9 45% 23% % of revenues................................. 73% 74% 62% 58%
Total Product Sales: Total product sales were $1,039.1 million in 1999, an increase of 45% from 1998 reflecting the effect of strong Rituxan sales, a full year of Herceptin sales and higher Activase sales. Product sales increased 23% in 1998 from 1997 as a result of a full year of Rituxan sales and initial Herceptin sales in the fourth quarter of 1998. This increase was partly offset by lower Activase and growth hormone sales in 1998. Product sales in connection with our licensing agreement with Hoffmann-La Roche were $41.3 million in 1999, $28.7 million in 1998 and $17.4 million in 1997. See "Business--Licensing Agreement with F. Hoffmann La Roche" below for further information about our licensing agreement with Hoffmann-La Roche. Herceptin: Sales of Herceptin were $188.4 million in 1999. We recorded $30.5 million of initial sales of Herceptin in the fourth quarter of 1998. An increase in physician acceptance of Herceptin has contributed to a positive sales trend and successful penetration into the breast cancer market. Herceptin was first marketed in September 1998 and is the first humanized monoclonal antibody for the treatment of HER2 overexpressing metastatic breast cancer. We have granted Hoffmann-La Roche exclusive marketing rights to Herceptin outside of the United States. Rituxan: Sales of Rituxan were $279.4 million in 1999, an increase of 72% from 1998. This increase was primarily due to increased market penetration for the treatment of B-cell non-Hodgkin's lymphoma. Sales of Rituxan were $162.6 million in 1998, its first full year of sales. Rituxan was approved for marketing by the FDA in late November 1997 and we launched Rituxan in December 1997. We co-developed Rituxan with IDEC Pharmaceuticals Corporation, commonly known as IDEC, from which we license Rituxan. We and IDEC are jointly promoting Rituxan in the United States. We shared responsibility with IDEC for manufacturing the product until the end of the third quarter of 1999, when IDEC finished transferring all bulk manufacturing responsibilities for Rituxan to us. Our partner Hoffmann-La Roche received permission from the European 19 23 Commission to market rituximab under the tradename MabThera(R) 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. In December 1998, a letter was sent to physicians advising them of some deaths associated with administration of Rituxan. As a result, we and IDEC updated the warning section of the Rituxan package insert to include information on infusion-related reactions and cardiovascular events. Activase: Sales of Activase were $236.0 million in 1999, an increase of 11% from 1998. This increase was largely due to the usage of Activase in peripheral vascular occlusive disease in lieu of another company's thrombolytic that was unavailable. This increase was offset in part by a continued decline in the overall size of the thrombolytic therapy market due to increasing use of mechanical reperfusion and continued competition from Centocor's Retavase. Sales of Activase in 1998 decreased 18% from 1997 primarily due to competition from Retavase. The decrease in 1998 also resulted, to a lesser extent, from a decline in the size of the thrombolytic market and from a temporary decrease in the available commercial market due to patients receiving therapy through large Phase III clinical trials completed in 1998. Protropin, Nutropin and Nutropin AQ: Sales of our three growth hormone products--Protropin, Nutropin, and Nutropin AQ,--were $221.2 million in 1999, a slight increase from 1998. This increase primarily reflects fluctuations in distributor ordering patterns. Sales of our growth hormone products decreased slightly in 1998 from 1997. A small loss of market share was seen in 1998 due to increased competition. We continue to face increased competition from five other companies with growth hormone products, although one company is preliminarily enjoined from selling its product. In December 1999, we received FDA approval for Nutropin Depot, the first long-acting dosage form of recombinant growth hormone for pediatric growth hormone deficiency. We expect to launch the product in the first half of 2000. Pulmozyme: Sales of Pulmozyme were $111.4 million in 1999, an increase of 19% from 1998. This increase was due to our continued market penetration for the management of cystic fibrosis in the early and mild patient populations. Sales of Pulmozyme were slightly higher in 1998 compared to 1997 primarily as a result of treatment of new patients in the mild to moderate cystic fibrosis patient population and treatment of new cystic fibrosis patients under the age of five due to a 1998 FDA approval for a label extension. Actimmune (interferon gamma-lb): In the second quarter of 1998, in return for a royalty on net sales, we licensed U.S. marketing and development rights to interferon gamma, including Actimmune, to Connetics Corporation. Thereafter, Connetics 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 directly in the United States. We have agreed to supply bulk materials to InterMune at cost plus a mark-up.
--------------------------------------------------------- YEAR ENDED DECEMBER 31, ROYALTIES, CONTRACT AND OTHER, AND INTEREST INCOME ------------------------------------ ANNUAL % CHANGE 1999 ------------------ ------------------ PRO FORMA ACTUAL PRO FORMA 1998 1997 99/98 98/97 ------ --------- ------ ------ --------- ----- In millions Royalties........................................ $189.3 $189.3 $229.6 $241.1 (18)% (5)% Contract and other............................... 103.6 83.2 114.8 121.6 (28) (6) Interest income.................................. 89.4 89.4 88.7 69.1 1 28
Royalties: Royalty income was $189.3 million in 1999, a decrease of 18% from 1998. Royalties in 1998 decreased 5% from 1997. These decreases primarily relate to the expiration of royalties from Eli Lilly and Company in August 1998. Under a 1994 settlement agreement and a prior license agreement with Eli Lilly, we received royalties for sales of Humulin(R) (human insulin) which expired in August 1998. The decrease in 1999 was partly offset by higher royalties from various licensees, and new royalties from Immunex Corporation under a licensing agreement for Enbrel(R) (etanercept) biologic response modifier. Cash flows from royalty income include revenues denominated in foreign currency. We currently purchase simple foreign currency put option contracts (options) to hedge these royalty cash flows. All options expire within the next three years. 20 24 Contract and Other Revenues: Contract and other revenues were $103.6 million in 1999, a decrease of 10% from 1998. This decrease which is further explained below, was partly offset by an adjustment of $20.3 million related to the write-up of certain marketable securities on June 30, 1999 as a result of push-down accounting. See the "Redemption of Our Special Common Stock" note in the notes to our consolidated financial statements in our annual report on Form 10-K for the year ended December 31, 1999, which are incorporated herein by reference, for further information on push-down accounting. Pro forma contract and other revenues in 1999, which exclude the effect of push-down accounting, were $83.2 million, a decrease of 28% from 1998. This decrease resulted primarily from higher revenues in 1998 related to payments from Hoffmann-La Roche for Herceptin marketing rights and from Novo Nordisk A/S, commonly known as Novo, for the patent infringement litigation settlement, as discussed below. These decreases were offset in part by higher revenues in 1999 from our strategic alliances, including initial license fees from Immunex Corporation for Enbrel and from Schwarz Pharma AG for Nutropin AQ and Nutropin Depot sustained-release growth hormone, and higher gains from the sale of biotechnology equity securities. Contract and other revenues in 1998 decreased 6% from 1997 as a result of lower contract revenues from our strategic alliances and lower gains from the sale of biotechnology equity securities. In addition, contract revenues from Hoffmann-La Roche in 1998 decreased significantly from 1997 primarily due to the discontinuation of several projects or indications in development. In July 1998, we settled a lawsuit brought by us against Novo relating to our patents for human growth hormone and insulin and a lawsuit brought by Novo alleging infringement of a patent held by Novo relating to our manufacture, use and sale of our Nutropin human growth hormone products. Under the settlement agreement, we agreed with Novo to cross-license worldwide certain patents relating to human growth hormone. In August 1998, Novo received a worldwide license under our patents relating to insulin, and we received certain payments from Novo that were recorded in contract revenues. We recorded nonrecurring contract revenues from Hoffmann-La Roche of $40.0 million in 1998 for Herceptin marketing rights outside of the United States. All other contract revenue from Hoffmann-La Roche, including reimbursement for ongoing development expenses after the option exercise date, totaled $17.2 million in 1999, $21.6 million in 1998 and $67.6 million in 1997. Interest Income: Interest income in 1999 was comparable to 1998. Although our cash, short-term and long-term investment portfolio, excluding marketable equity securities, at December 31, 1999 decreased from December 31, 1998, the average portfolio balance for the year was higher than the previous year. This resulted in an increase in interest income, which was offset by lower portfolio yields. Interest income increased in 1998 from 1997 primarily due to an increase in the investment portfolio and, to a lesser extent, a higher average yield on the investment portfolio.
