-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, Z7D9e0cy1/yFG+23e141lFEWIOAVubJLUUNTLgl43vq5gLbp3Y4F7EkgR9LMLVMy odEmk3YZ3x7BunOgT5fooA== 0000950123-95-001645.txt : 19950605 0000950123-95-001645.hdr.sgml : 19950605 ACCESSION NUMBER: 0000950123-95-001645 CONFORMED SUBMISSION TYPE: PRE13E3 PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19950602 SROS: NYSE SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: GENENTECH INC CENTRAL INDEX KEY: 0000318771 STANDARD INDUSTRIAL CLASSIFICATION: MEDICINAL CHEMICALS & BOTANICAL PRODUCTS [2833] IRS NUMBER: 942347624 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: PRE13E3 SEC ACT: 1934 Act SEC FILE NUMBER: 005-32488 FILM NUMBER: 95544651 BUSINESS ADDRESS: STREET 1: 460 POINT SAN BRUNO BLVD CITY: SOUTH SAN FRANCISCO STATE: CA ZIP: 94080 BUSINESS PHONE: 4152251000 MAIL ADDRESS: STREET 1: 460 POINT SAN BRUNO BLVD STREET 2: . CITY: SOUTH SAN FRANCISCO STATE: CA ZIP: 94080 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: GENENTECH INC CENTRAL INDEX KEY: 0000318771 STANDARD INDUSTRIAL CLASSIFICATION: MEDICINAL CHEMICALS & BOTANICAL PRODUCTS [2833] IRS NUMBER: 942347624 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: PRE13E3 BUSINESS ADDRESS: STREET 1: 460 POINT SAN BRUNO BLVD CITY: SOUTH SAN FRANCISCO STATE: CA ZIP: 94080 BUSINESS PHONE: 4152251000 MAIL ADDRESS: STREET 1: 460 POINT SAN BRUNO BLVD STREET 2: . CITY: SOUTH SAN FRANCISCO STATE: CA ZIP: 94080 PRE13E3 1 SCHEDULE 13E-3 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ SCHEDULE 13E-3 RULE 13E-3 TRANSACTION STATEMENT (Pursuant to Section 13(e) of the Securities Exchange Act of 1934) GENENTECH, INC. (Name of Issuer) GENENTECH, INC. ROCHE HOLDINGS, INC. (Name of Persons Filing Statement) REDEEMABLE COMMON STOCK, $.02 PAR VALUE 368710208 (Title of Class of Securities) (CUSIP Number of Class of Securities)
------------------------ JOHN P. MCLAUGHLIN, ESQ. SENIOR VICE PRESIDENT AND SECRETARY GENENTECH, INC. ROCHE HOLDINGS, INC. 460 POINT SAN BRUNO BOULEVARD 15 EAST NORTH STREET SOUTH SAN FRANCISCO, CALIFORNIA 94080 DOVER, DELAWARE 19901 (415) 225-1000
(Name, Address and Telephone Number of Persons Authorized to Receive Notices and Communications on Behalf of the Persons Filing Statement) ------------------------ COPIES TO: RICHARD D. KATCHER, ESQ. PETER R. DOUGLAS, ESQ. WACHTELL, LIPTON, ROSEN & KATZ DAVIS POLK & WARDWELL 51 WEST 52ND STREET 450 LEXINGTON AVENUE NEW YORK, NEW YORK 10019 NEW YORK, NEW YORK 10017 (212) 403-1000 (212) 450-4000
JUNE 2, 1995 (Date Proxy Statement First Published, Sent or Given to Security Holders) This statement is filed in connection with (check the appropriate box): a. /X/ The filing of solicitation materials or an information statement subject to Regulation 14A, Regulation 14C, or Rule 13e-3(c) under the Securities Exchange Act of 1934. b. / / The filing of a registration statement under the Securities Act of 1933. c. / / A tender offer. d. / / None of the above. Check the following box if the soliciting materials or information statement referred to in checking box (a) are preliminary copies. /X/ CALCULATION OF FILING FEE - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- TRANSACTION VALUATION AMOUNT OF FILING FEE - ---------------------------------------------------------------------------------------------------------------- $2,756,253,731* $551,251 - ---------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------
* For purposes of calculation of fee only, this amount is based upon the product of (i) 57,198,521, the number of outstanding shares of Redeemable Common Stock, par value $.02 per share ("Redeemable Common Stock") of Genentech, assuming the exercise of all Genentech warrants and stock options (whether or not currently exercisable), not including shares of Redeemable Common Stock held by Roche Holdings, Inc. and its affiliates, and (ii) $48.1875, the average of the high and low sales price of a share of Redeemable Common Stock quoted on the New York Stock Exchange on May 26, 1995 as reported in published financial sources. In accordance with Rule 0-11 under the Securities Exchange Act of 1934, the filing fee is determined by multiplying the amount calculated pursuant to the preceding sentence by 1/50th of one percent. On May 31, 1995, the Registrant transferred by electronic funds transfer to the Commission the sum of $555,000, of which $55l,251 was used to pay the filing fee set forth above. /X/ Check box if any part of the fee is offset as provided by Rule 0-11(a)(2). Amount Previously Paid: $555,000 Filing Party: Genentech, Inc. Form or Registration No.: Schedule 14A Date Filed: June 2, 1995 2 This Rule 13e-3 Transaction Statement (the "Statement") relates to a proposed Agreement and Plan of Merger dated as of May 23, 1995 (the "Merger Agreement") among Genentech, Inc., a Delaware corporation ("Genentech"), Roche Holdings, Inc., a Delaware corporation ("Roche"), and HLR (U.S.) II, Inc., a Delaware corporation and a wholly-owned subsidiary of Roche. The purpose of such Merger Agreement and resulting conversion of Genentech Common Stock into Genentech Special Common Stock is to, among other matters, (i) extend by four years the period during which the publicly traded stock of Genentech is subject to redemption by Genentech at the option of Roche, with such redemption during such four-year period being at specified prices per share ranging from $61.25 during the quarter ending September 30, 1995 increasing $1.25 per share for the next seven quarters and $1.50 per share for the next eight quarters to $82.00 during the quarter ending June 30, 1999 (the "Call Rights"), and (ii) provide holders thereof the right to require Genentech to redeem all or a portion (at the election of the holder) of their shares of such stock for a 30-business-day period beginning in July 1999 (unless such right is accelerated following the occurrence of certain insolvency events of Genentech) at a price of $60.00 per share in the event that Roche does not cause the exercise of the Call Rights. This Statement is intended to satisfy the reporting requirements of Section 13(e) of the Securities Exchange Act of 1934, as amended ("The Act"). A preliminary proxy statement on Schedule 14A (the "Proxy Statement") was filed by Genentech with the Securities and Exchange Commission (the "Commission") immediately prior to the filing of this Statement pursuant to the provisions of Regulation 14A of the Act. The cross reference sheet below is being supplied pursuant to General Instruction F to Schedule 13E-3 and shows the location in the Proxy Statement of the information required to be included in response to the items of this Statement. The information in the Proxy Statement, including all exhibits thereto, is hereby expressly incorporated herein by reference and the responses to each item in this Statement are qualified in their entirety by the information contained in the Proxy Statement. 3 CROSS-REFERENCE SHEET
ITEM IN SCHEDULE 13E-3 WHERE LOCATED IN THE PROXY STATEMENT - -------------- ----------------------------------------------------------------------------------------------------------------- Item 1(a) Cover Page; BUSINESS OF GENENTECH Item 1(b) GENERAL INFORMATION -- Record Date; Voting Rights; Proxies Item 1(c)-(d) MARKET PRICES OF AND DIVIDENDS ON THE REDEEMABLE COMMON STOCK Item 1(e) ** Item 1(f) CERTAIN INFORMATION CONCERNING ROCHE AND ROCHE HOLDING; PRINCIPAL STOCKHOLDERS OF GENENTECH; CERTAIN INFORMATION CONCERNING THE DIRECTORS AND EXECUTIVE OFFICERS OF ROCHE HOLDINGS, INC. AND ROCHE HOLDING LTD Item 2(a)-(g) Cover Page; BUSINESS OF GENENTECH; CERTAIN INFORMATION REGARDING ROCHE AND ROCHE HOLDING; CERTAIN INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY; CERTAIN INFORMATION CONCERNING THE DIRECTORS AND EXECUTIVE OFFICERS OF ROCHE HOLDINGS, INC. AND ROCHE HOLDING LTD Item 3(a)(1) CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Item 3(a)(2) THE PROPOSED TRANSACTIONS -- Background of the Proposed Transactions; CERTAIN INFORMATION CONCERNING THE DIRECTORS AND EXECUTIVE OFFICERS OF ROCHE AND ROCHE HOLDING Item 3(b) THE PROPOSED TRANSACTIONS -- Background of the Proposed Transactions Item 4(a) Pages i-ii; SUMMARY AND SPECIAL FACTORS -- Terms of the Proposed Transactions; THE PROPOSED TRANSACTIONS -- Purpose and Structure of the Transactions; THE MERGER AGREEMENT; THE CHARTER AMENDMENT; DESCRIPTION OF THE SPECIAL COMMON STOCK; ARTICLE ELEVENTH OF THE CERTIFICATE OF INCORPORATION; THE AMENDED GOVERNANCE AGREEMENT; GUARANTY OF ROCHE HOLDING; THE LICENSING AGREEMENT Item 4(b) Pages i-ii; SUMMARY AND SPECIAL FACTORS -- Terms of the Proposed Transactions; THE PROPOSED TRANSACTIONS -- Purpose and Structure of the Transactions; THE MERGER AGREEMENT; THE CHARTER AMENDMENT; DESCRIPTION OF THE SPECIAL COMMON STOCK; ARTICLE ELEVENTH OF THE CERTIFICATE OF INCORPORATION; THE AMENDED GOVERNANCE AGREEMENT; GUARANTY OF ROCHE HOLDING; THE LICENSING AGREEMENT Item 5(a)-(f) SUMMARY AND SPECIAL FACTORS; THE MERGER AGREEMENT; THE CHARTER AMENDMENT; DESCRIPTION OF THE SPECIAL COMMON STOCK; THE AMENDED GOVERNANCE AGREEMENT; GUARANTY OF ROCHE HOLDING; THE LICENSING AGREEMENT; CONDUCT OF GENENTECH'S BUSINESS AFTER COMPLETION OF THE PROPOSED TRANSACTIONS; ROCHE'S PLANS WITH RESPECT TO GENENTECH; INCORPORATION OF DOCUMENTS BY REFERENCE; THE PROPOSED TRANSACTIONS -- Interests of Certain Persons in the Proposed Transactions Item 5(g) ** Item 6(a)-(b) THE PROPOSED TRANSACTIONS -- Source of Funds; Expenses; GUARANTY OF ROCHE HOLDING Item 6(c)-(d) ** Item 7(a)-(c) SUMMARY AND SPECIAL FACTORS; THE PROPOSED TRANSACTIONS -- Background of the Proposed Transactions; -- Purpose and Structure of the Transactions Item 7(d) SUMMARY AND SPECIAL FACTORS; THE PROPOSED TRANSACTIONS -- Interests of Certain Persons in the Proposed Transactions; THE MERGER AGREEMENT; THE CHARTER AMENDMENT; DESCRIPTION OF THE SPECIAL COMMON STOCK; THE AMENDED GOVERNANCE AGREEMENT; GUARANTY OF ROCHE HOLDING; THE LICENSING AGREEMENT; CERTAIN FEDERAL INCOME TAX CONSIDERATIONS Item 8(a)-(c) SUMMARY AND SPECIAL FACTORS; THE PROPOSED TRANSACTIONS -- Recommendation of the Board of Directors; Fairness of the Transaction; -- Opinion of Financial Advisor; MARKET PRICES OF AND DIVIDENDS ON THE REDEEMABLE COMMON STOCK; THE CHARTER AMENDMENT; DESCRIPTION OF THE SPECIAL COMMON STOCK; GENERAL INFORMATION -- Required Vote Item 8(d) * Item 8(e) SUMMARY AND SPECIAL FACTORS; THE PROPOSED TRANSACTIONS -- Recommendation of the Board of Directors; Fairness of the Transaction Item 8(f) ** Item 9(a)-(c) SUMMARY AND SPECIAL FACTORS -- Opinion of Financial Advisor; THE PROPOSED TRANSACTIONS -- Opinion of Financial Advisor Item 10(a)-(b) PRINCIPAL STOCKHOLDERS OF GENENTECH; SECURITY OWNERSHIP OF MANAGEMENT; CERTAIN INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY; CERTAIN INFORMATION CONCERNING THE DIRECTORS AND EXECUTIVE OFFICERS OF ROCHE HOLDINGS, INC. AND ROCHE HOLDING LTD Item 11 SUMMARY AND SPECIAL FACTORS; CONDUCT OF GENENTECH'S BUSINESS AFTER COMPLETION OF THE PROPOSED TRANSACTIONS; ROCHE'S PLANS WITH RESPECT TO GENENTECH; THE MERGER AGREEMENT; THE CHARTER AMENDMENT; DESCRIPTION OF THE SPECIAL COMMON STOCK; THE AMENDED GOVERNANCE AGREEMENT; GUARANTY OF ROCHE HOLDING Item 12(a)-(b) THE PROPOSED TRANSACTIONS -- Recommendation of the Board of Directors; Fairness of the Transaction; -- Opinion of Financial Advisor; THE MERGER AGREEMENT Item 13(a) GENERAL INFORMATION -- No Appraisal Rights Item 13(b) ** Item 13(c) ** Item 14 SELECTED HISTORICAL FINANCIAL DATA; INCORPORATION OF DOCUMENTS BY REFERENCE Item 15(a) GENERAL INFORMATION -- Solicitation of Proxies Item 15(b) GENERAL INFORMATION -- Solicitation of Proxies; THE PROPOSED TRANSACTIONS -- Source of Funds; Expenses Item 16 ** Item 17(a) * Item 17(b) Annex B Item 17(c) Annex A Item 17(d) ** Item 17(e) ** Item 17(f) **