----------------------------------------------------------- YEAR ENDED DECEMBER 31, COSTS AND EXPENSES -------------------------------------- ANNUAL % CHANGE 1999 ------------------ -------------------- PRO FORMA ACTUAL PRO FORMA 1998 1997 99/98 98/97 -------- --------- ------ ------ --------- ----- In millions Cost of sales.................................. $ 285.6 $ 192.2 $138.6 $102.5 39% 35% Research and development....................... 367.3 367.3 396.2 470.9 (7) (16) Marketing, general and administrative.......... 467.9 467.9 358.9 269.9 30 33 Special charges: Legal settlements............................ 230.0 -- -- -- -- -- Related to redemption........................ 1,207.7 -- -- -- -- -- Recurring charges related to redemption........ 198.4 -- -- -- -- -- Interest expense............................... 5.4 5.4 4.6 3.6 17 28 -------- -------- ------ ------ Total costs and expenses..................... $2,762.3 $1,032.8 $898.3 $846.9 15% 6% % of revenues.................................. 194% 74% 78% 83% Cost of sales as a % of product sales.......... 18 19 18 Research and development as % of revenues...... 26 34 46 Marketing, general and administrative as % of revenues..................................... 33 31 27
21 25 Cost of Sales: Cost of sales was $285.6 million in 1999, an increase of 106% from 1998. This increase reflects the costs related to the sale of inventory that was written up at the Redemption due to push-down accounting. The remaining inventory that was written up is expected to be sold in 2000. Pro forma cost of sales in 1999, exclusive of the expense related to the sale of the inventory written up at the Redemption due to push-down accounting, was $192.2 million, a 39% increase from 1998. Cost of sales as a percent of net sales, exclusive of the expense related to the sale of the inventory written up, decreased to 18% in 1999 from 1998. This decrease was primarily driven by efficiencies in production and a more favorable product mix. Cost of sales as a percent of product sales increased to 19% in 1998 from 1997. 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. The economic benefits from sales to Hoffmann-La Roche are reflected in product sales and royalties. Research and Development: Research and development expenses in 1999 were $367.3 million, down 7% from 1998 as a result of reduced spending as products progressed through late-stage clinical trials. Research and development expenses in 1998 decreased 16% from 1997 primarily due to the wind-down of certain large late-stage clinical trials and lower expenses for licensing technology from third parties. The decrease in 1998 was partly offset by higher costs related to large scale development collaborations. Research and development as a percentage of pro forma revenues was 26% in 1999 and as a percentage of revenues was 34% in 1998 and 46% in 1997. The lower ratios from year to year reflect growing revenues and more recently in 1999 and 1998 a decrease in research and development spending. To gain additional access to potential new products and technologies, and to utilize other companies to help develop potential new products, we establish strategic alliances with various companies. These companies are developing technologies that may fall outside our research focus and through technology exchanges and investments with these companies we may have the potential to generate new products. As part of these strategic alliances, we have acquired equity and convertible debt securities of such companies. We have also entered into product-specific collaborations to acquire development and marketing rights for products. Marketing, General and Administrative: Marketing, general and administrative expenses in 1999 increased 30% from 1998 and such expenses in 1998 increased 33% from 1997. The increase in 1999 was driven mainly by support of the growth of our oncology products including the profit-sharing with IDEC related to Rituxan sales, and competitive conditions with other marketed products. Additional increases came from higher royalty, legal and corporate expenses. The 33% increase in 1998 was due to the introduction of Rituxan and related profit sharing with IDEC, the launch of Herceptin and a new indication for Nutropin and Nutropin AQ, competitive conditions with other marketed products and the write-down of certain biotechnology equity securities. Special Charges: During 1999, we had special charges of $1,437.7 million related to the Redemption and the application of push-down accounting, and legal settlements. The Redemption related charge of $1,207.7 million primarily included: (1) a non-cash charge of $752.5 million for in-process research and development, (2) $284.5 million of compensation expense related to early cash settlement of certain employee stock options and (3) an aggregate of approximately $160.1 million as a non-cash charge for the remeasurement of the value of continuing employee stock options. The legal settlements charge included: (1) a $50.0 million settlement related to a federal investigation of our past clinical, sales and marketing activities associated with human growth hormone; and (2) $180.0 million related to the settlement on the patent infringement lawsuits brought by the University of California relating to our human growth hormone products. See "--In-Process Research and Development" below and the "Redemption of Our Special Common Stock" and "Leases, Commitments and Contingencies" notes in the notes to our consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 1999, which is incorporated herein by reference, for further information regarding these special charges. Recurring Charges Related to Redemption: We began recording recurring charges related to the Redemption and push-down accounting in the third quarter of 1999. These charges were $198.4 million in 1999 and were comprised of $191.1 million related to the amortization of other intangible assets and goodwill, and $7.3 million of compensation expense related to alternative arrangements provided at the time of the Redemption for certain holders of some of the unvested options. 22 26 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.
--------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------- 1999 Income Before Taxes and Income Taxes --------------------- ACTUAL PRO FORMA 1998 1997 --------- --------- ------ ------ In millions Income (loss) before taxes.................................. $(1,340.9) $368.2 $252.6 $169.8 Income tax (benefit) provision.............................. (196.4) 121.5 70.7 40.8 Effective tax rate.......................................... 15% 33% 28% 24%
Income Tax: The tax benefit of $196.4 million for 1999 consists of tax expense of $121.5 million on pretax income excluding the income and deductions attributable to push-down accounting and legal settlements, and tax benefits of $317.9 million related to income and deductions attributable to push-down accounting and legal settlements. Our effective tax rate for 1999 was approximately 15%. The tax rate on pretax income excluding non-recurring special charges was 50% for 1999, which reflects the impact of non-deductible goodwill amortization related to push-down accounting. The pro forma 1999 effective tax rate of 33% is higher than the 1998 effective tax rate of 28% primarily due to reduced research credits and realization of foreign losses. The 1998 effective tax rate increased from the 24% rate in 1997 primarily due to reduced research credits. We expect our effective tax rate on pro forma income to increase to approximately 34% in 2000. Our effective tax rate on pre-tax income, including recurring Redemption related charges, will be adversely affected due to a full year of non-deductible goodwill amortization.
-------------------------------------------------------------- YEAR ENDED DECEMBER 31, ------------------ ANNUAL % CHANGE Net Income (Loss) --------------------- ------------------- 1999 --------------------- PRO FORMA ACTUAL PRO FORMA 1998 1997 99/98 98/97 --------- --------- ------ ------ --------- ----- In millions Net income (loss)............................ $(1,144.5) $246.7 $181.9 $129.0 36% 41% Earnings (loss) per share: Basic...................................... $ (4.46) $ 0.96 $ 0.72 $ 0.52 Diluted.................................... $ (4.46) $ 0.93 $ 0.70 $ 0.51
Net Income (Loss): The net loss in 1999 of $1,144.5 million, or a loss of $4.46 per share, is attributable to the Redemption and related push-down accounting, legal settlements and their related tax effects. Pro forma net income in 1999 was $246.7 million, or $0.93 per share, a 36% increase in pro forma net income from 1998. This increase was due to higher Herceptin, Rituxan and Activase sales and lower research and development spending. The increase was partly offset by higher marketing, general and administrative expenses, higher cost of sales, higher income taxes and lower royalty and contract and other revenues. The 41% 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 administrative expenses, a decrease in Activase sales, higher cost of sales and higher income taxes. In-Process Research and Development: At June 30, 1999, the Redemption date, we determined that the acquired in-process technology was not technologically feasible and that the in-process technology had no future alternative uses. As a result, $500.5 million of in-process research and development related to Roche's 1990 through 1997 purchases of our common stock was charged to retained earnings, and $752.5 million of in-process research and development related to the Redemption was charged to operations at June 30, 1999. The amounts of in-process research and development were determined based on an analysis using the risk-adjusted cash flows expected to be generated by the products that result from the in-process projects. The analysis included forecasted future cash flows that were expected to result from the progress made on each of the in-process projects prior to the purchase dates. These cash flows were estimated by first forecasting, on a product-by-product basis, total revenues expected from sales of the first 23 27 generation of each in-process product. A portion of the gross in-process product revenues was then removed to account for the contribution provided by any core technology, which was considered to benefit the in-process products. The net in-process revenue was then multiplied by the project's estimated percentage of completion as of the purchase dates to determine a forecast of net in-process research and development revenues attributable to projects completed prior to the purchase dates. Appropriate operating expenses, cash flow adjustments and contributory asset returns were deducted from the forecast to establish a forecast of net returns on the completed portion of the in-process technology. Finally, these net returns were discounted to a present value at discount rates that incorporate both the weighted average cost of capital (relative to the biotech industry and us) as well as the product-specific risk associated with the purchased in-process research and development products. The product specific risk factors included each product in each phase of development, type of molecule under development, likelihood of regulatory approval, manufacturing process capability, scientific rationale, pre-clinical safety and efficacy data, target product profile and development plan. The discount rates ranged from 16% to 19% for the 1999 valuation and 20% to 28% for the 1990 purchase valuation, all of which represent a significant risk premium to our weighted average cost of capital. The forecast data in the analysis was based on internal product level forecast information maintained by our management in the ordinary course of managing the business. The inputs used by us in analyzing in-process research and development were based on assumptions, which we believed to be reasonable but which were inherently uncertain and unpredictable. These assumptions may be incomplete or inaccurate, and no assurance can be given that unanticipated events and circumstances will not occur. A brief description of projects that were included in the in-process research and development charge is set forth below, including an estimated percentage of completion as of the Redemption date. Projects subsequently added to the research and development pipeline are not included. Except as otherwise noted below, there have been no significant changes to the projects since the Redemption date. We do not track all costs associated with research and development on a project-by-project basis. Therefore, we believe a calculation of cost incurred as a percentage of total incurred project cost as of FDA approval is not possible. We estimated, however, that the research and development expenditures that will be required to complete the in-process projects will total at least $750.0 million, as compared to $700.0 million as of the Redemption date. This estimate reflects an increase in certain cost estimates related to early stage projects partially offset by decreases in cost to complete estimates for other projects. The foregoing discussion of our in-process research and development projects, and in particular the following table and subsequent paragraphs regarding the future of these projects, our additional product programs and our process technology program include forward-looking statements that involve risks and uncertainties, and actual results may vary materially. For a discussion of risk factors that may affect projected completion dates and the progress of research and development, see "Risk Factors--The Results of Our Research and Development Are Unpredictable," "--Protecting Our Proprietary Rights Is Difficult and Costly" and "--Our Products Are Subject to Governmental Regulations and Approvals." At the Redemption date, we estimated percentage complete data for each project based on weighting of three indicators, as follows: - PTS: Probability of technical success is a project level statistic maintained by us on an ongoing basis, which is intended to represent the current likelihood of project success, i.e., FDA approval. This is a quantitative calculation based on the stage of development and the complexity of the project, and it is highly correlated with the project's phase of development. PTS is periodically adjusted to reflect actual experiences over a reasonable period of time. - Status compared to Baseline Model: We developed a baseline model which allocated percentages of a standard development project to each major phase of the project based on our experience. We then overlaid the time-based status of each project to this baseline model, in order to calculate a percentage complete for each project. 24 28 - Management's Estimate of Percentage Complete: Below is a list of the projects and their estimated percentage complete included in the in-process research and development charge related to the Redemption:
----------------------------------------------------------------------------------- AS OF THE REDEMPTION DATE, JUNE 30, 1999 -------------------------------------------- PHASE OF SUBSTANTIAL PROJECT DESCRIPTION/INDICATION DEVELOPMENT COMPLETION DATE % COMPLETE ------- ------------------------------------ ------------- --------------- ---------- Nutropin Depot long-acting dosage form of Awaiting 2000 85% recombinant growth hormone Regulatory Approval TNKase second generation t-PA acute myocardial infarction Awaiting 2000 90% Regulatory Approval Anti-IgE antibody allergic asthma, seasonal allergic Phase III 2001 75% rhinitis Pulmozyme early-stage cystic fibrosis Phase III 2003 75% Dornase alfa AERx(TM) Delivery cystic fibrosis Preparing for 2003 45% System clinical testing Rituxan antibody intermediate- and high-grade Phase III 2004 60% non-Hodgkin's lymphoma Xubix (sibrafiban) oral orally administered inhibitor of Phase III 2000 65% IIb/IIIa antagonist platelet aggregation Activase t-PA intravenous catheter clearance Preparing for 1999 90% Phase III Anti-CD11a antibody (hull24) psoriasis Preparing for 2003 50% Phase III Herceptin antibody adjuvant therapy for breast cancer Preparing for 2007 45% Phase III Thrombopoietin (TPO) thrombocytopenia related to cancer Preparing for 2002 55% treatment Phase III Anti-CD18 antibody acute myocardial infarction Phase II 2004 55% Anti-VEGF antibody colorectal and lung cancer Phase II 2003 35-40% Herceptin antibody other tumors Phase II 2004 40-45% AMD Fab age-related macular degeneration Preparing for 2004 20% Phase I LDP-02 inflammatory bowel disease Phase Ib/IIa 2005 30%
We also identified five additional product programs that were at different stages of in-process research and development. As of June 30, 1999, the Redemption date, we estimated that these projects would be substantially complete in years 1999 through 2004. The percent completion for each of these additional programs ranged from an estimated 35% to 90%. These projects did not receive material allocations of the purchase price. In addition, our in-process research and development at the Redemption date included a process technology program. The process technology program included the research and development of ideas and techniques that could improve the bulk production of antibodies, including cell culture productivity, and streamlined and improved recovery processes, and improvements in various areas of pharmaceutical manufacturing. We estimated that the process technology program was approximately 50% complete at the Redemption date. The significant changes to the projects in the in-process research and development charge since the Redemption date as of December 31, 1999, include: - Nutropin Depot sustained-release growth hormone--project was substantially completed in 1999; - Anti-IgE antibody--project has moved from Phase III studies to preparing FDA filing; - Xubix (sibrafiban) oral IIb/IIIa antagonist--project has been discontinued; - Anti-VEGF antibody--project has moved from Phase II studies to preparing for Phase III studies; and - Dornase alfa AERx--project has moved to Phase IIa studies. 25 29 LIQUIDITY AND CAPITAL RESOURCES
------------------------------------- AS OF DECEMBER 31, ------------------------------------- 1999 1998 1997 --------- -------- -------- In millions Cash and cash equivalents, short-term investments and long-term marketable securities........................... $1,957.4 $1,604.6 $1,286.5 Working capital............................................. 842.4 950.6 904.4 Cash provided by (used in): Operating activities...................................... (7.4) 349.9 118.3 Investing activities...................................... (96.2) (421.1) (168.4) Financing activities...................................... 160.2 107.9 87.3 Capital expenditures (included in investing activities above).................................................... (95.0) (88.1) (154.9) Current ratio............................................... 2.7 : 1 4.3 : 1 4.1 : 1
Cash generated from operations, income from investments and proceeds from stock issuances were used to pay for the cash-out of stock options related to the Redemption in 1999, to purchase marketable securities and to make capital and equity investments. Capital expenditures in 1999 primarily consisted of equipment purchases and improvements to existing manufacturing and service facilities. Capital expenditures in 1998 included improvements to existing office and laboratory facilities and equipment purchases. In 1997, capital expenditures primarily included building improvements to existing manufacturing and office facilities and production systems. We believe that our cash, cash equivalents and short-term investments, together with funds provided by operations and leasing arrangements, will be sufficient to meet our foreseeable operating cash requirements. In addition, we believe we could access additional funds from the debt and, under certain circumstances, capital markets. For more information, see "Risk Factors--A Variety of Factors Could Adversely Affect Our Cash Position." Our long-term debt consists of $149.7 million of convertible subordinated debentures, with interest payable at 5%, due in 2002. As a result of the redemption of our special common stock, upon conversion, the holder receives, for each $74 in principal amount of debenture converted, $59.25 in cash, of which $18 will be reimbursed to us by Roche. Generally, we may redeem the debentures until maturity. 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 From the redemption of our special common stock in June 1999 until Roche completed its public offering of our common stock in October 1999, we were included in Roche's U.S. consolidated federal income tax group and 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 are to make payments such that, with respect to the period during which Genentech is a member of a Roche consolidated or combined group, 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 had filed separate, stand-alone federal, state and local income tax returns as the common parent of an affiliated group of corporations filing consolidated or combined federal, state and local returns rather than a consolidated subsidiary of Roche. Such stand-alone tax returns will be prepared on a 26 30 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. 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 our consolidated financial statements in our annual report on Form 10-K for the year ended December 31, 1999, which is incorporated herein by reference. 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 in our financial statements 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, 1999. 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, 1999 and 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 27 31 exchange rates, and in particular a strengthening of the U.S. dollar, may adversely affect our royalty revenues as expressed in U.S. dollars. In addition, as part of 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 three 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, 1999 and 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, 1999, 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 $43.2 million. However, the change in 1999 has resulted in a material benefit to our consolidated financial statements. NEW ACCOUNTING STANDARD In July 1999, the Financial Accounting Standards Board announced the delay of the effective date of Statement of Financial Accounting Standards ("FAS") 133, "Accounting for Derivative Instruments and Hedging Activities," for one year, to the first quarter of 2001 (its effective date had been set as 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. 