- --------------- * The information requested by this item is not required to be included in the Proxy Statement. ** The Item is inapplicable or the answer thereto is in the negative. 2 4 ITEM 1. ISSUER AND CLASS OF SECURITIES SUBJECT TO THE TRANSACTION. (a) The information set forth on the cover page of, and "BUSINESS OF GENENTECH" in, the Proxy Statement/Prospectus is incorporated herein by reference. (b) The information set forth under "GENERAL INFORMATION -- Record Date; Voting Rights; Proxies" in the Proxy Statement/Prospectus is incorporated herein by reference. (c)-(d) The information set forth in the Proxy Statement/Prospectus under "MARKET PRICES OF AND DIVIDENDS ON THE REDEEMABLE COMMON STOCK" is incorporated herein by reference. (e) Not applicable. (f) The information set forth under "CERTAIN INFORMATION CONCERNING ROCHE AND ROCHE HOLDING", "PRINCIPAL STOCKHOLDERS OF GENENTECH" and "CERTAIN INFORMATION CONCERNING THE DIRECTORS AND EXECUTIVE OFFICERS OF ROCHE HOLDINGS, INC. AND ROCHE HOLDING LTD" is incorporated herein by reference. ITEM 2. IDENTITY AND BACKGROUND. Genentech, a person filing this statement, is the issuer of the class of equity securities which is the subject of the Rule 13e-3 transaction. (a)-(g) Additionally, the information set forth on the cover page of the Proxy Statement/Prospectus and under "BUSINESS OF GENENTECH," "CERTAIN INFORMATION REGARDING ROCHE AND ROCHE HOLDING," "CERTAIN INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY" and "CERTAIN INFORMATION CONCERNING THE DIRECTORS AND EXECUTIVE OFFICERS OF ROCHE HOLDINGS, INC. AND ROCHE HOLDING LTD" is incorporated herein by reference. ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS. (a)(1) The information set forth in the Proxy Statement/Prospectus under "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" is incorporated herein by reference. (2) The information set forth in the Proxy Statement/Prospectus under "THE PROPOSED TRANSACTIONS -- Background of the Proposed Transactions" and "CERTAIN INFORMATION CONCERNING THE DIRECTORS AND EXECUTIVE OFFICERS OF ROCHE AND ROCHE HOLDING" is incorporated herein by reference. (b) The information set forth in the Proxy Statement/Prospectus under "THE PROPOSED TRANSACTIONS -- Background of the Proposed Transactions" is incorporated herein by reference. ITEM 4. TERMS OF THE TRANSACTION. (a) The information set forth in the Proxy Statement/Prospectus on pages i-ii and under the captions "SUMMARY AND SPECIAL FACTORS -- Terms of the Proposed Transactions", "THE PROPOSED TRANSACTIONS -- Purpose and Structure of the Transactions", "THE MERGER AGREEMENT", "THE CHARTER AMENDMENT; DESCRIPTION OF THE SPECIAL COMMON STOCK", "ARTICLE ELEVENTH OF THE CERTIFICATE OF INCORPORATION", "THE AMENDED GOVERNANCE AGREEMENT", "GUARANTY OF ROCHE HOLDING", and "THE LICENSING AGREEMENT" is incorporated herein by reference. (b) The information set forth in the Proxy Statement/Prospectus on pages i-ii and under the captions "SUMMARY AND SPECIAL FACTORS -- Terms of the Proposed Transactions", "THE PROPOSED TRANSACTIONS -- Purpose and Structure of the Transactions", "THE MERGER AGREEMENT", "THE CHARTER AMENDMENT; DESCRIPTION OF THE SPECIAL COMMON STOCK", "ARTICLE ELEVENTH OF THE CERTIFICATE OF INCORPORATION", "THE AMENDED GOVERNANCE AGREEMENT", "GUARANTY OF ROCHE HOLDING", and "THE LICENSING AGREEMENT" is incorporated herein by reference. ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OF AFFILIATE. (a)-(f) The information set forth in the Proxy Statement/Prospectus under the captions "SUMMARY AND SPECIAL FACTORS", "THE MERGER AGREEMENT", "THE CHARTER AMENDMENT; DESCRIPTION OF THE SPECIAL COMMON STOCK", "THE AMENDED GOVERNANCE AGREEMENT", "GUARANTY OF ROCHE HOLDING", "THE LICENSING AGREEMENT", "CONDUCT OF GENENTECH'S BUSINESS AFTER COMPLETION OF THE PROPOSED TRANSACTIONS; ROCHE'S PLANS WITH RESPECT TO GENENTECH", "INCORPORATION OF DOCUMENTS BY REFERENCE" and "THE PROPOSED TRANSACTIONS -- Interests of Certain Persons in the Proposed Transactions" is incorporated herein by reference. (g) Not applicable. ITEM 6. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION. (a)-(b) The information set forth in the Proxy Statement/Prospectus under "THE PROPOSED TRANSACTIONS -- Source of Funds; Expenses" and "GUARANTY OF ROCHE HOLDING" is incorporated herein by reference. (c)-(d) Not applicable. ITEM 7. PURPOSES, ALTERNATIVES, REASONS AND EFFECTS. (a)-(c) The information set forth in the Proxy Statement/Prospectus under "SUMMARY AND SPECIAL FACTORS"; "THE PROPOSED TRANSACTIONS -- Background of the Proposed Transactions", and "-- Purpose and Structure of the Transactions" is incorporated herein by reference. (d) The information set forth in the Proxy Statement/Prospectus under "SUMMARY AND SPECIAL FACTORS", "THE PROPOSED TRANSACTIONS -- Interests of Certain Persons in the Proposed Transactions", "THE MERGER AGREEMENT", "THE CHARTER AMENDMENT; DESCRIPTION OF THE SPECIAL COMMON STOCK", "THE AMENDED GOVERNANCE AGREEMENT", "GUARANTY OF ROCHE HOLDING", "THE LICENSING AGREEMENT", and "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" is incorporated herein by reference. ITEM 8. FAIRNESS OF THE TRANSACTION. (a)-(c) The information set forth in the Proxy Statement/Prospectus under "SUMMARY AND SPECIAL FACTORS", "THE PROPOSED TRANSACTIONS -- Recommendation of the Board of Directors; Fairness of the Transaction" and "-- Opinion of Financial Advisor", "MARKET PRICES OF AND DIVIDENDS ON THE REDEEMABLE COMMON STOCK", "THE CHARTER AMENDMENT; DESCRIPTION OF THE SPECIAL COMMON STOCK" and "GENERAL INFORMATION -- Required Vote" is incorporated herein by reference. (d) No representative was hired solely on the behalf of unaffiliated security holders. (e) The information set forth in the Proxy Statement/Prospectus under "SUMMARY AND SPECIAL FACTORS" and "THE PROPOSED TRANSACTIONS -- Recommendation of the Board of Directors; Fairness of the Transaction" is incorporated herein by reference. (f) Not applicable. 3 5 ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS. (a)-(c) The information set forth in the Proxy Statement/Prospectus under "SUMMARY AND SPECIAL FACTORS -- Opinion of Financial Advisor" and "THE PROPOSED TRANSACTIONS -- Opinion of Financial Advisor" is incorporated herein by reference. ITEM 10. INTEREST IN SECURITIES OF THE ISSUER. (a)-(b) The information set forth in the Proxy Statement/Prospectus under "PRINCIPAL STOCKHOLDERS OF GENENTECH"; "SECURITY OWNERSHIP OF MANAGEMENT"; "CERTAIN INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY"; and "CERTAIN INFORMATION CONCERNING THE DIRECTORS AND EXECUTIVE OFFICERS OF ROCHE HOLDINGS, INC. AND ROCHE HOLDING LTD" is incorporated by reference. ITEM 11. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECT TO THE ISSUER'S SECURITIES. The information set forth in the Proxy Statement/Prospectus under "SUMMARY AND SPECIAL FACTORS", "CONDUCT OF GENENTECH'S BUSINESS AFTER COMPLETION OF THE PROPOSED TRANSACTIONS; ROCHE'S PLANS WITH RESPECT TO GENENTECH", "THE MERGER AGREEMENT", "THE CHARTER AMENDMENT; DESCRIPTION OF THE SPECIAL COMMON STOCK", "THE AMENDED GOVERNANCE AGREEMENT" and "GUARANTY OF ROCHE HOLDING" is incorporated herein by reference. ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS WITH REGARD TO THE TRANSACTION. (a)-(b) The information set forth in the Proxy Statement/Prospectus under "THE PROPOSED TRANSACTIONS -- Recommendation of the Board of Directors; Fairness of the Transaction", "-- Opinion of Financial Advisor", and "THE MERGER AGREEMENT" is incorporated herein by reference. ITEM 13. OTHER PROVISIONS OF THE TRANSACTION. (a) The information set forth in the Proxy Statement/Prospectus under "GENERAL INFORMATION -- No Appraisal Rights" is incorporated herein by reference. (b) Not applicable. (c) Not applicable. ITEM 14. FINANCIAL INFORMATION. The information set forth in the Proxy Statement/Prospectus under "SELECTED HISTORICAL FINANCIAL DATA" is incorporated herein by reference. In addition, the information set forth in (i) Item 14(a)(2) of Part IV of Genentech's Annual Report on Form 10-K for the year ended December 31, 1994, (ii) Part II of Genentech's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995 and (iii) pages 39-61 of Genentech's Annual Report to Stockholders for the year ended December 31, 1994 is incorporated herein by reference. ITEM 15. PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED. (a) The information set forth in the Proxy Statement/Prospectus under "GENERAL INFORMATION -- Solicitation of Proxies" is incorporated herein by reference. (b) The information set forth in the Proxy Statement/Prospectus under "GENERAL INFORMATION -- Solicitation of Proxies" and "THE PROPOSED TRANSACTIONS -- Source of Funds; Expenses" is incorporated herein by reference. ITEM 16. ADDITIONAL INFORMATION. Reference is hereby made to the Proxy Statement/Prospectus and to each exhibit attached thereto, each of which is incorporated herein by reference. ITEM 17. MATERIAL TO BE FILED AS EXHIBITS. (a) Not applicable. (b) Opinion of Lehman Brothers (incorporated by reference to Annex B to the Proxy Statement/Prospectus). (c)(1) Agreement and Plan of Merger, dated May 23, 1995, among Roche Holdings, Inc., HLR (U.S.) II, Inc. and Genentech, Inc. (incorporated by reference to Annex A to the Proxy Statement/Prospectus). (c)(2) Amended and Restated Governance Agreement, to be entered into at the effective time of the merger contemplated by the Merger Agreement included as Exhibit (c)(1) hereof (incorporated by reference to Exhibit A to Annex A to the Proxy Statement/Prospectus). (c)(3) Guaranty of Roche Holding Ltd to be dated as of the effective date of the merger contemplated by the Merger Agreement included as Exhibit (c)(1) hereof (incorporated by reference to Exhibit B to Annex A to the Proxy Statement/Prospectus). (c)(4) Article THIRD to Amended and Restated Certificate of Incorporation of Genentech (incorporated by reference to Exhibit C to Annex A to the Proxy Statement/Prospectus). (d) Proxy Statement and related Notice of Special Meeting, Letter to Shareholders and Proxy (incorporated by reference to the Proxy Statement and related material filed under a Schedule 14A by Genentech on the date hereof). (e) Not applicable. (f) Not applicable. (g)(1) Annual Report to Stockholders of Genentech for the year ended December 31, 1994. (g)(2) Annual Report on Form 10-K of Genentech for the year ended December 31, 1994. (g)(3) Quarterly Report on Form 10-Q of Genentech for the quarter ended March 31, 1995. 4 6 SIGNATURE After due inquiry and to the best of its knowledge and belief, the undersigned certifies that the information set forth in this statement is true, complete and correct. Date: June 2, 1995 GENENTECH, INC. By: /s/ John P. McLaughlin --------------------------------------------- Name: John P. McLaughlin Title: Senior Vice President and Secretary ROCHE HOLDINGS, INC. By: /s/ Henri B. Meier --------------------------------------------- Name: Henri B. Meier Title: Vice President 5 7 EXHIBIT INDEX
EXHIBIT SEQUENTIAL NO. PAGE NO. - ------- ---------- (a) Not applicable. (b) Opinion of Lehman Brothers (incorporated by reference to Annex B to the Proxy Statement/Prospectus). (c)(1) Agreement and Plan of Merger, dated May 23, 1995, among Roche Holdings, Inc., HLR (U.S.) II, Inc. and Genentech, Inc. (incorporated by reference to Annex A to the Proxy Statement/Prospectus). (c)(2) Amended and Restated Governance Agreement between Genentech and Roche Holdings, Inc., to be entered into at the effective time of the merger contemplated by the Merger Agreement included as Exhibit (c)(1) hereof (incorporated by reference to Exhibit A to Annex A to the Proxy Statement/Prospectus). (c)(3) Guaranty of Roche Holding Ltd to be dated as of the effective date of the merger contemplated by the Merger Agreement included as Exhibit (c)(1) hereof (incorporated by reference to Exhibit B to Annex A to the Proxy Statement/Prospectus). (c)(4) Article THIRD to Amended and Restated Certificate of Incorporation of Genentech (incorporated by reference to Exhibit C to Annex A to the Proxy Statement/Prospectus). (d) Proxy Statement/Prospectus and related Notice of Special Meeting, Letter to Shareholders and Proxy (incorporated by reference to the Proxy Statement and related material filed under a Schedule 14A by Genentech on the date hereof). (e) Not applicable. (f) Not applicable. (g)(1) Annual Report to Stockholders of Genentech for the year ended December 31, 1994. (g)(2) Annual Report on Form 10-K of Genentech for the year ended December 31, 1994. (g)(3) Quarterly Report on Form 10-Q of Genentech for the quarter ended March 31, 1995.
EX-99.G1 2 1994 ANNUAL REPORT TO STOCKHOLDERS 1 Exhibit (g)(1) SCIENCE. SCIENCE. SCIENCE. 1994 Annual Report Genentech, Inc. 2 Cover As in the past, Genentech's future is science. That future is best exemplified by the wealth of products in the company's pipeline. From products in Phase III trials offering near-team prospects, to those in late research offering opportunities for the 21st century, Genentech's pipeline is filled with the potential to bring important new clinical benefits to patients with a variety of medical conditions. --Profile Genentech, Inc. is a leading international biotechnology company that discovers, develops, manufactures and markets human pharmaceuticals for significant unmet medical needs. The company's currently marketed products are available free to needy, uninsured patients in the United States. Genentech has headquarters in South San Francisco, California and is listed on the New York and Pacific Stock Exchanges under the symbol GNE.
CONTENTS Genentech Pipeline (poster insert facing this page) Genentech's product protfolio will fuel growth into the next century. (If removed from this report, call 800-626-3553, r5272, for a replacement poster.) Financial Highlights 1 Highlights 2 Letter to Stockholders 4 The Future is Science 9 From laboratory bench to market, excellent science drives Genentech's success. Genentech Markets Today and Tomorrow 13 Marketed Products 13 Marketing in a Changing Environment 21 Genentech Leadership 24 Meet six Genentech senior executives, who keep the company's vision in sharp focus. Genentech Financials 31 Stock and Stockholder Information 64 Offices and Board of Directors 65 Officers and Staff Scientists 66
3 Actimmune* Second Generation IGF-1 Anti-HERZ Antibody Thrombopoletin Anti-IgE Antibody 4 PROCESS SCIENCE AND MANUFACTURING As Genentech moves multiple products through late-stage clinical trials, process scientists apply their industry-leading expertise to develop cost-effective methods for manufacturing these pharmaceutical candidates in quantities and on a time-line sufficient to supply fast-paced clinical trials and, ultimately, the market. (ART) Genentech's new process science center, scheduled for completion in mid 1995, will centralize the company's process scientists in one state-of-the-science facility, enhancing their ability to develop cost-effective methods of manufacturing Genetech's protein pharmaceuticals. 5 DISCOVERY RESEARCH Genentech's science begins with its innovative and prolific discovery research. Through a clear research focus on well-defined biological areas and selective use of key emerging technologies, Genentech scientists continuously generate a wealth of pharmaceutical candidates from which the company moves one or two into development each year. Promising projects not chosen for development are outlicensed to capture their value for stockholders. [ART] In June 1994, Genentech scientists reported they discovered the long- sought blood platelet growth factor, thrombopoietin. The company has since acted quickly to plan to move the protein into clinical development for the treatment of a dangerous side effect of cancer chemotherapy. Reprinted with permission from Nature, vol. 369, no. 6481. Copyright 1994 Macmillian Magazines Limited. 6 PRECLINICAL AND CLINICAL DEVELOPMENT Genentech selects a limited number of products for development based on specific selection criteria. It discontinues efforts on projects that do not continue to meet these criteria. This focuses the company's resources on projects most likely to bring value to patients and stockholders. Genentech is using its proven expertise, enhanced by close collaborations with regulatory authorities, to guide several promising products through preclinical testing and various stages of human clinical trials. Phase I Determine safety Phases of Human Clinical Trials: Phase II Determine safety, dosage and initial efficacy Phase III Prove efficacy and safety [PHOTO] 11-year-old Robert Coleman has had allergies since infancy and began asthma symptoms at age 5. He is enrolled in a Phase I trial for Genentech's anti-IgE antibody, which is testing the drug's safety in children. Phase II trials in adults are testing safety and efficacy for allergic rhinitis and asthma. With proven expertise, Genentech's Medical Affairs groups manage dozens of clinical trials worldwide. 7 [GENENTECH, INC. LOGO] Genentech, Inc. 460 Point San Bruno Boulevard South San Francisco, CA 94080-4990 (415) 225-1000 8 PROGRESS IN 1994 AND EARLY 1996 Information accurate through January 1995 and may change as projects progress through pipeline. Marketing rights information represents where Genentech or its subsidiaries retains rights at the end of January 1995 for each product/indication -- not necessarily exclusively -- within the countries indicated by the icons. PRECLINICAL PROJECTS ANTI-VEGF ANTIBODY RAS FT INHIBITER 2ND GENERATION t-PA ORAL IIb/IIIa ANTAGONIST - -- ANTI-VEGF HUMANIZED MONOCLONAL ANTIBODY For cancer and diabetic retinopathies The protein vascular endothelial growth factor (VEGF) promotes blood vessel growth. It can be involved in disease by promoting blood supply that tumors need to become malignant, or by promoting excess blood vessel growth at the retina in diabetics, which can lead to blindness. An antibody to VEGF may be useful to treat cancers and diabetic retinopathy. This clinical development candidate is in late-stage research. - -- RAS FARNESYLTRANSFERASE INHIBITOR For pancreatic and colon concerns Ras is a growth controlling factor that becomes oncogenic (cancer causing) when mutated. The mutated protein is found in most pancreatic cancers and many colon cancers. The enzyme ras farnesyltransferase is involved in processing ras and is critical to its function. An inhibitor to this enzyme may be useful to treat these cancers. This clinical development candidate is in late stage research. - -- THROMBOPOICTIN For thrombocytopenia related to cancer treatment Patients undergoing cancer chemotherapy may suffer from thrombocytopenia -- a shortage of clot-inducing platelets that can lead to uncontrolled bleeding. Thrombopoictin promotes platelet production. It may be useful to treat cancer patients so they can avoid this side effect and possibly tolerate higher doses of anti-cancer treatment. Genentech has identified this project for clinical development. - -- ORAL IIb/IIIa ANTAGONIST For cardiovascular indications Blood platelets aggregate to initiate clotting. This orally active IIb/IIIa antagonist, discovered in collaboration with Roche, is designed to bind to the IIb/IIIa receptor on the surface of platelets to inhibit their ability to aggregate. It may be useful to help prevent blood clotting in certain cardiovascular conditions, such as to prevent reclotting after a heart attack. Genentech has identified this project for clinical development. 9 PHASE I PHASE II IGF-I 2ND GENERATION t-PA gp120 NGF ANTI-IgE ANTIBODY NUTROPIN(Bullet) - -- ORAL IIb/IIIa ANTAGONIST For cardiovascular indications Blood platelets aggregate to initiate clotting. This orally active IIb/IIa antagonist, discovered in collaboration with Roche, is designed to bind to the IIb/IIIa receptor on the surface of platelets to inhibit their ability to aggregate. It may be useful to help prevent blood clotting in certain cardiovascular conditions, such as to prevent reclotting after a heart attack. Genentech has identified this project for clinical development. - -- SECOND GENERATION t-PA For heart attacks and related cardiovascular disorders Designed to build on the success of Activase, second generation t-PA is a selectively mutated version of natural t-PA. Preclinical data suggest it may be easier to administer, work faster, cause less unwanted bleeding and require smaller doses than Activase. - -- NERVE GROWTH FACTOR For peripheral neuropathics Often associated with diabetes or cancer chemotherapy, peripheral neuropathy is characterized by progressive nerve fiber damage in the hands and feet. Nerve growth factor may be able to prevent loss of or restore nerve function in patients with diabetes or undergoing cancer chemotherapy. - -- INSULIN-LIKE GROWTH FACTOR (IGF-I) For diabetes Some Type II diabetics do not respond well to oral hypoglycemic agents or insulin. Studies show that patients with Type I diabetes have fewer complications if they closely control blood sugar levels; this is probably also true for Type II diabetes. Genentech is investigating whether IGF-I can increase insulin sensitivity in Type II diabetics and help diabetics of either type maintain better glucose control. - -- ANTI-IgE HUMANIZED MONOCLONAL ANTIBODY For allergic rhinitis and asthma The anti-IgE humanized monoclonal antibody is designed to interfere early in the complex, multistep process that leads to the symptoms of allergy, such as allergic rhinitis and asthma. - -- gp120 As a prophylactic vaccine against HIV-1 infection Genentech's gp120 is a genetically engineered copy of a protein on the surface of HIV-1, the virus that causes AIDS. Genentech is investigating gp120 as a prophylactic vaccine in U.S. Phase II clinical trials. The World Health Organization is conducting Phase I trials of gp120 in intravenous drug users in Bangkok, Thailand. - -- NUTROPIN For growth hormone inadequacy in adults Genentech is investigating the potential of Nutropin to restore proper metabolic functioning in adults who have been growth hormone inadequate since childhood or who have become so through disease or accident. These patients may benefit from growth hormone replacement to restore their physical and psycho-social well-being. - -- ACTIVASE For ischemic stroke Ischemic stroke is caused by blood clots in the arteries of the brain. Activase may be able to dissolve the clots and restore blood flow to the brain, reducing neurologic damage. When completed, ongoing clinical trials may provide data necessary to apply for regulatory approval to change Activase's label to reflect its efficiency in stroke patients. 10 PHASE I PHASE II IGF-I 2ND GENERATION t-PA gp-120 NGF ANTI-IgE ANTIBODY NUTROPIN(Bullet) - -- THROMBOPOIETIN For thrombocytopenia related to cancer treatment Patients undergoing cancer chemotherapy may suffer from thrombocytopenia -- a shortage of clot-inducing platelets that can lead to uncontrolled bleeding. Thrombopoietin promotes platelet production. It may be useful to treat cancer patients so they can avoid this side effect and possibly tolerate higher doses of anti-cancer treatment. Genentech has identified this project for clinical development. - -- ORAL IIb/IIIa ANTAGONIST For cardiovascular indications Blood platelets aggregate to initiate clotting. This orally active IIb/IIIa antagonist, discovered in collaboration with Roche, is designed to bind to the IIb/IIIa receptor on the surface of platelets to inhibit their ability to aggregate. It may be useful to help prevent blood clotting in certain cardiovascular conditions, such as to prevent reclotting after a heart attack. Genentech has identified this project for clinical development. - -- SECOND GENERATION t-PA For heart attacks and related cardiovascular disorders Designed to build on the success of Activase, second generation t-PA is a selectively mutated version of natural t-PA. Preclinical data suggest it may be easier to administer, work faster, cause less unwanted bleeding and require smaller doses than Activase. - -- NERVE GROWTH FACTOR For peripheral neuropathics Often associated with diabetes or cancer chemotherapy, peripheral neuropathy is characterized by progressive nerve fiber damage in the hands and feet. Nerve growth factor may be able to prevent loss of or restore nerve function in patients with diabetes or undergoing cancer chemotherapy. - -- INSULIN-LIKE GROWTH FACTOR (IGF-I) For diabetes Some Type II diabetics do not respond well to oral hypoglycemic agents or insulin. Studies show that patients with Type I diabetes have fewer complications if they closely control blood sugar levels; this is probably also true for Type II diabetes. Genentech is investigating whether IGF-I can increase insulin sensitivity in Type II diabetics and help diabetics of either type maintain better glucose control. - -- ANTI-IgE HUMANIZED MONOCLONAL ANTIBODY For allergic rhinitis and asthma The anti-IgE humanized monoclonal antibody is designed to interfere early in the complex, multistep process that leads to the symptoms of allergy, such as allergic rhinitis and asthma. - -- gp120 As a prophylactic vaccine against HIV-1 infection Genentech's gp120 is a genetically engineered copy of a protein on the surface of HIV-1, the virus that causes AIDS. Genentech is investigating gp120 as a prophylactic vaccine in U.S. Phase II clinical trials. The World Health Organization is conducting Phase I trials of gp120 in intravenous drug users in Bangkok, Thailand. - -- NUTROPIN For growth hormone inadequacy in adults Genentech is investigating the potential of Nutropin to restore proper metabolic functioning in adults who have been growth hormone inadequate since childhood or who have become so through disease or accident. These patients may benefit from growth hormone replacement to restore their physical and psycho-social well-being. - -- ACTIVASE For Ischemic stroke Ischemic stroke is caused by blood clots in the arteries of the brain. Activase may be able to dissolve the clots and restore blood flow to the brain, reducing neurologic damage. When completed, ongoing clinical trials may provide data necessary to apply for regulatory approval to change Activase's label to reflect its efficacy in stroke patients. 