28 32 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. Thirteen 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 our growth hormone products. PRODUCTS We manufacture and market seven products directly in the United States. In addition, we have received regulatory approval to market Nutropin Depot and we expect to launch this product in the first half of 2000. Our products are: - Herceptin (trastuzumab) antibody 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) 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; - 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; and - Nutropin Depot (somatropin (rDNA origin) for injectable suspension) encapsulated sustained-release growth hormone for the treatment of pediatric growth hormone deficiency. We receive royalties on sales of rituximab outside of the United States (excluding Japan), on sales of Pulmozyme and Herceptin outside of the United States and on sales of certain products in Canada from Hoffmann-La Roche. We receive royalties on sales of growth hormone products and t-PA outside of the Unites States and Canada and on sales of rituximab in Japan through other licenses. We also receive worldwide royalties on seven additional licensed products that are marketed by other companies. Six of these products originated from our technology. Herceptin In September 1998, we received 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. In September 1999, Hoffmann-La Roche announced it had obtained authorization to sell Herceptin in Switzerland as a treatment for breast cancer. This is the product's first European approval and comes shortly after authorization of the product in Canada for treatment of metastatic or advanced breast cancer, alone, and in combination with Taxol (paxlitaxel), a product 29 33 made by Bristol Myers Squibb. Recent clinical data indicates that Herceptin combined with chemotherapy, including Taxol, improves survival by 25% over chemotherapy alone in women with metastatic breast cancers that over express the HER2 proteins. 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. Rituxan was co-developed with IDEC, from whom we license Rituxan. In November 1997, Rituxan was cleared for marketing in the United States by the FDA. Rituxan was the first monoclonal antibody approved in the United States to treat cancer. We are jointly promoting Rituxan with IDEC in the United States and until recently, we shared responsibility with IDEC for manufacturing the product. By the end of the third quarter of 1999, IDEC transferred all bulk manufacturing responsibilities for rituximab to us. Hoffmann-La Roche is responsible for marketing MabThera (rituximab) in the rest of the world, excluding Japan. In 1999, we and IDEC, in consultation with the FDA, updated the warning section of the package insert for Rituxan to include information on infusion-related reactions and cardiovascular events. IDEC filed a supplemental BLA in October 1999 relating to use of Rituxan in expanded dosing for the treatment of B-cell non-Hodgkin's lymphoma, including retreatment, dosing with eight infusions and for the treatment of patients with bulky disease. 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. 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. We have also licensed certain rights to Boehringer Ingelheim regarding future sales of a second generation t-PA, TNKase. On July 30, 1999, we made U.S. regulatory filings seeking marketing approval for TNKase, and we are currently awaiting regulatory clearance. Boehringer Ingelheim, which markets a recombinant t-PA under the trademark Actilyse(R), filed a marketing application for TNKase with European regulatory authorities in September 1999. 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 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 30 34 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. This status will terminate in November 2000. 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. Nutropin Depot In December 1999, we received regulatory approval to market Nutropin Depot (somatropin (rDNA origin) for injectable suspension), the first long-acting dosage form of recombinant growth hormone. We expect to launch this product during the first half of 2000. Nutropin Depot is a long-acting form of our recombinant human growth hormone using ProLease(R), an injectable extended-release drug delivery system, which was developed by our partner Alkermes Controlled Therapeutics, Inc., or Alkermes. This new formulation was designed to reduce the frequency of injections by encapsulating the drug in biodegradable microspheres. During the first quarter of 1999, we entered into an agreement with Schwarz Pharma AG for the development and distribution of Nutropin AQ and Nutropin Depot for the treatment of certain pediatric and adult growth disorders in Europe and certain other countries outside of the United States, Canada and Japan. With our partner Alkermes, we have agreed to manufacture these products for sale by Schwarz Pharma. Schwarz Pharma filed for European marketing approval of Nutropin Depot on February 17, 2000. The agreement also entitles us to receive additional benchmark payments upon Schwarz Pharma's achievement of certain product development milestones. As part of our strategic alliance formed with Sumitomo Pharmaceutical, Inc., or Sumitomo, in December 1997, we have agreed to provide Sumitomo exclusive rights to develop, import and distribute Nutropin AQ and Nutropin Depot in Japan. Pulmozyme Pulmozyme is marketed in the United States for the management of cystic fibrosis, for which it has U.S. Orphan Drug designation. This status will terminate in December 2000. It 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. On March 13, 2000, we voluntarily issued an important drug notification regarding a defect in the packaging of Pulmozyme. During a quality assurance inspection, we discovered that a small puncture may be present in approximately one of every 1,700 ampules of Pulmozyme, potentially causing the ampule to leak. We are working with the FDA and we are in the process of informing wholesalers, retailers and physicians. We believe that the possible leaks are unlikely to cause adverse health effects, but we are asking physicians to advise patients that ampules with leaks should not be used and should be returned to us. Our product complaint and adverse event reporting systems have not revealed evidence of a change in the safety pattern of Pulmozyme as a result of the packaging defect. We are advising physicians that ampules without leaks may continue to be used by patients. We have implemented corrective actions to prevent recurrence of this defect, and we do not foresee a disruption in the product supply. 31 35 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. 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 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. In February 2000, the FDA approved Actimmune as a treatment to delay the time to disease progression in patients with severe, malignant osteopetrosis. We receive royalty payments from Boehringer Ingelheim from the sale of interferon gamma in certain countries outside of the United States, Canada, 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. Hepatitis B vaccine Engerix-B SmithKline Beecham Biologicals S.A. Factor VIII Kogenate Bayer Corporation Bovine growth hormone Posilac Monsanto Company Interferon gamma-1b Actimmune InterMune Pharmaceuticals, Inc. Soluble TNF receptor Enbrel Immunex Corporation
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 TNKase second generation t-PA 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. On July 30, 1999, we made U.S. regulatory filings seeking marketing approval for TNKase. These filings were accepted by the FDA and we are currently awaiting regulatory clearance. This product is being developed in collaboration with Boehringer Ingelheim, which filed a marketing application with European regulatory authorities in September 1999. Preparing Regulatory Filings Anti-IgE (rhuMab E25) 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 Novartis Pharmaceuticals Corporation, or Novartis, and Tanox, Inc. Phase III clinical trials have been completed in patients with allergic asthma and in patients with seasonal allergic rhinitis.
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PRODUCT DESCRIPTION ------- ----------- Phase III Anti-CD11a (hull24) antibody An antibody designed to block certain immune cells as a potential treatment for moderate to severe psoriasis. We are currently conducting a Phase III trial in psoriasis. We are developing this product in collaboration with Xoma Corporation. 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 conducting Phase III trials of this product for intravenous catheter clearance. 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. We are in Phase III clinical trials for the treatment of intermediate- and high-grade non-Hodgkin's lymphoma. This product is being developed in collaboration with IDEC. The FDA has indicated its acceptance of our proposed plan for Phase III trials. Tezosentan An endothelin receptor antagonist that is being developed for the potential treatment of acute heart failure. The development effort is being led by our partner Actelion, which licensed tezosentan from Hoffmann-La Roche in 1998. 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. Preparing for Phase III trials 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. We are currently preparing for Phase III trials in patients with colorectal cancer and non-small cell lung cancer. Phase II trials are ongoing in patients with breast cancer and renal cell carcinoma. 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. 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. 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. 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. Dornase alfa inhalation solution A recombinant human protein used for the management of with Aradigm's delivery system cystic fibrosis. Aradigm Corporation filed an IND. in December, 1999 and recently began a Phase IIa clinical trial of dornase alfa delivery via Aradigm's AERx(TM) delivery system. LDP-02 antibody A monoclonal antibody for the treatment of inflammatory bowel diseases. This product is licensed from and being developed in collaboration with Millennium Pharmaceuticals, Inc., or Millennium. Millennium recently began a Phase II clinical trial in patients with Crohn's disease. Phase II trials are being planned for patients with ulcerative colitis. INS365 A second generation P2Y2 agonist, for the potential treatment of patients with chronic bronchitis. We are currently initiating a Phase IIa study in collaboration with Inspire.
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PRODUCT DESCRIPTION ------- ----------- TNKase second generation t-PA A second generation t-PA that is a selectively mutated version of wild-type t-PA. TNKase is being studied and will be studied in combination with several antiplatelet agents in patients with acute myocardial infarction through collaboration among Genentech and other pharmaceutical companies. Phase I AMD Fab A customized fragment of an anti-VEGF antibody for the potential treatment of age-related macular degeneration, or AMD. In this condition, excessive blood vessel growth in the retina of the eye can lead to blindness. On October 6, 1999, we filed an IND for AMD Fab, and we are currently conducting Phase I clinical trials. Preparing for Phase I trials APO2 Ligand/TRAIL A protein, also known as tumor necrosis factor-related apoptosis-inducing ligand, for the potential treatment of cancer. We are currently preparing for Phase I clinical trials for this product, which we are developing in collaboration with Immunex Corporation. Anti-CD11a (hu1124) antibody An antibody designed to block certain immune cell function to prevent solid organ transplant rejection. Our collaborator, Xoma, has filed an IND for this indication and is preparing to initiate Phase I clinical trials for this product.
In conjunction with our amended and restated licensing agreement with Hoffmann-LaRoche in July 1999, Hoffmann-LaRoche was granted an option until at least 2015 for licenses to use and sell certain of our products in non-U.S. markets. See "--Licensing Agreements with F. Hoffmann-LaRoche Ltd." below. In general, with respect to our products, Hoffmann-La Roche pays us a royalty on aggregate sales outside of the United States. Hoffmann-La Roche has rights to, and pays us royalties for, Canadian sales of Activase, Protropin, Nutropin, Nutropin AQ, Pulmozyme, Actimmune and Rituxan, sales of rituximab outside of the United States, excluding Japan, and sales of Pulmozyme and Herceptin outside of the United States. We supply these products to Hoffmann-La Roche, and have agreed to supply the products for which Hoffmann-La Roche has exercised its option, for sales outside of the United States. In addition to the products described above, we are working on additional products and new indications for currently marketed products. Also, we retain certain rights to gp120, a recombinant form of the gp120 envelope glycoprotein of human 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. We have separate options for worldwide marketing rights and commercial supply of gp120 in the event that gp120 is approved as an AIDS vaccine. In May 1999, we entered into a license and collaboration agreement with Aradigm Corporation to develop an advanced pulmonary delivery system for our Pulmozyme product in the United States. As part of the agreement, we agreed to provide Aradigm a loan of up to $10.4 million for development costs. As of December 31, 1999, Aradigm's outstanding loan was $2.3 million. In November 1997, we entered into a research collaboration agreement with CuraGen Corporation, whereby we made a $5.0 million equity investment in Curagen and agreed to provide a convertible equity loan to CuraGen of up to $26.0 million. In October 1999, CuraGen exercised its right to borrow $16.0 million. Simultaneously, with this draw down, CuraGen repaid the loan by issuing 977,636 shares of CuraGen stock valued at $16.37 per share at such issuance, or an aggregate of $16.0 million. At December 31, 1999, there were no outstanding loans to CuraGen. In December 1997, we entered into a collaboration agreement with Alteon Inc. to develop and market pimagedine, an advanced glycosylation end-product formation inhibitor to treat kidney disease in diabetic patients, and invested $37.5 million in Alteon stock. In 1998, as a result of the decline in Alteon's stock value and the unsuccessful clinical trials with pimagedine, we wrote down $24.2 million of our investment in Alteon. In 1999, due to the continued decline of Alteon's stock value and unsuccessful negotiations with Alteon, we wrote-off our remaining $10.8 million investment in Alteon. In December 1997, we entered into a collaborative agreement with Millennium to develop and commercialize Millennium's LDP-02, a humanized monoclonal antibody for the potential treatment of inflammatory bowel diseases. Under the terms of the 34 38 agreement, we made a $4.0 million equity investment in Millennium and have agreed to provide a convertible equity loan for approximately $15.0 million to fund Phase II development costs. Upon successful completion of Phase II, if Millennium agrees to fund 25% of Phase III development costs, we have agreed to provide a second loan to Millennium for such funding. As of December 31, 1999, there were no outstanding loans to Millennium. 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, Immunex's product to treat moderately to severely active rheumatoid arthritis. Immunex paid us an initial license fee and has agreed to pay royalties on sales of Enbrel from November 6, 1998, which was the date of product launch, through the life of our patents. On August 6, 1999, Hoffmann-La Roche announced that the preliminary results from its Phase III trial of Xubix had not shown that Xubix was better than aspirin in preventing recurrent ischemic events in patients suffering from acute coronary syndrome. Hoffmann-La Roche has terminated its development of Xubix based on these unsuccessful results. 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. During 1999, 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 7% of our total revenues in 1999, 11% in 1998 and 11% in 1997. 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, a national distributor, did not contribute over 10% of our total revenues in 1999, although it accounted for 10% in 1998 and 14% in 1997 of our total revenues. Caremark primarily distributes our growth hormone products through its extensive branch network and is then reimbursed through a variety of sources. Bergen Brunswig, a national wholesale distributor of all of our products, contributed 14% in 1999, 11% in 1998 and 10% in 1997 of our total revenues. Cardinal Distribution, Inc., a national wholesale distributor of all our products, contributed 13% in 1999 and 11% in 1998 of our total revenues but it did not contribute over 10% of total revenues in 1997. 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 July 1999, we amended this licensing 35 39 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 - 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"). 36 40 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. 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 has terminated its development of Xubix based on unsuccessful results of a Phase III trial. 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 have reviewed the committee structure and intend to implement a simplified 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. 37 41 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; - 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. 38 42 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; - 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. 39 43 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 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. 40 44 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, Rituxan and TNKase (licensed by Boehringer Ingelheim), 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 and TNKase, for which applications are pending with the U.S. Patent and Trademark Office. Our royalty income for patent licenses, know-how and other related rights amounted to $189.3 million in 1999, $229.6 million in 1998 and $241.1 million in 1997. Royalty expenses were $88.8 million in 1999, $66.3 million in 1998 and $58.9 million in 1997. 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 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 is expected to file a revised BLA in 2000 for a product that would compete with our product Rituxan. We are aware of other potentially competitive biologic therapies for non-Hodgkin's lymphoma in development. Activase We continue to face competition in the thrombolytic market. Activase has lost market share and could lose additional market to Centocor Retavase; the resulting adverse effect on sales could be material. 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 July 1999, we submitted U.S. regulatory filings seeking marketing approval for our second generation t-PA, TNKase, to be used in treating heart attack patients, and we are currently waiting for regulatory clearance. 41 45 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--BTG, Novo Nordisk A/S and Pharmacia & Upjohn--received FDA approval in 1995 to market their growth hormone products in the United States, although BTG 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 & 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, four of our competitors have received approval to market their existing human growth hormone products in the United States for additional indications. In December 1999, we received FDA approval for Nutropin Depot, the first long-acting dosage form of recombinant growth hormone for pediatric growth hormone deficiency. We expect to launch the product in the first half of 2000. 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 42 46 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. 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 1999, 1998 and 1997, our research and development expenses were $367.3 million, $396.2 million and $470.9 million, respectively. 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 December 31, 1999, we had 3,883 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-five buildings for our research and development, manufacturing, marketing and administrative activities. Fourteen of the buildings are owned property and eleven are leased. We have made and continue to 43 47 make improvements to these properties to accommodate our growth. In addition, we own approximately 17 acres adjacent to our current facilities that may be used for future expansion. In 1995, we began development of a new manufacturing facility of approximately 300,000 square feet in Vacaville, California under an operating lease arrangement. The facility is operational and we expect to gain licensure by the second quarter of 2000. 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 awaiting FDA licensure), are adequate for all present and near term uses. Additional manufacturing capacity may be added in the South San Francisco or 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. LEGAL PROCEEDINGS We are party to various legal proceedings, including patent infringement litigation relating to our human growth hormone products and antibody products, licensing and contract disputes, and other matters. In 1990 and 1997, the Regents of the University of California, or UC, filed patent infringement lawsuits against us, alleging that the manufacture, use, and sale of our Protropin and Nutropin human growth hormone products infringe a patent known as the "Goodman patent" that is owned by UC. On November 19, 1999, we and UC announced a proposed settlement of those lawsuits, and on or about December 17, 1999, the parties entered into a definitive written agreement on the terms of the settlement. Under the terms of the settlement, Genentech paid UC $150 million and made a contribution in the amount of $50 million toward construction of the first biological sciences research building at the University of California, San Francisco Mission Bay campus, and Genentech and UC granted certain releases to one another and dismissed with prejudice the 1990 and 1997 patent infringement lawsuits and related appeals. Such amounts were included in other liabilities at December 31, 1999. The settlement resolves all outstanding litigation between Genentech and UC relating to our growth hormone products. On May 28, 1999, Glaxo Wellcome Inc. filed a patent infringement lawsuit against us in the U.S. District Court in Delaware. The suit asserts that we infringe four U.S. patents owned by Glaxo Wellcome. Two of the patents relate to the use of specific kinds of monoclonal antibodies for the treatment of human disease, including cancer. The other two patents asserted against us relate to preparations of specific kinds of monoclonal antibodies which are made more stable and the methods by which such preparations are made. We have been served with the complaint. The complaint fails to specify which of our products or methods of manufacture are allegedly infringing the four patents at issue. However, we believe that the suit relates to the manufacture, use and sale of our Herceptin and Rituxan antibody products. On July 19, 1999, we filed our answer to Glaxo Wellcome's complaint, and in our answer we also stated counterclaims against Glaxo Wellcome. On or about January 10, 2000, Glaxo Wellcome filed a request with the Court to add additional patent infringement claims to the suit under Glaxo Wellcome's U.S. Patent No. 5,633,162. We opposed that request; the Court has not yet made a decision whether to grant Glaxo Wellcome's request. The Court has scheduled the trial of this suit to begin on January 29, 2001. We and the City of Hope Medical Center are parties to a 1976 agreement relating to work conducted by two City of Hope employees, Arthur Riggs and Keiichi Itakura, and patents that resulted from that work, which are referred to as the "Riggs/Itakura Patents." Since that time, Genentech has entered into license agreements with various companies to make, use and sell the products covered by the Riggs/Itakura Patents. On August 13, 1999 the City of Hope filed a complaint against us in the Superior Court in Los Angeles County, California alleging that we owe royalties to the City of Hope in connection with these license agreements, as well as product license agreements that involve the grant of licenses under the Riggs/Itakura Patents. The complaint states claims for declaratory relief, breach of contract, breach of implied covenant of good faith and fair dealing and breach of fiduciary duty. On December 15, 1999, we filed our answer to the City of Hope's complaint. The judge has scheduled the trial of this suit to begin February 5, 2001. On December 1, 1994, Genentech filed suit against BTG in the United States District Court in Delaware charging BTG with infringement of two Genentech patents applicable to its human growth hormone product. On February 28, 1995, Genentech filed an Amended Complaint against BTG alleging infringement of an additional Genentech patent. On January 6, 1995, BTG filed suit against Genentech in the United States District Court for the southern District of New York seeking declaratory judgements that those patents and another Genentech patent are invalid and not infringed by BTG. Genentech's suit in Delaware was then transferred to New York and consolidated with BTG's suit there. At the time of filing its suit and thereafter, BTG alleged various antitrust, abuse of process, civil rights, malicious prosecution and unfair competition claims against Genentech. All of those claims were dismissed by the District Court. 