11 PHASE III AWAITING REGULATORY APPROVAL ACTIVASE(Bullet) ACTIMMUNE AURICULIN(Bullet) ACTIVASE (ACCELERATED) NUTROPIN ANTI-HER2 ANTIBODY NUTROPIN (LIQUID) PULMOZYME - -- AURICULIN For acute renal failure Acute renal failure is a life-threatening condition that results primarily from a temporary decrease in blood flow to the kidneys after injury or complicated surgery. Genentech and Scios Nova Inc., which licensed Auriculin to Genentech and Scios Nova Inc., which licensed Auriculin to Genentech, are collaborating to investigate whether Auriculin-- a hormone that occurs naturally in the heart-- can reduce the need for kidney dialysis in patients with this acute condition. - -- ANTI-HER2 HUMANIZED MONICIONAL ANTIBODY For breast cancer The anti-HER2 antibody is designed to block a protein receptor called HER2 that is produced in excess amounts in some women with breast cancer. Based on favorable Phase II trial results, Genentech is investigating the anti-HER2 antibody as a treatment for breast cancer in international Phase III trials. - -- PULMOZYME For chronic obstructive pulmonary disease Chronic obstructive pulmonary disease (COPD) is a syndrome of airway inflammation, infection and obstruction that leads to lung destruction. In Phase II trials, Pulmozyme reduced mortality in patients hospitalized with acute infectious episodes of chronic bronchitis (a form of COPD). Genentech's international Phase III trial will determine if Pulmozyme can reduce mortality in hospitalized COPD patients. - -- ACTIMMUNE For renal cell carcinoma Actimmune has been shown to have some anti-tumor effects, including some tumor shrinkage in patients with metastatic renal cell carcinoma-kidney cancer that has spread beyond the kidneys. NUTROPIN For short stature associated with Turner syndrome Turner syndrome is a genetic disorder in females that causes a variety of medical problems including very short stature. Clinical trials have shown Nutropin may help these patients become taller than they would otherwise. - -- NUTROPIN (LIQUID) For growth hormone inadequacy in children and growth failure due to chronic renal insufficiency A liquid formulation of growth hormone would not require reconstitution, making administration easier for patients. - -- ACTIVASE (ACCELERATED INFUSION) For acute myocardial infarction (heart attack) Based on the results of the GUSTO clinical trial, an FDA advisory committee unanimously agreed that the rapid infusion of Activase has a clinically significant mortality benefit in the treatment of heart attacks and recommended that the new dosing regimen be incorporated into the product's labeling. - -- DISCONTINUED PIPELINE PROJECTS Genentech is seeking development partners for these projects: - - Anti-CD18 Humanized Monoclonal Antibody for inflammatory disorders - - Transforming Growth Factor-B1 for mucositis Genentech has discontinued these projects because in each case Phase II clinical trials showed no significant benefit of the product for the targeted indication: - - gp120 as an immunotherapeutic for HIV-1 infected individuals - - IGF-I for physical wasting syndrome associated with AIDS 12 FINANCIAL HIGHLIGHTS DISTRIBUTION OF REVENUE DOLLARS (millions) $800 TOTAL REVENUES $700 COST OF SALES $600 $500 RESEARCH & DEVELOPMENT EXPENSES $400 [GRAPH] MARKETING, GENERAL, $300 & ADMINISTRATIVE EXPENSES $200 $100 INTEREST EXPENSES & INCOME TAXES NET INCOME 0 1992 1993 1994 AS REVENUES HAVE GROWN, AN INCREASING PORTION HAS BEEN BROUGHT TO THE NET INCOME LINE.
(MILLIONS, EXCEPT PER SHARE AND EMPLOYEE DATA) 1994 1993 1992 - ------------------------------------------------------------------------------ INCOME STATEMENT Total revenues $ 795.4 $ 649.7 $ 544.3 Product sales 601.0 457.4 391.0 Research and development expenses 314.3 299.4 278.6 Total costs and expenses 665.8 590.8 522.3 Net income 124.4 58.9 20.8 Net income per share 1.04 0.50 0.18 Weighted average number of shares 119.5 117.1 114.0 -------- -------- -------- BALANCE SHEET Cash, short-term investments and marketable securities $ 920.9 $ 719.8 $ 646.9 Property, plant and equipment, net 485.3 456.7 432.5 Total assets 1,745.1 1,468.8 1,305.1 Long-term debt 150.4 151.2 152.0 Total stockholders' equity 1,348.8 1,116.8 1,007.3 Capital expenditures 82.8 87.5 126.0 Employees 2,738 2,510 2,331 -------- -------- --------
The company has paid no dividends. 1 13 HIGHLIGHTS Genentech highlights in 1994 and early 1995 CORPORATE - 1994 earnings: $124.4 million, or $1.04 per share. 1994 revenues: $795.4 million - Began European commercial opera- tions with launch of Pulmozyme. - Reached an agreement with Eli Lilly and Company, ending a long-stand- ing dispute regarding recombinant human growth hormone, to receive $145 million over approximately four years, plus future payments, contin- gent on sale of certain products. - Elected Louis J. Lavigne, Jr. and Barry M. Sherman, M.D., to senior vice president. - Elected Robert Garnick to vice president -- Quality; Dennis J. Henner, vice president -- Research Technology: Stephen Juelsgaard, vice president and general counsel: Bryan Lawlis, vice president -- Process Science: Polly Moore, vice president -- Information Resources: Kim Popovits, vice president -- Sales; and Nicholas J. Simon, vice president -- Business Development. - Began construction of a new $62.5 million process science center, bring- ing Genentech's total facilities space to nearly 1,700,000 square feet. - Identified Vacaville, California as location for new $150 million manu- facturing facility. MARKETED PRODUCTS ACTIVASE* (ALTEPLASE, RECOMBINANT), A TISSUE-PLASMINOGEN ACTIVATOR - 1994 Activase sales: $280.9 million. - An FDA advisory committee unanimously agreed that the rapid infusion of Activase has a clinically significant mortality benefit in the treatment of heart attacks and recommended that the new dosing regimen be incorporated into the product's labeling. - Repurchased rights in Canada to tis- sue-plasminogen activator (Alteplase, recombinant) from Boehringer Ingelheim International GmbH. PROTROPIN* (SOMATREM FOR INJECTION) AND NUTROPIN* (SOMATROPIN [rDNA ORIGIN] FOR INJECTION) GROWTH HORMONES - 1994 growth hormone sales: $225.4 million. - Began shipping Nutropin January 1994 for treating children with growth failure due to chronic renal insufficiency. - Received regulatory approval in March 1994 to market Nutropin for the treatment of children with growth hormone inadequacy. - Following the dismissal of an inter- national Trade Commission (ITC) petition against Novo-Nordisk and Bio-Technology General Corporation due to a technicality -- even though the ITC Judge ruled that certain Genentech patents were valid and infringed -- Genentech filed a patent infringement suit with the U.S. District Court in Delaware against Novo-Nordisk and Bio-Technology General Corporation. - Filed a submission with the FDA for regulatory approval to market a liquid formulation of Nutropin for treating growth hormone inadequacy in children and growth failure due to chornic renal insufficiency. PULMOZYME* (DORNASE ALFA) INHALATION SOLUTION - Begin shipping Pulmozyme in January 1994. 1994 sales: $88.3 million. - Pulmozyme is now sold in 19 countries. - Launched patient registry studies in the United States and Europe to track the long-term safety and effec- tiveness of Pulmozyme in cystic fibrosis patients, with more than 14,000 patients from more than 200 medical centers worldwide enrolled. 2 14 - -- Began international Phase III clinical trials in hospitalized patients with chronic obstructive pulmonary disease (COPD) after a Phase II trial showed a 61 percent reduction in mortality in certain hospitalized patients receiving Pulmozyme. Actimmune* (Interferon gamms-1b) - -- 1994 Actimmune sales: $6.4 million. - -- Completed enrollment in Phase III trials for renal cell carcinoma (kidney cancer). PRODUCTS IN DEVELOPMENT To track progress made in Genentech's rich product pipeline in 1994, see the poster inside the front cover of this report. If the poster has been removed, call (800) 626-3553, x5272, to receive a new poster. RESEARCH - -- Published 275 papers in scientific journals in 1994. - -- Obtained 397 patents worldwide in 1994 for a total of 1,922 patents. - -- Purified and cloned thrombopoletin, a long-sought blood factor that induces platelet production. - -- In laboratory models, demonstrated the efficacy of an anti-VEGF anti- body in shrinking tumors and in preventing retinopathy. RESEARCH AND DEVELOPMENT COLLABORATIONS - -- Entered into agreements with: - - Scios Nova Inc. for it to develop in the United States and Canada and Genentech to develop in other countries its Auriculin* (anaritide), currently in Phase III clinical trials, for the treatment of acute renal failure. - - Cytotherapeutics to develop central nervous system therapeutics. - - Exocell regarding its A1717 monoclonal antibody for diabetic- related disease. - - Alkermes, Inc. to develop sustained-release formulations of two proteins, including human growth hormone. - -- Progressed significantly in collaborations with Roche: Determined to jointly develop an orally active IIb/IIIa antagonist for cardiovascular indications. Continued collaborative research of orally active antagonists to LFA/ICAM for chronic inflammatory disorders and to ras farnesyl- transferase for cancers. CORPORATE RESPONSIBILITY - -- Provide more than $26 million worth of pharmaceuticals free-of-charge in 1994 through various programs for un- or underinsured patients in the United States. - -- Donated more than $3 million for scientific research through medical and academic research organizations and hospital groups. - -- Identified, trained and equipped the first 100 Access Excellnce Fellows, and enabled access to the program by thousands of teachers nationwide. Access Excellence is a $10 million, multi-year national education program to assist high school biology teachers in the United States. - -- Donated more than $510,000 to the Genentech Foundation for Biomedical Sciences, which provided the money for science education to local schools, from grade school through post-graduate level. - -- Made available unique experimental proteins free-of-charge to academic researchers worldwide. - -- Extended eligibility for benefits coverage to same-sex domestic partners of employees. - -- For the fifth time, Genentech was named one of the top 100 companies for working mothers by Working Mother magazine. 3 15 GENENTECH PRESIDENT AND CHIEF EXECUTIVE OFFICER G. KIRK RAAB MEETS WITH TWO OF THE FOUNDING MEMBERS OF AFRICAN AMERICANS IN BIOTECHNOLOGY, GLYNIS MCCRAY AND MAX FOSTER, BOTH GENENTECH EMPLOYEES. FOUNDED TO PROVIDE ROLE MODELS TO YOUTHS AND EXPOSE THEM TO CAREERS IN SCIENCE AND BIOTECHNOLOGY, AAIB ALSO WORKS WITH GENENTECH IN ITS EMPLOYEE OUTREACH EFFORTS. 16 GENENTECH, INC. G. Kirk Raas PRESIDENT & CEO January 31, 1995 Dear Fellow Stockholders: Thanks to the tremendous efforts of Genentech employees, I'm able to report a successful year in which we've more than doubled profits and increased product sales 31 percent, and total revenues 22 percent, with a greater percentage of revenues going to the bottom line. We also made significant progress with important preclinical and clinical programs for our new products. Our employees continue to be guided by a clear focus and united purpose: to apply excellent science toward innovative products that substantially help people with serious medical conditions, while increasing returns for our stockholders. The fundamentals of the business are sound, with execution based on a disciplined and caring culture. It's the leaders of Genentech's major operating functions, each profiled beginning on page 24, who keep us sharply focused. Regardless of function, each group's priorities converge back to Genentech's science. Consider our research discovery and technology groups. By any measure, these groups continue to be exceptionally creative and productive. An especially telling indication is how difficult it is to choose development projects among the many exciting research projects they generate. We decide which projects to move into development based on important information gathered early. Our preclinical scientists determine potential uses and safety issues in laboratory models. Our clinical scientists evaluate the potential benefits a product brings to patients. Our legal group determines what market protection we can anticipate. Our marketing group evaluates worldwide commercial possibilities and our process scientists determine if we can manufacture a product cost-effectively. As a result, we can make intelligent decisions about which projects to move toward the marketplace, while our financial group keeps us directed toward profitable growth. In making choices, we balance risk and return as an investment portfolio manager would. Some projects have potential for high return, but at a higher risk than we might otherwise 5 17 consider. Others may have lower potential for return, but also lower risk. Of course we make a priority of those with low relative risk and high potential for return. The result is a balanced mix offering good opportunity for significant return with reasonable risk. Anticipated market protection is a major consideration; without the assurance of a fair market advantage as a proprietary product, a project is not worth the investment risk. As Lee Iacocca said, "In any kind of competition, the first thing you do is protect yourself." Our legal group has protected our efforts well, as exemplified by a recent major agreement in our favor settling a long-standing dispute with Eli Lilly and Company regarding a variety of patent and contract issues. This agreement, which should result in payments of $145 million, reinforces the value of our patents. We will continue to defend and enforce them, as we have recently by filing suits against other makers of recombinant growth hormone products. And we will continue to aggressively patent new technology. The efforts of our regulatory affairs team have helped secure an FDA advisory committee recommendation for approval for new labeling for Activase. We anticipate such approval in 1995, which would allow our sales force and marketing group to actively promote this drug's life-saving benefits as demonstrated by the GUSTO trial. This would translate into even higher market share than the present more than 70 percent and, most importantly, more lives saved from heart attack. As we strive to design clinical trials to meet the demands of regulatory authorities worldwide, this group's efforts become increasingly important. As will the efforts of our clinical and process scientists. We currently have five projects in Phase II and five in Phase III clinical trials, some of which are multinational. We're seekng key answers quickly to get important products to market fast. And to terminate projects whose potential has faded so we can redirect our resources to more promising opportunities. Health Care realities dictate that through clinical trials we demonstrate not only safety and effectiveness, but also value. Our clinical scientists are doing more than ever, and they're doing it very well. 6 18 To conduct clinical trials, we must develop manufacturing processes to produce large quantities of many different products simultaneously. Making increased quantities of a protein is not simple, particularly with cost-effectiveness as essential as it is today. Our process scientists use the same level of creativity and ingenuity as our discovery scientists use to discover new pharmaceuticals. When it opens this year, our new process science center will provide the same caliber of centralized facility and equipment as our Founders Research Center did in 1992. Our outstanding manufacturing team will also have new facilities, in Vacaville, California, as we expand in preparation for our new products. In 1995, our facilities and engineering group will break ground on this new manufacturing facility. This group has kept our facilities growth in step with corporate growth within a disciplined budget. Another group with key accomplishments in 1994 is business development. These employees identify areas where Genentech could best proceed in collaboration with external organizations, and they identify key technologies or products to which Genentech can gain access via collaboration. An example of their efforts in 1994 is the agreement with Scios Nova to develop a therapy for acute renal failure. In 1994, Genentech Europe Ltd. successfully launched Pulmozyme in four European countries. This group's efforts in 1995 will not only significantly increase Pulmozyme sales, but also coordinate clinical trials and develop new marketing plans for new indications and products for Europe. Our agreement with Roche to develop Pulmozyme in Europe helped bring that product to additional European countries. Our R&D agreements with Roche have already led to one joint development product - our orally active IIb/IIIa antagonist for treating cardiovascular disorders. Our U.S. sales and marketing groups have done a terrific job in 1994, as evidenced by our product sales increases. They achieved this success despite a critical environment in which our past practices have come under investigation. In light of the changing regulatory environment, we have provided these groups clear guidelines and contracts for acceptable practices. 