44 48 On August 10, 1995, the District Court issued a preliminary injunction which prohibited BTG, pending the Court's final determination of the action, from importing, making, using, selling, offering for sale or distributing in the United States BTG's human growth hormone products except for certain ongoing FDA approved clinical trials. BTG filed an appeal from the District Court's issuance of the preliminary injunction to the United States Court of Appeals for the Federal Circuit. On April 8, 1996, the Federal Circuit affirmed the preliminary injunction granted by the District Court. On May 20, 1996, the Federal Circuit denied BTG's petition for rehearing, and on October 7, 1996, the United States Supreme Court declined to review the case. In 1999, the case was transferred to a different judge of the District Court for further proceedings. A jury trial of BTG's patent invalidity claim began on January 10, 2000. On January 18, 2000, the jury returned a verdict in our favor on a certain factual issue underlying BTG's invalidity claim, but the judge nevertheless entered judgment in favor of BTG and lifted the preliminary injunction that had been in effect against BTG since 1995. On February 23, 2000, we filed a motion with the Federal Circuit requesting that the injunction against BTG be reinstated pending appeal and for an expedited appeal. On February 24, 2000, the Federal Circuit temporarily reinstated the injunction against BTG pending the Court's further review of the issues raised in our motion. In the event that the injunction is not maintained during the pendency of our appeal, or if our appeal is not successful, BTG could potentially enter the United States market with its human growth hormone product. Based upon the nature of the claims made and the information available to date to us and our counsel through investigations and otherwise, we believe the outcome of these actions is not likely to have a material adverse effect on our financial position, result of operations or cash flows. However, were an unfavorable ruling to occur in any quarterly period, there exists the possibility of a material impact on the net income of that period. In addition to the above, in April 1999, we agreed to pay $50 million to settle a federal investigation relating to our past clinical, sales and marketing activities associated with human growth hormone. 45 49 MANAGEMENT Our board consists of two Roche directors, Franz B. Humer and Jonathan K.C. Knowles, three independent directors, Herbert W. Boyer, Charles A. Sanders and Sir Mark Richmond, and one Genentech employee, Arthur D. Levinson, who is also 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." Our executive officers and directors and their respective ages and positions are as follows:
- ----------------------------------------------------------------------------------------------------------- NAME AGE POSITION - ----------------------------------------------------------------------------------------------------------- Arthur D. Levinson, Ph.D. ............... 49 Chief Executive Officer and Chairman of the Board Louis J. Lavigne, Jr. ................... 51 Executive Vice President and Chief Financial Officer Susan D. Desmond-Hellmann, M.D., 42 Executive Vice President--Development and Product M.P.H. ................................ Operations and Chief Medical Officer Dennis J. Henner, Ph.D. ................. 48 Senior Vice President--Research Judith A. Heyboer........................ 50 Senior Vice President--Human Resources Stephen G. Juelsgaard.................... 51 Senior Vice President--General Counsel and Secretary James P. Panek........................... 46 Senior Vice President--Product Operations W. Robert Arathoon, Ph.D. ............... 47 Vice President--Process Sciences Joffre B. Baker, Ph.D. .................. 52 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........................... 30 Vice President--Product Development Robert L. Garnick, Ph.D. ................ 50 Vice President--Regulatory Affairs Paula M. Jardieu, Ph.D. ................. 49 Vice President--Pharmacological Sciences Sean A. Johnston, Ph.D................... 41 Vice President--Intellectual Property Cynthia J. Ladd.......................... 44 Vice President--Corporate Law and Assistant Secretary Laura Leber.............................. 37 Vice President--Corporate Communications Walter K. Moore.......................... 48 Vice President--Government Affairs Diane L. Parks........................... 47 Vice President--Marketing Kimberly J. Popovits..................... 41 Vice President--Sales Daniel S. Sulzbach, Ph.D................. 50 Vice President--Information Resources John M. Whiting.......................... 44 Controller and Chief Accounting Officer Franz B. Humer, Ph.D. ................... 53 Director of Genentech Jonathan K.C. Knowles, Ph.D. ............ 51 Director of Genentech Herbert W. Boyer, Ph.D. ................. 63 Director of Genentech Sir Mark Richmond, Ph.D.................. 68 Director of Genentech Charles A. Sanders, M.D.................. 67 Director of Genentech
All officers are elected annually by the Board of Directors. Dr. Levinson, Mr. Lavigne, Dr. Desmond-Hellmann, Dr. Henner, Ms. Heyboer, Mr. Juelsgaard and Mr. Panek are members of our management executive committee. 46 50 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 our corporate governance after the 1990 merger. Pursuant to the 1990 governance agreement, our 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 our stockholders other than Roche, each share of common stock was converted into one share of our special common stock. Roche maintained the same percentage ownership of our equity as prior to the 1995 merger and continued to have the right to nominate only two directors to our 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 our publicly traded stock could be redeemed by us at Roche's option at specified prices per share ranging from $31.25 during the quarter ending December 31, 1995 to $41.25 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 $30.00 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 at $41.25 per share in cash and retired all of the shares of special common stock including those held by Roche. 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. OFFERINGS OF, AND NOTES EXCHANGEABLE FOR, OUR COMMON STOCK On July 23, 1999, Roche completed a public offering of 44 million shares of our common stock. In connection with that offering, we amended our certificate of incorporation and bylaws and entered into an affiliation agreement with Roche, described below. On October 26, 1999, Roche completed a public offering of 40 million shares of our common stock. Upon completion of that offering, Roche's percentage ownership of our outstanding common stock was reduced to 66.4%. On January 19, 2000, Roche completed an offering of zero-coupon notes which are exchangeable for an aggregate of 6,517,309 shares of our common stock held by Roche. 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. Subsequently, we entered into an affiliation agreement with Roche that enabled our current management to conduct our business and operations as we had done in the past while at the same time reflecting Roche's ownership interest in us. The affiliation agreement is for the exclusive benefit of Roche and can be amended at any time by Roche and us. We have amended our bylaws in order to maintain certain proportional representation rights of Roche under the bylaws with respect to membership on our board of directors and board committees to the extent that we do not make repurchases of our common stock as required by the affiliation agreement. We expect that we and Roche will make similar amendments to the affiliation agreement and licensing agreement. 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. 47 51 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 Our board consists 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 the nominating committee. Directors are elected to serve one year terms or until their successors are elected and qualified. At all times our board will 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 have five standing committees of the board: a Nominating Committee, an Executive Committee, an Audit Committee, a Compensation Committee and a Corporate Governance Committee. Roche is 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 48 52 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. 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 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." 49 53 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 - 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 The affiliation agreement requires us to, among other things, establish a stock repurchase program designed to maintain Roche's percentage ownership interest in our common stock. We are 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 occurring in July 1999 but prior to the time of such issuance, except that we may issue shares up to an amount that would cause Roche's lowest percentage ownership to be no more than 2% below the "Minimum Percentage." The Minimum Percentage equals a fraction (expressed as a percentage) where the numerator is the lowest number of shares of our common stock owned by Roche since the July 1999 offering (to be adjusted in the future for dispositions of shares of our common stock by Roche, including this offering), and the denominator is 254,597,176, which is the number of shares of our common stock outstanding at the time of the July 1999 offering adjusted for the two-for-one split of our common stock in November 1999. Each of the numerator and denominator are to be adjusted in the future for stock splits or stock combinations. As long as Roche's percentage ownership is greater than 50%, prior to issuing any shares, we must repurchase a sufficient number of shares of our common stock to ensure that, immediately after its issuance of shares, Roche's percentage ownership will be greater than 50%. We have also agreed, upon Roche's request, to repurchase shares of our common stock to increase Roche's ownership to the Minimum Percentage. Roche currently owns 50 54 approximately 65.5% of our common stock and will own approximately 58.9% of our common stock following completion of this offering. In addition, 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 has (i) a continuing option (which is 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 (which percentage ownership will be 58.9% after the completion of this offering), and (ii) a continuing option (which is 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 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 From the redemption of our special common stock in June 1999 until Roche completed its public offering of our common stock in October 1999, we were included in Roche's U.S. consolidated federal income tax group and included with Roche and/or one or more Roche subsidiaries in consolidated or combined income tax groups for certain state and local tax jurisdictions. Effective upon the consummation of the public offering on October 1999, we ceased to be a member of the consolidated federal income tax group (and certain consolidated or combined state or local income tax groups) of which Roche is the common parent. Pursuant to our tax sharing agreement with Roche, we and Roche are to make payments such that, with respect to the period during which we are a member of a Roche consolidated or combined group, 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 if we had filed separate, stand-alone federal, state and local income tax returns as the common parent of an affiliated group of corporations filing consolidated or combined federal, state and local returns 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, for periods during which we are a member of a consolidated or combined group of which Roche is the parent, 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 us have agreed to cooperate under the tax sharing agreement to assist in the defense of claims relating to us. 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 us and Roche, we could be liable in the event that any federal tax liability is incurred by Roche's consolidated federal income tax group with respect to the period during which we were a member of such consolidated group (including the portion of Roche's 1999 taxable year following the completion of its October 1999 offering of our common stock) and such liability has not been 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. 51 55 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." 52 56 SELLING STOCKHOLDER The following table sets forth certain information as of February 29, 2000 regarding the beneficial ownership of common stock by Roche. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities and options that are exercisable within 60 days. The person named below has sole voting and investment power with respect to all shares of common stock shown as beneficially owned by it.
------------------------------------------------------ SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED PRIOR TO OFFERING AFTER OFFERING ------------------------- ------------------------- NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENTAGE NUMBER PERCENTAGE ------------------------------------ ----------- ---------- ----------- ---------- Roche Holdings, Inc. ................................. 170,597,176 65.5% 153,297,176 58.9% One Commerce Center, Suite 1050 Wilmington, DE 19801
In addition, Roche has granted the underwriters an option to purchase an additional 1,700,000 shares of common stock to cover over-allotments. If the underwriters exercise this option in full, Roche will own 58.2% of our outstanding common stock after this offering. In January 2000, Roche completed an offering of zero-coupon notes which are exchangeable for an aggregate of 6,517,309 shares of our common stock held by Roche, or 2.5% of our outstanding common stock as of March 10, 2000. 53 57 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 54 58 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. 55 59 SHARES ELIGIBLE FOR FUTURE SALE The 17,300,000 shares of our common stock sold in this offering, along with the 84,000,000 shares sold in the July and October 1999 offerings, will be freely tradable without restriction under the Securities Act of 1933 except for any such shares which may be acquired by one of our affiliates 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 (30 days in the case of our directors and our management executive committee members) after the date of this prospectus, sell or otherwise, dispose of any shares of our common stock, subject to certain exceptions. For a more detailed description of the terms of this agreement, 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 more detailed description of Roche's registration rights, see "Relationship with Roche--Arrangements between Genentech and Roche--Registration Rights." Options representing an aggregate of 18,780,917 shares of our common stock have been issued under our stock option plans, of which options representing 4,340,232 shares of our common stock were exercisable as of March 10, 2000. The shares issued pursuant to our stock option plans are freely tradable, subject to the restrictions on resale by affiliates under Rule 144 discussed above. 56 60 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, FleetBoston Robertson Stephens Inc. and Lehman Brothers 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..................................... FleetBoston Robertson Stephens Inc. ........................ Lehman Brothers Inc. ....................................... ---------- Total............................................. 17,300,000 ==========
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 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 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 1,700,000 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 $ million. Roche has agreed to pay all expenses in connection with this offering. 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 57 61 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, our directors and our management executive committee members and the selling stockholder have agreed, with certain exceptions, that during the period beginning from the date of this prospectus and continuing and including the date 90 days (30 days in the case of our directors and our management executive committee members) 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. It is expected that delivery of the shares will be made to investors on or about March , 2000. 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. 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, New York, New York. EXPERTS The consolidated financial statements of Genentech, Inc. incorporated by reference in Genentech, Inc.'s Annual Report (Form 10-K) for the year ended December 1999, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon incorporated by reference therein and incorporated herein and in the registration statement by reference. Such consolidated financial statements are incorporated herein and in the registration statement by reference in reliance upon such report given on the authority of such firm 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 58 62 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, 1999; 2. Our current report on Form 8-K dated January 14, 2000; and 3. The description of our capital stock under the caption "Description of Capital Stock" in our registration statement on Form 8-A (File No. 1-09813). 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. 59 63 [Genentech] 64 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
---------- AMOUNT TO BE PAID ---------- Registration fee............................................ $1,072,170 NASD Filing fee............................................. 30,500 Transfer agent's fees....................................... * Printing and engraving expenses............................. * Legal fees and expenses..................................... * Accounting fees and expenses................................ * Miscellaneous............................................... * ---------- Total............................................. $ * ==========
- --------------- * To be filed by amendment. Each of the amounts set forth above, other than the registration fee and the NASD filing fee, is an estimate. Roche Holdings, Inc. has agreed to pay all expenses in connection with this offering. 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 opportunity to us or Roche as the director, officer or employee deems appropriate under the circumstances in his sole II-1 65 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 5 -- Opinion of Davis Polk & Wardwell 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. 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. (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-2 66 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of South San Francisco, State of California, on the 14th day of March, 2000. GENENTECH, INC. By: /s/ STEPHEN G. JUELSGAARD --------------------------------------- Name: Stephen G. Juelsgaard Title: Senior Vice President-General Counsel and Secretary Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 2 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- * Principal Executive Officer and Director March 14, 2000 - ----------------------------------------------------- Arthur D. Levinson * Principal Financial Officer March 14, 2000 - ----------------------------------------------------- Louis J. Lavigne, Jr. * Principal Accounting Officer March 14, 2000 - ----------------------------------------------------- John M. Whiting * Director March 14, 2000 - ----------------------------------------------------- Herbert W. Boyer * Director March 14, 2000 - ----------------------------------------------------- Franz B. Humer * Director March 14, 2000 - ----------------------------------------------------- Jonathan K.C. Knowles * Director March 14, 2000 - ----------------------------------------------------- Charles A. Sanders * Director March 14, 2000 - ----------------------------------------------------- Mark Richmond By /s/ STEPHEN G. JUELSGAARD -------------------------------------------------- Stephen G. Juelsgaard Attorney-in-Fact
II-3 67 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1 -- Form of Underwriting Agreement 5 -- Opinion of Davis Polk & Wardwell 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 FORM OF UNDERWRITING AGREEMENT 1 GENENTECH, INC. 17,300,000 Shares of Common Stock Underwriting Agreement March , 2000 J.P. Morgan Securities Inc. Goldman, Sachs & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated Warburg Dillon Read LLC FleetBoston Robertson Stephens Inc. Lehman Brothers 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 a 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 17,300,000 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 1,700,000 shares (the "Option Shares") of Common Stock. The Underwritten Shares and the Option Shares are herein referred to as the "Shares." The Selling Stockholder acknowledges that the Shares (other than the Option Shares) are (i) those shares of Common Stock represented by certificate 27 representing 4,502,758 shares (which shares were received on July 6, 1999 in exchange for the payment by us of $42.50 per share in cash) and (ii) a total of 12,797,242 of those shares of Common Stock represented by certificates __ and __ (of which 12,797,242 shares, 2,540,400 were received on February 11, 1997 in exchange for the payment by us of $27.7750 per share in cash, 8,000,000 were received on February 8, 1996 in exchange for the 2 -2- payment by us of $27.5241 per share in cash, 112,000 were received on January 24, 1997 in exchange for the payment by us of $27.1277 per share in cash, and 2,144,842 were received on January 24, 1997 in exchange for the payment by us of $27.00 per share in cash). The Selling Stockholder further acknowledges that the Option Shares, if issued and sold, are a total of 1,700,000 of those shares of Common Stock represented by certificates __ and __ (of which 1,700,000 shares, 55,158 were received on January 24, 1997 in exchange for the payment by us of $27.00 per share in cash, 767,000 were received on April 26, 1994 in exchange for the payment by us of $25.0220 per share in cash, and 877,842 were received on April 25, 1994 in exchange for the payment by us of $25.0165 per share in cash). 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, including 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 sell the Option Shares to the several Underwriters as hereinafter provided, and each Underwriter, upon the basis of the repre- 3 -3- sentations 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 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 March , 2000, 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 4 -4- 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: (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 the 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 5 -5- 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 the 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 fact or omit to state a material fact necessary to make the statements therein, in the 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 (except for the exercise of stock options or the issuance of shares pursuant to the Company's employee stock plan) 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; 6 -6- (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"); (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; 7 -7- (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 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 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 the 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 8 -8- 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, which is required by the Securities Act to be described in the Registration Statement or 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; 9 -9- (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 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; 10 -10- (v) 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; (w) 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; (x) 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 (y) 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 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; 11 -11- (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 Section 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; (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; 12 -12- (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 the 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 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. 