7 19 We stand behind their efforts. They have done a vital job in bringing the benefits of our products to patients who need them. This is evident in the growing acceptance of Pulmozyme among the cystic fibrosis community. I'm confident their efforts in 1995 will be even more successful. I can say the same for all of our more than 2,700 employees, including those who work in human resources, information services, corporate communications and other important areas I didn't mention here. In 1994, we continued our efforts to ensure Genentech values the contributions of our diverse groups of employees and that our work environment brings out the best in each of them. As our employees' accomplishments in 1994 showed, their efforts are what ultimately bring value to Genentech stockholders. I'll continue to ensure Genentech's work environment is one that fully realizes and enhances that value. Finally, I'd like to thank Roche and all the other Genentech stockholders for your continued support. Thanks to your vision, our science is bringing innovative medicine to patients around the world. I'm confident we can all look forward to further growth. Sincerely, /s/ G. KIRK RAAB G. Kirk Raab 8 20 THE FUTURE IS SCIENCE [ART] AS IN THE PAST, GENENTECH'S FUTURE IS SCIENCE Since its founding in 1976, Genentech has rooted its success in excellent science. That strategy continues today. Excellent science sustains all stages of a product's journey from stimulating the mind of a scientist to meeting the needs of a patient. DISCOVERY RESEARCH That journey begins in discovery research. Here Genentech scientists focus their efforts on specific areas of medicine where the company has significant expertise and where room remains for important clinical advances. But Genentech also encourages its scientists to spend about 25 percent of their time on research of their own choosing, a source of some of Genentech's most important discoveries. This discretionary research time is part of a work environment designed to foster scientific excellence -- an environment that includes a liberal publication policy, frequent scientific seminars and top-quality laboratory facilities. Besides focusing on specific areas of medicine, Genentech researchers identify emerging technologies in which to develop an expertise in-house. This keeps the company at the forefront of biotechnology even as technology moves ever forward. And it leads to innovative products. Genentech's expertise in humanized monoclonal antibodies has led to the anti-HER2 and anti-1gE antibodies. An expertise in gene "knock out" technology lets Genentech scientists understand the effects of specific genes and how the proteins those genes produce -- or molecules that mimic them -- might function therapeutically. A mouse model deficient in nerve growth factor, for example, suggests this protein could 9 21 be useful in treating Alzheimer's disease. Genentech is also nurturing expertise in gene therapy and certain other key technologies. Genentech relies on research collaborations to access additional technologies of interest. In collaboration with Roche, for example, the company combines its expertise in biological molecules with Roche's expertise in orally active molecules. This collaboration has already led to one clinical development project targeting cardiovascular indications. PRECLINICAL AND CLINICAL DEVELOPMENT Genentech's discovery research has led to more potential products than the company has resources to develop. Genentech manages this fortunate dilemma with discipline, applying strict selection criteria to determine which projects to develop. The goal is to identify projects with the best potential to benefit patients and stockholders. Genentech will stop development if a project does not continue to meet these criteria. More projects wait in the wings. To realize the value of all promising research projects for stockholders, Genentech outlicenses those that do not meet selection criteria yet remain scientifically promising. Regulatory authorities require preclinical testing and three phases of human clinical trials of increasing complexity and cost to ulti- GENENTECH SELECTION CRITERIA FOR CLINICAL DEVELOPMENT Scientific Confidence Critical Medical Need Significant Market Opportunity Adequate Market Protection Reasonable Manufacturing Economics PART OF GENENTECH'S DISCOVERY RESEARCH STRATEGY IS TO IDENTIFY KEY EMERGING TECHNOLOGIES, SUCH AS GENE "KNOCK OUT" TECHNIQUES, FOR WHICH TO DEVELOP AN EXPERTISE IN-HOUSE. HERE A NEEDLE (RIGHT) INJECTS [ART] SPECIALIZED "STEM" CELLS MISSING A SPECIFIC GENE INTO AN HOURS-OLD MOUSE EMBRYO. MICE DESCENDED FROM AN EMBRYO INJECTED WITH STEM CELLS DEFICIENT IN NERVE GROWTH FACTOR SUGGESTED THAT NGF MAY BE USEFUL TO TREAT ALZHEIMER'S DISEASE. 10 22 Pat Burch began noticing tingling in his toes ten years ago. His symptoms of peripheral neuropathy related to diabetes have since progressed; he has lost most sensation in his toes. He is participat- ing in Genentech's Phase II trial of nerve growth factor in the hope it can return his sensation or stop or slow progression of the neuropathy. Designed to ask whether NGF is safe and effec- tive, the trial is ongoing at several U.S. medical centers. mately prove safety and efficacy. Recognizing that a shortcut can be the longest route. Genentech relies on information from preclinical experiments and Phase I trials to design comprehensive Phase II trials that can clearly demonstrate the efficacy of a drug, minimizing the risk of Phase III surprises. Done well, Phase II trials can provide "proof of concept" and data needed to design Phase III trials to answer the questions regulatory authorities ask. Clinical trials designed carefully and in closer collaboration with the FDA and other regulatory authorities allow Genentech to proceed from phase to phase of the process with confidence it will know definitively whether a drug works. If a drug does work, this approach can ultimately provide compelling proof of a drug's safety, efficacy and value, essential for both regulatory approvals and successful marketing. PROCESS SCIENCE AND MANUFACTURING Genentech scientists and engineers must determine how to make a drug in large quantities in a way that will provide pure, high-quality product at the lowest possible cost. Genentech's manufacturing processes today are far more sophisticated in scale, yield, efficacy and quality than the processes of 15 years ago. As Genentech strives for increasing cost-efficiency, this trend will continue. Toward that end, Genentech is constructing a new $62.5 million process science center to be completed in mid-1995. The center will gather in one modern facility scientists and engineers currently scattered on Genentech's campus. It 11 23 will provide equipment necessary to test and refine future manufacturing processes. The pay-off will be faster development of more economical manufacturing processes. In 1994, Genentech selected Vacaville, California as the site of a new manufacturing facility for products currently in its pipeline. A challenge will be to balance the capacity developed, with progress of clinical trials, ensuring adequate capacity to support late-stage clinical trials and the market, yet not investing in excess capacity that will remain idle. Well-designed clinical trials help give the answers needed to strike the right balance. SCIENCE BEYOND PRODUCT APPROVAL Once a product reaches the market, the need for excellent science continues. Clinical registry studies of Genetech's marketed products help these drugs meet their potential to help patients. Genentech continues research in the disease areas its products target through second-generation products that may offer further clinical advances. Science is an ongoing process. It is not merely an academic pursuit, but one that leads to improvements in human health. Science is the basis of Genentech's successful approach to business. SCIENCE ADDS VALUE EVEN AFTER A PRODUCT IS MARKETED. DR. SANDRA BLETHEN, ASSOCIATE PROFESSOR AT THE STATE UNIVERSITY OF NEW YORK, HAS BEEN INVOLVED IN GENENTECH'S NATIONAL COOPERATIVE GROWTH [PHOTO] STUDY SINCE IT STARTED IN 1985. "NCGS GIVES VALUABLE INFORMATION ON THE SAFETY AND EFFECTIVE- NESS OF GROWTH HORMONE TREATMENT," SHE SAID. "THE INFORMATION IT PRO- VIDES HELPS ME EVALUATE TREATMENT FOR MY GROWTH HORMONE PATIENTS." GENENTECH ALSO SUPPORTS REGISTRY STUDIES FOR ACTIVASE AND PULMOZYME. 12 24 GENENTECH MARKETS TODAY AND TOMORROW [ART] Genetech's five marketed products are driving the company's growth today. Even in a changing health care environment, if products provide true value, the company can scientifically demonstrate that medical and economic value to health care decision makers. Genentech's growth tomorrow will be driven on a global scale by the products in its pipeline today. HELPING HEALTH CARE PROFESSIONALS IMPROVE PATIENT CARE Genentech's commitment to improving medical care goes beyond selling a product. The company provides a variety of programs and services to ensure its medicines meet their full potential in enhancing patient care. Genentech helps ensure its products are available to all appropriate patients through programs that provide its medicines free to un- or underinsured patients in the United States who need but cannot afford them. Genentech markets five products to treat six serious medical conditions: - - Pulmozyme (dornose alfa) inhalation solution -- cystic fibrosis - - Activase (Alteplase, recombinant), a tissue-plasminogen activator -- acute myocardial infarction (heart attack), acute massive pulmonary embolism (blood clots in the lungs) - - Protropin (somatrem for injection) and Nutropin (somatropin [rDNA origin] for injection) growth hormones -- growth hormone inadequacy and growth failure due to chronic renal insufficiency (Nutropin only) - - Actimmune (interferon gamma-1b) -- chronic granulomatous disease 13 25 BREATHING EASIER PULMOZYME Genentech, Genentech Europe Ltd. or Roche have launched Pulmozyme for cystic fibrosis (CF) in 19 countries, together reaching much of the eligible worldwide patient population of this life-shortening disease. The challenge now is to make Pulmozyme available to all who need it so they can breathe more easily and spend less time in the hospital due to respiratory infections. Clinical data presented in 1994 re-affirmed Pulmozyme's benefits and enhanced its acceptance among CF patients and their doctors. The results of the Phase III trial in CF patients, on which Pulmozyme's approval was based, were reported in The New England Journal of Medicine. Data presented at a medical conference in October continue to suggest Pulmozyme is safe and effective. To continue to monitor safety and effectiveness, Genentech has created growing patient registry studies in the United States and Europe with more than 14,000 patients at 200 CF centers. These will help physicians optimize patient care through an increased understanding of the disease and its treatment. These studies are only part of Genentech's commitment to CF, distilled in the Pulmozyme Patient Pledge, which ensures all U.S. patients who need Pulmozyme wil receive it, and which commits Genentech to work toward a cure. Genentech's research with a second generation version of the drug may lead to a therapy with even greater clinical benefits than Pulmozyme. Through a collaboration with GenVec, Inc., a gene therapy company, Genentech is pursuing the technology that is the best hope for a cure for the life-shortening respiratory problems of CF. Because only when CF patients worldwide no longer have to struggle for breath can we all breathe easier. ELIZABETH LOBO OF ENGLAND WAS DIAGNOSED WITH CYSTIC FIBROSIS IN INFANCY. IT DID NOT SERIOUSLY LIMIT HER UNTIL YOUNG ADULTHOOD, WHEN INFECTIONS REQUIRING [PHOTO] HOSPITALIZATION CAME WITH INCREASING FREQUENCY. SHE BEGAN PULMOZYME THERAPY TWO YEARS AGO IN A CLINICAL TRIAL AND CONTINUES TODAY. "PULMOZYME HAS MADE A TREMENDOUS DIFFERENCE," SHE SAID. "I'D HATE TO BE WITHOUT IT." /X/ Launched by Genentech /X/ Launched by Roche /X/ Argentina /X/ Australia /X/ Austria /X/ Canada /X/ Denmark /X/ France /X/ Germany /X/ Greece /X/ Ireland /X/ Netherlands /X/ New Zealand /X/ Portugal /X/ South Africa /X/ Spain /X/ Sweden /X/ Switzerland /X/ UK /X/ US /X/ Uruguay 14 26 [PHOTO ART] 15 27 TIME MATTERS ACTIVASE In the treatment of heart attacks, time matters. In June 1994, a U.S. FDA advisory committee recommended that an accelerated infusion of Activase be cleared for marketing for the management of acute myocardial infarction (AMI), or heart attack. If approved, Activase's revised labeling would incorporate data from the worldwide GUSTO trial, which showed that accelerated Activase saves more lives than another clot-dissolving (thrombolytic) agent studied. Once Activase's labeling incorporates GUSTO's findings, Genentech will be able to promote them, so more physicians might apply this new, life-saving regimen. Since the GUSTO results were first reported in April 1993, Genentech's market share has risen from just under 50 percent to more than 70 percent. Ways to further improve heart attack treatment are to reduce time to treatment and identify all patients eligible for thrombolytic therapy. In 1994, the National Institute of Health issued guidelines to encourage hospitals to administer thrombolytic therapy more quickly and to more patients who could benefit. Genentech endorses these recommendations through its registry studies, which provide data on more than 350,000 heart attack patients supplied by 1,500 participating medical centers. By monitoring patient data, medical centers can enhance their approach to treatment. Genentech also supports education that encourages heart attack patients to seek treatment quickly. Genentech's commitment to improving heart attack treatment extends into the future. The company's second-generation t-PA, currently in Phase I trials, may be easier to administer, cause less bleeding, and -- toward an ever-desirable goal of heart attack treatment -- work faster. [PHOTO] NOW 67, BILL ROGERS OF PENNSYLVANIA HAD BYPASS SURGERY IN 1985 AFTER HIS FIRST HEART ATTACK. IN 1994, HE HAD ANOTHER HEART ATTACK. RECOGNIZING THE SYMPTOMS, HE HAD HIS WIFE RUSH HIM TO THE HOSPITAL, WHERE HE WAS QUICKLY TREATED WITH ACTIVASE. "I HAVE NO DOUBT IT SAVED MY LIFE," HE SAID. TODAY BILL IS BACK AT WORK AT HIS VARIETY STORE AND ENJOYING TIME WITH HIS FIVE CHILDREN AND EIGHT GRANDCHILDREN. 