13 -13- 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 Selling Stockholder, to the Representatives six 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; (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, 14 -14- (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 the 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 Selling Stockholder if delivery of the prospectus is required at any time prior to the expiration of nine months after the Closing Date (and at the expense of such Underwriters if delivery of the Prospectus is required nine 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; (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 such 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; 15 -15- (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, (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 and (iii) as consideration for any acquisition (including, without limitation, by way of merger or consolidation) by the Company or any of its Subsidiaries; and (j) whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated and subject to the obligation of the Selling Stockholder under paragraph (b) of Section 5(B), to pay or cause to be paid all costs and expenses incident to the performance of its obligations hereunder. (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 re- 16 -16- ceive, 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., other than the sale of Shares to be sold by the Selling Stockholder hereunder; and (b) 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 costs and expenses (i) incident to the preparation, registration, transfer, execution and delivery of the Shares, (ii) except as provided in paragraph (j) of Section 5(A), 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 Section 5(A), (iii) related to the filing with, and clearance of the offering by, the National Association of Securities Dealers, Inc., (iv) 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, (v) any expenses incurred by the Company in connection with a "road show" presentation to potential investors, (vi) the cost of preparing stock certificates, (vii) the cost and charges of the Company's transfer agent and registrar, (viii) costs and expenses (including all filing fees) 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) and (ix) the fees and expenses of counsel for the Company and the Selling Stockholder. 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 pro- 17 -17- ceedings 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; (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 (except for the exercise of stock options or the issuance of shares pursuant to the Company's employee stock plan) 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 re- 18 -18- spective 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) the Selling Stockholder has been duly incorporated and each of the Company and the Selling Stockholder is validly existing as a corporation in good standing under the 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 legal matters or documents referred to therein, fairly summarize in all material respects such 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 belief is expressed) do not comply as to form in all material respects with the Securities Act, (B) the Registration Statement and the prospectus included therein (other than any financial statements and related schedules and other financial or statistical information therein as to which no belief is expressed) at its effective date contained an 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 or (C) the Prospectus (except as stated), as of its date and as of the Closing Date or the Additional 19 -19- Closing Date, as the case may be, contained or contains an untrue statement of a material fact or omitted or omits to state a 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 laws in connection with the purchase and distribution of the Shares by the Underwriters; (vii) the Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be required to register as 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 Section 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); 20 -20- (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 material indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument known to such counsel 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 (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 (v) 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 21 -21- 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: (i) the Company has been duly incorporated 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; (ii) each of the Company's material 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 material 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 22 -22- 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; (v) such counsel shall state that no facts have come to his attention to cause him 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 belief is expressed) do not comply as to form in all material respects with the Securities Act, (B) the Registration Statement and the prospectus included therein (other than any financial statements and related schedules and other financial or statistical information therein as to which no belief is expressed) at its effective date contained an 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 or (C) the Prospectus (other than any financial statements and other financial or statistical information therein as to which no belief is expressed), as of its date and as of the Closing Date or the Additional Closing Date, as the case may be, contained or contains an untrue statement of a material fact or omitted or omits to state a 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 Com- 23 -23- pany or any of its material subsidiaries is a party or by which the Company or any of its material subsidiaries is bound or to which any of the property or assets of the Company or any of its material 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 material subsidiaries or any of their respective properties, except for such conflicts, breaches and defaults which would not, individually or in the aggregate, have a Material Adverse Effect; (viii) such counsel shall state that no facts have come to his attention to cause him to believe that (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 belief is expressed), when they were filed with the Commission did not comply 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) 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 belief 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 material 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; 24 -24- (x) the Company and its material 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 such subsidiaries; and any real property and buildings held under lease by the Company and its material 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 such subsidiaries; (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 reasonably necessary to carry on 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 or- 25 -25- der 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 the Company's Intellectual Property which could reasonably be expected to result in a Material Adverse Effect; (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 26 -26- opinion of such counsel for the Company shall state that the opinion of any such other counsel upon which such counsel relied is in form satisfactory to such counsel and, in such counsel's opinion, the Underwriters and such counsel 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. 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) 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 (k) 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 27 -27- 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 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, 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) 28 -28- 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 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 designated 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 writ- 29 -29- ing 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- 30 -30- 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, the Chicago Board Options Exchange, the Chicago Mercantile Exchange or the Chicago 31 -31- 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 reasonable judgment of the Representatives, is material and adverse and which, in the reasonable 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 defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 32 -32- 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 and Secretary. 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. 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. 33 If the foregoing is in accordance with your understanding, please sign and return six counterparts hereof. Very truly yours, GENENTECH, INC. By: ------------------------ Name: Title: ROCHE HOLDINGS, INC. By: ------------------------ Name: Title: 34 Accepted: March , 2000 J.P. MORGAN SECURITIES INC. GOLDMAN, SACHS & CO. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED WARBURG DILLON READ LLC FLEETBOSTON ROBERTSON STEPHENS INC. LEHMAN BROTHERS INC. Acting severally on behalf of themselves and the several Underwriters listed in Schedule I hereto. By: J.P. MORGAN SECURITIES INC. By: ------------------------------ Name: Michael J. Tiedemann Title: Vice President 35 SCHEDULE I
Number of Underwritten Shares To Be Underwriter Purchased - ----------- --------- J.P. Morgan Securities Inc.................................................................... Goldman, Sachs & Co........................................................................... Merrill Lynch, Pierce, Fenner & Smith Incorporated.................................................................. Warburg Dillon Read LLC....................................................................... FleetBoston Robertson Stephens Inc............................................................ Lehman Brothers Inc........................................................................... ---------- Total....................................................................... 17,300,000 ==========
36 EXHIBIT A [Form of Lock-Up Agreement] EX-5 3 OPINION OF DAVIS POLK & WARDELL 1 EXHIBIT 5 March 14, 2000 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 (File No. 333-32014) as amended (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 the Shares have been duly authorized and validly issued and are fully paid and non-assessable. 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 and to the reference to us under the caption "Legal Matters" in the Prospectus contained in this Registration Statement. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act. Very truly yours, /s/ DAVIS POLK & WARDWELL -------------------------------- Davis Polk & Wardwell EX-23.1 4 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS 1 Exhibit 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in Amendment No. 2 to the Registration Statement (Form S-3) and related Prospectus of Genentech, Inc. for the registration of 19,000,000 shares of its common stock and to the incorporation by reference therein of our reports dated January 18, 2000, with respect to the consolidated financial statements of Genentech, Inc. incorporated by reference in its Annual Report (Form 10-K) for the year ended December 31, 1999 and the related financial statement schedule included therein, filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP San Jose, California March 14, 2000 -----END PRIVACY-ENHANCED MESSAGE-----