16 28 [PHOTO ART] 17 29 WAY TO GROW PROTROPIN/NUTROPIN Though in 1994 Genentech did not face additional competition in the human growth hormone (hGH) market, the company is prepared for competition in 1995. Some market loss will be inevitable. Yet Genentech intends to apply its many strengths to maintain leadership. These strengths stem from Genentech's commitment to helping physicians better understand human growth and development. The company's National Cooperative Growth Study has tracked more than 20,000 patients at more than 400 participating medical centers. It provides physicians data on product safety and helps them develop the best course of treatment for patients. Genentech is the only company to market hGH for two indications. It has also filed for approval to market a liquid hGH, which will provide a competitive advantage because it does not require reconstitution. Genentech is continuing clinical trials to treat Turner syndrome in girls with this genetic disorder affecting growth. It also supports patient education programs and an independent foundation that provides grants for researchers investigating human growth and development. Genentech is working to defend its hGH patent position, which was reaffirmed through a settlement in Genentech's favor with Eli Lilly and Company, maker of the only other hGH product on the U.S. market. Regardless of when additional competition enters the market, Genentech remains committed to helping improve the care of patients with growth disorders. That commitment will help ensure the continued success of its hGH products. BECAUSE OF CHRONIC RENAL INSUFFICIENCY, 7-YEAR OLD CASSANDRA DUKE OF ALABAMA DID NOT GROW LIKE OTHER CHILDREN HER AGE, EVEN THOUGH SHE WAS TALL -- 24 INCHES -- AS A BABY. SINCE SHE STARTED NUTROPIN [PHOTO] TREATMENT IN THE FALL OF 1994, SHE HAS GROWN ALMOST THREE INCHES. "NOW THAT SHE'S GROWING," SAID HER MOTHER, "CASSANDRA HAS A MUCH BETTER ATTITUDE ABOUT HERSELF AND HER ILLNESS." 18 30 [PHOTO ART] 19 31 STAYING HEALTHY ACTIMMUNE Staying healthy can be difficult for patients with chronic granulomatous disease [CGD]. This very rare inherited deficiency of the immune system leaves patients vulnerable to frequent and severe bacterial and fungal infections that often required hospitalization and can be fatal. Most of the approximately 400 CGD patients in the United States are children. Actimmune reduces approximately threefold the frequency of serious infections requiring hospitalization. Because of Actimmune, patients with CGD can come closer to achieving a goal most of us can take for granted; staying healthy. JEAN PAUL BINGHAM OF GEORGIA INHERITED CHRONIC GRANULOMATOUS DISEASE (CGD). IN HIS FIRST TWO YEARS OF LIFE, HE CONTRACTED FREQUENT [PHOTO] SEVERE INFECTIONS, SEV- ERAL REQUIRING SURGERY. AFTER FRUSTRATING MONTHS WITHOUT A DIAGNOSIS, HIS FAMILY RELOCATED FROM COSTA RICA TO THE UNITED STATES SO JEAN PAUL COULD HAVE ACCESS TO BETTER MEDICAL CARE. HE WAS DIAGNOSED AND PUT ON ACTIMMUNE. IN THE FIVE YEARS SINCE, JEAN PAUL, NOW 7, HAS BEEN HOSPITALIZED ONLY ONCE WITH INFECTIONS RELATED TO CGD. 20 32 MARKETING IN A CHANGING ENVIRONMENT [PHOTO] In a health care environment that focuses increasingly on cost, Genentech is working to demonstrate the value of its unique pharmaceuticals. In doing so, the company is targeting the changing customer audience of formulary managers and health benefits directors who are increasingly important in determining which drugs are available to patients. DEMONSTRATING VALUE STARTS WITH DEVELOPING VALUE Take Pulmozyme. By demonstrating in a Phase III clinical trial that this drug can reduce some other costs associated with cystic fibrosis treatment and that it improves patients' quality-of-life, Genentech was able to demonstrate the drug's value -- the positive ratio of its clinical benefits relative to its cost -- to health care providers, insurance companies and government reimbursement programs. As a result, the overwhelming majority of these medical providers make this important medicine available to patients who need it. 21 33 12-YEAR-OLD CYSTIC FIBROSIS PATIENT LINDSEY JENSEN MEETS WITH HER PHYSICIAN, DR. GREGORY SHAY, [PHOTO] AT KAISER PERMANENTE MEDICAL CARE PROGRAM. LINDSEY IS A LIFE-LONG MEMBER OF KAISER'S MANAGED CARE HEALTH PLAN, THROUGH WHICH SHE RECEIVES PULMOZYME TREATMENT. Genentech's registry programs for its marketed products continue to provide data to support the value of these products. As the company moves forward with clinical development of new products, wherever possible it will design clinical trials to show not only safety and efficiency, but also the value of these products. It will do so by providng data on cost-effectiveness -- whether it reduces the costs of other treatments, and how its overall cost compares to other widely accepted medical interventions. Of course, to demonstrate value requires a drug that truly brings significant medical value to patients -- exactly the kind of drug Genentech has always pursued, and exactly the kind that fills its pipeline today. - --GLOBAL OPPORTUNITIES Beginning with Pulmozyme, compared to Genentech's earlier products marketed mainly in the United States, the potential market for many products in Genentech's pipeline increases with the European and Japanese markets. In collaboration with Roche, Genentech Europe Ltd. is conducting an international Phase III clinical trial of Pulmozyme for chronic obstructive pulmonary disease (COPD) at 80 centers in Europe, where Genentech and Roche share marketing rights. The two companies are developing Pulmozyme for COPD in Japan. Through these collaborations, their combined clinical expertise will speed the process and enhance the opportunity for success, just as the collaboration to get Pulmozyme to market in Europe for CF did. 22 34 [Photo] ROBERT BITON (LEFT) OF GENENTECH'S MANAGED CARE GROUP REGULARLY MEETS WITH MANAGED CARE EXECUTIVES TO EVALUATE OUTCOMES DATA ON THE VALUE OF PHARMACEUTICALS. HERE HE MEETS WITH ANDY STERGACHIS, PH.D., (CENTER) DIRECTOR OF THE PROGRAM IN PHARMACEUTICAL OUTCOMES RESEARCH AND POLICY. UNIVERSITY OF WASHINGTON SCHOOL OF PHARMACY, AND PETE FULLERTON, PH.D., VICE PRESIDENT OF PHARMACY SERVICES AT KING COUNTY MEDICAL BLUE SHIELD. Drawing on recent international experience, Genentech is developing its anti-IgE and anti-HER2 antibodies in Europe. Genentech Europe Ltd. is currently planning clinical trials, with trials of the anti-HER2 antibody scheduled to begin in the first half of 1995. Roche and Genentech are developing the anti-IgE antibody in Japan. The poster inside the front cover of this report shows where Genentech retains international marketing rights for the products in its pipeline. The expertise Genentech is developing with Pulmozyme and the anti-IgE and anti-HER2 antibodies will serve the company well as it develops products for a global market, bringing the medical benefits of its unique products to patients around the world. [PHOTO] 56-YEAR-OLD BART BRAGGAAR OF THE NETHERLANDS HAS HAD ASTHMATIC BRONCHITIS SINCE EARLY CHILDHOOD. IN DECEMBER 1994, FOR THE FIRST TIME HE BECAME SERIOUSLY ILL WITH AN INFECTIOUS COMPLICATION OF HIS CONDITION THAT REQUIRED HOSPITALIZATION. WHILE HOSPITALIZED, HE PARTICIPATED IN GENENTECH'S INTERNATIONAL PHASE III TRIAL TESTING PULMOZYME TO TREAT PATIENTS WITH ACUTE INFECTIOUS EPISODES OF CHRONIC OBSTRUCTIVE PULMONARY DISEASE. 23 35 GENENTECH LEADERSHIP Genentech's six senior executives are all long-time employees of the company with other traits in common. They all left what were sure to be good careers with more traditional employers. They were lured by the excitement of recombinant DNA technology and its potential to help people, and by the opportunity to build functions and test new management ideas in an entrepreneurial environment. Without resorting to cumbersome, hierarchical management structures, they have all grown their functions with Genentech, growing themselves as well. They are each quick to credit their success to the skill and dedication of their people. And they all marvel at the talent, energy and enthusiasm they have found at Genentech. The expertise these six senior executives have developed in their areas and in managing Genentech's unique culture, combined with their ongoing entrepreneurial drive, will lead Genentech's success into the next century. 24 36 [PHOTO] RICHARD B. BREWER Senior Vice President U.S. Sales and Marketing, Genentech Europe Ltd., Genentech Canada, Inc. Dick Brewer began his career as a sales representative with Ives Laboratories and progressed steadily through several marketing and sales management positions, first at G.D. Searle and Co. and then, beginning in 1984, at Genentech, where he successfully led the effort to launch Protropin. Dick was named vice president of Marketing in 1989, vice president of Sales and Marketing in 1990 and senior vice president in 1993. He oversees the U.S. sales and marketing effort and all aspects of Genentech's Canadian and European operations. For 1995, he is focusing on the business success of these operations: "A priority for me is to ensure that our two businesses outside the United States -- Genentech Canada, Inc. and Genentech Europe Ltd. -- continue to move toward further commercial success. In both these businesses we will continue to build the necessary infrastructures to conduct clinical trials, obtain regulatory and reimbursement approval of new products, and effectively commercialize our products so we can expeditiously get new drugs to patients who need them in these parts of the world. Specific priorities for 1995 are to ensure continued success in commercializing Pulmozyme for cystic fibrosis in Europe and to continue progress with international clinical trials of Pulmozyme for chronic obstructive pulmonary disease, of our anti-HER2 antibody for breast cancer, and of our anti-1gE antibody for allergies and asthma. "For our U.S. sales and marketing operations, our number one job is to deliver the revenues. While that's very clear, an equally important priority is to ensure we do so while keeping within appropriate regulations and guidelines and our own strict policies and controls. The world of pharmaceutical sales and marketing is changing, and I'll continue to ensure we're changing with it, proactively. Key to doing so successfully while keeping employees motivated is to provide very clear guidelines to our sales and marketing staff so they are empowered to bring in sales as they continue to operate within all applicable regulations. We are making very clear to them not only what they cannot do, but also what they can do, to effectively market our products." 25 37 LOUIS J. LAVIGNE, JR. [PHOTO] Senior Vice President and Chief Financial Officer Treasury, Controllers, Information Systems, Investor Relations, Planning and Purchasing Lou Lavigne's penchant for planning became apparent after he was named controller in 1983, a year after he joined the company from Pennwalt Corporation. Though Genentech had income of about $1 million, to be ready for growth he built the company's financial functions by hiring people with expertise at large companies. Most of them now make up Genentech's financial management team and draw on that experience daily. Since named vice president in 1986 and chief financial officer in 1988, and then senior vice president in 1994, this operations-oriented CFO has focused on strategic corporate planning. For 1995, he has a clear strategy: "Our financial strategy consists of four major elements, best described as principles of disciplined growth leading to increased stockholder value. They are: 1. Achieve strong top- and bottom-line growth; 2. Increase the percentage of revenues to the bottom line through tight management of expenses; 3. Enhance financial strength paced with growth; and 4. Increase returns to our stockholders. "An example of our disciplined growth is R&D expenses. These are signficant ($314.3 million in 1994) and will continue to grow because of increasing numbers of potential projects in later stages of clinical trials. But as revenues grow, our percentage of R&D investment relative to revenues will decline. We will not lose discipline in controlling expenditures, even in this key area, just because revenues are increasing. At the same time, we will moderate the percentage of revenues spent in marketing, general and administrative expenses, further improving the bottom line. But we will invest adequately for continued growth. It's through investments today that we'll bring value to stockholders in the future. "A challenge for Genentech in 1995 is to make our overall strategy for growth clear to the investment community. Out job is unchanged: It's up to us to manage the company for profitable growth. That will benefit all stockholders." 26 38 [PHOTO] ARTHUR D. LEVINSON, PH.D. Senior Vice President and Staff Scientist Research, Preclinical Development, Medical Affairs, Product Development Since joining Genentech in 1980, Art Levinson outgrew several research positions before becoming vice president of Research Technology in 1989, of Research in 1990, and then senior vice president in 1993. Most pipeline projects today come from research under his watch. He is driven by a need to know the answers science can provide and the knowledge that those answers could help people. In 1995, he is focusing on maintaining that drive in all Genentech scientists: "By all measures, Genentech scientists are extremely productive. Given their qualifications, dedication and drive, that's not surprising. But we can't get complacent. I put a lot of effort into keeping motivational levels high, reflecting my belief that the productivity of a research organization is a function of the motivation and creativity of individual scientists. Creativity is a rare commodity to be nourished and prized. "Because our discovery scientists are so productive, we don't have resources to develop all their good projects ourselves, which could be demotivating. But we've been clear in communicating our criteria for development. We're fostering a culture where the scientists recognize when a project won't meet those criteria. Those exceptional projects that we can't develop internally, we outlicense, which the scientists recognize as the success it is. When we drop a project, they know that it's their responsibility -- not management's -- to identify new opportunities. "Keeping a clear focus and working with new technologies also helps motivational levels. Each year we evaluate emerging technologies and identify those for which we should develop an expertise in-house. We choose those that can help us make discoveries in our areas of focus. Or we may collaborate with companies that have technology of potential future value. Biotechnology today is different than five years ago, and it will be different still in five years. Given our scientific staff and expertise in key areas, we'll continue to define this evolution." 27 39 JOHN P. MCLAUGHLIN [PHOTO] Senior Vice President and Secretary Legal, Business Development, Corporate Communications, Government Affairs Early in his career, while working in Congress, John McLaughlin drafted the U.S. Orphan Drug law giving pharmaceutical companies incentives to develop drugs targeting small patient populations -- a law that has benefited many patients who use Genentech products. Later, John left private law practice to join Genentech as vice president of Government Affairs in 1987. He opened the company's Government Affairs office in Washington, D.C., and spent his first few months on a team working with the FDA to secure approval for Activase. He moved to California in 1989 when he was named vice president, general counsel and secretary. In 1993 he became senior vice president. For 1995, John is focusing on maximizing commercial opportunities for Genentech through productive relationships and by protecting intellectual property rights: "Hard realities are forcing a retrenchment in the biotechnology industry. This creates opportunities for collaborations. We want to make sure Genentech is well positioned to collaborate on medically important products. A priority for me in 1995 is to identify opportunities where there's a fit for Genentech and where we can bring to bear some of our resources -- our strength in science, in development and manufacturing, our financial resources -- to pursue these great opportunities toward marketed products, to the benefit of both patients and stockholders. "Genentech has an enviable product portfolio. And our legal group works hard and successfully to ensure our innovative science is protected by the patent system. The recent settlement with Lilly demonstrates the value of these efforts. In 1995, we will continue to defend and build on our patent portfolio to maximize the commercial potential of our product pipeline. "Not all of the projects coming out of research -- our own or our collaborators -- will make it into or through our development pipeline. Another priority for 1995 is to ensure we realize the value of projects that don't meet our development criteria, but that are still promising, through outlicensing agreements with other companies. Again this will benefit both patients and our stockholders. "We've always been proud of all we accomplish at Genentech. But not so proud to think that we can do it all. Productive relationships add tremendous value to our efforts." 28 40 [PHOTO] BARRY M. SHERMAN, M.D. Senior Vice President and Chief Medical Officer Clinical Research and Development, Biostatistics, Drug Safety and Post-marketing Programs When Barry Sherman joined Genentech in 1985 as director of clinical research from the University of Iowa College of Medicine, the company had few projects in the clinic. Today it has about a dozen, with several in overlapping stages. Named vice president of Medical Affairs in 1989 and senior vice president in 1995, Barry believes the wider impact his efforts at Genentech have on human health more than make up for the fact that he is no longer involved in direct patient care. Barry's responsibilities include all aspects of clinical development and medical issues related to marketed products. His project goals for 1995 are outlined on the poster inside this report. He also has overarching goals that relate to asking the right questions: "With several projects moving simultaneously through the clinic, we have to design trials to help focus our efforts. You can't always expect positive results from clinical trials. Our goal isn't to execute a trial to show that a drug will work, although we hope it will. Our goal is to conduct a trial to show whether or not a drug is safe and will work. And to do so early, in smaller, Phase II trials, rather than in large, expensive Phase III trials. This lets us make intelligent stop-or-go decisions before we've invested heavily. And it minimizes the chance of unexpected results from Phase III trials. "To design trials that will give the right answers, we emphasize early planning. If we understand the disease we're investigating, we can target the right clinical endpoints --what we're going to measure and what kinds of changes we're going to look for. In this endeavor, if the first few questions you ask aren't the right ones, asking more later is costly in terms of both dollars and health. "We collaborate with regulatory agencies throughout clinical development to make sure we'll provide the answers they need. Choosing the right clinical endpoints in Phase II and Phase III trials is essential to definitively prove safety and efficacy. Now that our drug development is international, we need to be certain our trials are consistent with medical and regulatory thinking in other countries. "Unless we're incredibly lucky, all the projects in our pipeline won't make it to market. We're managing product development so we'll always focus on those most likely to get to market, and so that we'll get them to patients as quickly as possible." 29 41 WILLIAM D. YOUNG [PHOTO] Senior Vice President Manufacturing, Process Science, Quality, Regulatory Affairs, Engineering & Facilities In 1980, after collaborating with Genentech to manufacture human insulin for Eli Lilly and Company, Bill Young came to Genentech as director of Manufacturing. His first projects were the manufacture of growth hormone and, a couple years later, of Activase. The success of these projects provided enough product to supply fast clinical trial schedules and, upon approval, patients who needed the drugs. These projects stamped a pattern Genentech's manufacturing group would follow with product after product. In 1983, Bill became vice president of manufacturing and process science, and in 1988 was promoted to senior vice president. For 1995, he's seeking balance: "With our new location for manufacturing expansion identified, our challenge is to increase manufacturing capacity in a way that keeps one eye on clinical progress, yet can make enough of each pipeline product as needed. We'll work closely with Medical Affairs to strike the right balance. In the shorter term, during 1995, we'll have several projects in Phase III clinical trials that we'll need to manufacture on a commercial scale. We're developing that capability in existing facilities now. For those projects not as far along, we need to develop processes to make large amounts of product at low cost by continually exploring and applying new technology. As always, ensuring high quality will be a priority. "I have two main goals for regulatory affairs. First: Develop a relationship with the FDA regarding sales and marketing efforts that's as good as the one we have regarding product development. We've evolved our efforts with the FDA's changing approach to monitoring pharmaceutical promotional practices. We'll continue to do so, in productive dialogue with the FDA. Second: Assure that Regulatory Affairs becomes globally integrated in its thinking, decisions and actions with respect to product development. Again there's a balance to strike: We must ensure we don't let one country's differing requirements slow an entire project. "We're managing several projects at once, many globally. In all areas we'll continue to look for ways to reduce development time. We'll strive to balance the needs of each project to keep them all on track." 30 42 GENENTECH FINANCIALS
Financial Overview 32 Management's Discussion and Analysis 33 Report of Management 39 Consolidated Statements of Income 40 Consolidatd Statements of Cash Flows 41 Consolidated Balance Sheets 42 Consolidated Statements of Stockholders' Equity 43 Notes to Consolidated Financial Statements 44 Report of Ernst & Young LLP, Independent Auditors 61 Quarterly Financial Data 61 11-Year Financial Summary 62 Stock and Stockholder Information 64
31 43 FINANCIAL OVERVIEW REVENUES (millions) [INSERT GRAPH] PRODUCT SALES ARE DRIVING THE INCREASE IN GENENTECH REVENUES. RESEARCH & DEVELOPMENT EXPENSES (millions) [INSERT GRAPH] RESEARCH AND DEVELOPMENT INVESTMENT IS SHOWING BENEFIT ON REVENUES LINE. REVENUES PER EMPLOYEE (thousands) [INSERT GRAPH] REVENUES PER EMPLOYEE ARE INCREASING DUE TO CAREFUL MANAGEMENT OF HEADCOUNT GROWTH AS REVENUES INCREASE. NET INCOME (millions) [INSERT GRAPH] NET INCOME AS A PERCENT OF REVENUES (4% IN 1992, 9% IN 1993, AND 10% IN 1994) IS INCREASING DUE TO CAREFUL MANAGEMENT OF EXPENSE GROWTH AS REVENUES INCREASE. 32 44 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (dollars in millions, except per share amounts) OVERVIEW Genentech, Inc. (the Company) is an international biotechnology company that discovers, develops, manufactures and markets human pharmaceuticals for significant medical needs. The science of biotechnological product discovery and development is at the core of the Company's business and has led to ten of the approved human pharmaceutical products of biotechnology. The Company manufactures and markets five of these products directly and receives royalties from the sales of five products which have originated from the Company's technology. RESULTS OF OPERATIONS
Annual % Change REVENUES 1994 1993 1992 94/93 93/92 ______________________________________________________________________________ Revenues $ 795.4 $ 649.7 $ 544.3 22% 19%
Revenues have increased in each year since the Company's inception. The increase in 1994 revenues resulted primarily from higher product sales. The increase in 1993 revenues resulted primarily from higher product sales, royalty income and contract revenues.
Annual % Change PRODUCT SALES 1994 1993 1992 94/93 93/92 ______________________________________________________________________________ Activase $ 280.9 $ 236.3 $ 182.2 19% 30% Protropin and Nutropin 225.4 216.8 205.9 4 5 Pulmozyme 88.3 - - - - Actimmune 6.4 4.3 2.9 49 48 ____________________________________________________________ Total product sales $ 601.0 $ 457.4 $ 391.0 31% 17% % of revenues 76% 70% 72%
Activase The increase in Activase,(R) sales in 1994 and 1993 is attributable to an increase in the number of patients being treated with Activase as a result of the completion of the worldwide Global Utilization of Streptokinase and Activase for occluded coronary arteries (GUSTO) clinical trial and the reporting of its results in 1993. During 1994, Activase market share increased to over 70% from approximately 66% and 50% in 1993 and 1992, respectively, in the United States. Protropin and Nutropin Net sales of Protropin,(R) and Nutropin,(R) continued to increase in 1994 due primarily to the introduction of Nutropin for the treatment of chronic renal insufficiency and to more growth hormone inadequate patients starting treatment. The Company has not faced new competition in the growth hormone market, although this possibility exists for 1995. If additional competitors enter the growth hormone market, the Company expects that such competition will have an adverse effect on its sales of Protropin and Nutropin which, depending on the extent and type of competition, could be material to the Company's total growth hormone sales. Factors that may influence future Protropin and Nutropin sales include: the number and market entry dates of new competitive products and their effect on the Company's market share and pricing; the availability of third party reimbursement for the costs of such therapies; and the outcome of litigation involving the Company's patents for growth hormone and related processes. 33 45 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Pulmozyme Pulmozyme,(R) was launched during 1994 in the United States, Canada and certain European countries. In 1994, sales totaled $88.3 million. In 1995, as approvals for marketing the product in other European countries are received, and a full year of sales is achieved in countries in which Pulmozyme sales began in 1994, the Company expects sales to grow. Other factors that may influence future sales of Pulmozyme for the management of cystic fibrosis include: the number and kinds of patients benefiting from such therapy; the availability of third party reimbursement for the costs of such therapies, physicians' personal experiences in the use and results of the therapy; the development of alternate therapies for the treatment and cure of cystic fibrosis; the development of additional indications for using Pulmozyme; and the cost of Pulmozyme therapy. To protect the Company from adverse changes in foreign currency exchange rates, the Company has purchased simple put options to hedge anticipated non-dollar denominated revenue. All options mature within one year. See Note 6 in the "Notes to Consolidated Financial Statements" for further information. Actimmune Actimmune,(R) sales increased in 1994 and 1993 primarily due to the sales of interferon gamma to licensee Boehringer Ingelheim International GmbH, which has approval to market interferon gamma in several countries in its licensed territory.
Annual % Change ROYALTIES, CONTRACT AND _________________ OTHER, AND INTEREST INCOME 1994 1993 1992 94/93 93/92 __________________________________________________________________________________ Royalties $ 126.0 $ 112.9 $ 91.7 12% 23% Contract and other 25.6 37.9 16.7 (32) 127 Interest income 42.7 41.5 44.9 3 (8)
The Company receives royalty payments from the sales of various human health care products. These payments have increased in each of the past three years primarily due to increases in product sales by the Company's licensees. In 1994, the largest dollar increase was attributable to royalties earned from the sales of recombinant human insulin. In 1993, the largest dollar increase was attributable to hepatitis B vaccine royalties. Cash flows from royalty income include non-dollar denominated revenues. The Company currently purchases simple foreign currency put options to hedge these cash flows, all of which expire within the next two years. Royalty expense obligations associated with these revenues are included in marketing, general and administrative expenses. In December 1994, the Company and Eli Lilly and Company (Lilly) reached an agreement regarding all patent infringement and contract actions between the two parties, which included the Company granting to Lilly licenses, options to license, or immunities from suit for certain of the Company's patents. Future payments are required from Lilly on sales of these products. See Note 12 in the "Notes to Consolidated Financial Statements" for further information. Contract revenues in 1993 included $18.2 million related to fixed license fees receivable through 1996 from Schering Corporation and its affiliates for a world-wide license to certain patented technology and processes used to produce recombinant interferon alpha. Contract and other revenues will continue to fluctuate due to variations in the timing of contract benchmark achievements, the initiation of new contractual arrangements, and the conclusion of existing arrangements. Interest income was slightly higher in 1994 due to a larger investment portfolio in 1994 more than offsetting the decline in the average portfolio yield. Similarly, interest income was lower in 1993 compared to 1992 primarily due to the lower average portfolio yield in 1993. 34 46 The Company enters into interest rate swaps as part of its overall strategy of managing the duration of its investment portfolio. See Note 6 in the "Notes to Consolidated Financial Statements" for further information. Due to the approximately two-year effective average duration of the portfolio, which includes the impact of the swaps, the average yield on the portfolio in any one year is primarily a function of financial instruments purchased in prior years. The average portfolio yield decline in 1993 and 1994 reflected the generally continuous decline in interest rates between 1990 and the first quarter of 1994. As discussed in Note 6, during 1994, the Company terminated certain swaps which resulted in an unamortized loss of $6.2 million being recorded at December 31, 1994. The amortization of these losses over the next four years will reduce yields during those years.
Annual % Change ___________________ COSTS AND EXPENSES 1994 1993 1992 94/93 93/92 __________________________________________________________________________________ Cost of sales $ 95.8 $ 70.5 $ 66.8 36% 6% Research and development 314.3 299.4 278.6 5 7 Marketing, general and administrative 248.6 214.4 172.5 16 24 Interest expense 7.1 6.5 4.4 9 48 ____________________________________________________________ Total costs and expenses $665.8 $ 590.8 $ 522.3 13% 13% % of revenues 84% 91% 96% Cost of sales as % of product sales 16% 15% 17% R&D as % of revenues 40 46 51 MG&A as % of revenues 31 33 32
Cost of Sales Cost of sales increased in 1994 and 1993 primarily due to increased product sales and provisions for inventory obsolescence. Research and Development The increase in R&D expenses in 1994 and 1993 reflects the Company's continued commitment to developing new products and new indications for existing products. Overall increases resulted from the higher level of activity and associated costs of products in the later stages of clinical trials and the manufacture of products for clinical trials. As a percentage of revenues, research and development has declined over the last three years due to increasing revenues combined with the Company's disciplined approach to its research and development investment. The Company now has 12 products in the clinic and two products in preclinical development. At the end of 1993 the Company had nine products in the clinic and four products in preclinical development. To gain additional access to potential new products and technologies, the Company has established research collaborations, including equity investments, with companies developing technologies that fall outside the Company's research focus and with companies having the potential to generate new products through technology exchanges and investments. The Company has also entered into product-specific collaborations to acquire development and marketing rights for products. In December 1994, the Company entered into a collaboration with Scios Nova Inc. (Scios Nova) for the U.S. and Canadian development of Scios Nova's Auriculin,(R) (anaritide) for the treatment of acute renal failure, which is currently in Phase III clinical trials. See Note 2 in the "Notes to Consolidated Financial Statements" for a further description of this collaboration. 35 47 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Marketing, General and Administrative: Marketing, general and administrative expenses increased in 1994 primarily due to the launch of Pulmozyme in Europe and higher corporate expenses, including litigation related expenses, and $12.6 million in charges due to the write-down of marketable equity securities of several of the biotechnology companies that are strategic alliance partners of the Company. The declines in the fair value of such securities were considered other than temporary. The increase in 1993 compared to 1992 was primarily due to additional Activase marketing expenses, Pulmozyme marketing costs in preparation for the anticipated U.S. and European product launches in 1994, and increased growth hormone marketing expenses in anticipation of future competition. Interest expense in 1994, 1993 and 1992, net of amounts capitalized, relates primarily to interest on the Company's 5% convertible subordinated debentures.
INCOME BEFORE TAXES AND INCOME TAXES 1994 1993 1992 _____________________________________________________________________________ Income before taxes $ 129.6 $ 58.9 $ 21.9 Income tax provision 5.2 - 1.1 Effective tax rate 4% - 5% Deferred tax assets less deferred tax liabilities $ 118.6 $ 123.0 $ 132.8 Valuation allowance 84.4 123.0 132.8 ________________________________ Total net deferred taxes $ 34.2 $ - $ - ================================
Approximately $26 million of the valuation allowance at December 31, 1994, reflected above relates to the tax benefits of stock option deductions which will be credited to additional paid-in capital when realized. Realization of the net deferred taxes, future effective tax rates, and future reversals of the valuation allowance (that is, recognition of deferred tax assets) depend on future earnings from existing and new products and new indications for existing products. The timing and amount of future earnings will depend on continued success in marketing and sales of the Company's current products, scientific success, results of clinical trials and regulatory approval of products under development. The net increase in the effective tax rate from 1993 to 1994 was primarily related to limitations on the utilization of existing carryforwards related to the U.S. alternative minimum tax. Expected increases in future effective tax rates are also attributable to these limitations. Additionally, possible changes in tax legislation could affect the Company's effective tax rate. Based on current projections, the Company estimates its 1995 effective tax rate to be around 15%.
Annual % Change NET INCOME 1994 1993 1992 94/93 93/92 _______________________________________________________________________________ Net income $124.4 $ 58.9 $ 20.8 111% 183% Net income per share 1.04 0.50 0.18 Net income as a % of revenue 16% 9% 4%
36 48 Net income as a percent of revenue has increased each year as careful expense management, particularly R&D expense management, has allowed an increasing proportion of revenues to flow to net income. Earnings in 1995 will depend on a continuation of the positive impact of the GUSTO trial results on Activase sales, sales of Pulmozyme, Protropin and Nutropin competition, and the level of costs and expenses.
LIQUIDITY AND CAPITAL RESOURCES 1994 1993 1992 _______________________________________________________________________________ Cash, cash equivalents, short-term investments and long-term marketable debt and equity securities $ 920.9 $ 719.8 $ 646.9 Working capital 776.6 694.6 447.0 Cash provided by (used in): Operating activities 200.4 114.5 36.0 Investing activities (322.3) (121.3) (126.4) Financing activities 71.2 49.9 35.6 Capital expenditures (included in investing activities above) $ (82.8) $ (87.5) $(126.0) Current ratio 4.5:1 4.6:1 4.3:1
Cash generated from operating activities was used to purchase short-term investments, long-term marketable securities, and property, plant and equipment, increasing the amount of cash used in investing activities. Cash provided by financing activities increased from the issuance of redeemable common stock under employee stock plans and the exercise of warrants. Capital expenditures in 1994 include costs incurred for additional manufacturing facilities and the addition of a central process utility plant. Capital expenditures decreased in 1993 as compared to 1992 primarily due to completing construction in 1992 of the Founders Research Center, a state-of- the-art facility housing many of the Company's research activities, and substantially completing in 1992 new manufacturing facilities for Pulmozyme. PROSPECTIVE INFORMATION Market Potential/Risk Over the longer term, the Company's (and its partners') ability to successfully market current products, expand their usage, and bring new products to the marketplace will depend on many factors, including 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, Orphan Drug Act legislation, the possible future enactments of biotechnology product protection in the United States as well as in Europe and Japan, and the outcome in the United States of potential health care reform legislation. The Company believes it has strong patent protection or the potential for strong patent protection for a number of its products that generate royalty revenue or that the Company is developing; however, the courts will determine the ultimate strength of patent protection of the Company's products and those on which the Company earns royalties. A product that has received an Orphan Drug designation for a specific indication, when approved, will be protected from FDA approval of similar products for similar indications during the first seven years of product sales in the United States. Loss of Orphan Drug Act protection for the Company's products that are currently marketed or in development, resulting from expiration of Orphan Drug status or amendment of the Orphan Drug Act, could lead to increased competition for those products and potentially lower future product revenues. 37 49 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Roche Holdings, Inc. At December 31, 1994, the Company was 65% owned by Roche Holdings, Inc. (Roche). See Note 9 in the "Notes to Consolidated Financial Statements" for further information. Foreign Exchange The Company receives revenues from countries throughout the world. As a result, risk exists that revenues may be impacted by changes in the exchange rates between the U.S. dollar and foreign currencies. To mitigate this risk, the Company hedges certain of these revenues as discussed in Note 6 in the "Notes to Consolidated Financial Statements." Legal Proceedings The Company is a party to various legal proceedings. See Note 12 in the "Notes to Consolidated Financial Statements" for further information. General The Company believes that its cash, cash equivalents, and short-term and long-term investments, together with funds provided by operations and leasing arrangements, will be sufficient to meet its operating cash requirements, including capital expenditures and the development of existing and new products through internal research and development activities, product in-licensing, research collaborations, equity investments and geographic expansion. 38 50 REPORT OF MANAGEMENT Genentech, Inc. is responsible for the preparation, integrity and fair presentation of its published financial statements. The Company has prepared the financial statements, presented on pages 33 to 60, in accordance with generally accepted accounting principles. As such, the statements include amounts based on judgments and estimates made by management. The Company also prepared the other information included in the annual report and is responsible for its accuracy and consistency with the financial statements. The financial statements have been audited by the independent auditing firm, Ernst & Young LLP, which was given unrestricted access to all financial records and related data, including minutes of all meetings of stockholders, the Board of Directors and committees of the Board. The Company believes that all representations made to the independent auditors during their audit were valid and appropriate. Ernst & Young LLP's audit report appears on page 61. Systems of internal accounting controls, applied by operating and financial management, are designed to provide reasonable assurance as to the integrity and reliability of the financial statements and reasonable, but not absolute, assurance that assets are safeguarded from unauthorized use or disposition, and that transactions are recorded according to management's policies and procedures. The Company continually reviews and modifies these systems, where appropriate, to maintain such assurance. Through the Company's audit activities, the adequacy and effectiveness of the systems and controls are reviewed and the resultant findings to management and the Audit Committee of the Board of Directors. The selection of Ernst & Young LLP as the Company's independent auditors has been approved by the Company's Board of Directors and ratified by the stockholders. An Audit Committee of the Board of Directors, composed of four non-management directors, meets regularly with, and reviews the activities of, corporate financial management, the general audit function and the independent auditors to ascertain that each is properly discharging its responsibilities. The independent auditors separately meet with the Audit Committee, with and without management present, to discuss the results of their work, the adequacy of internal accounting controls and the quality of financial reporting. /s/ G. KIRK RAAB /s/ LOUIS J. LAVIGNE, JR. /s/ BRADFORD S. GOODWIN - ------------------- ------------------------- ----------------------- G. Kirk Raab Louis J. Lavigne, Jr. Bradford S. Goodwin President and Chief Senior Vice President and Vice President and Executive Officer Chief Financial Officer Controller 39 51 CONSOLIDATED STATEMENTS OF INCOME (thousands, except per share amounts)
YEAR ENDED DECEMBER 31 1994 1993 1992 ________________________________________________________________________________ Revenues Product sales $ 601,064 $ 457,360 $ 390,975 Royalties (including amounts from related parties: 1994-$8,454; 1993-$5,488; 1992-$5,378) 126,022 112,872 91,682 Contract and other (including amounts from related parties: 1994-$17,106; 1993-$8,869; 1992-$7,234) 25,556 37,957 16,727 Interest 42,748 41,560 44,881 ___________________________________ Total revenues 795,390 649,749 544,265 Costs and expenses Cost of sales 95,829 70,514 66,824 Research and development (including contract related: 1994-$7,584; 1993-$4,235; 1992-$8,468) 314,322 299,396 278,615 Marketing, general and administrative 248,604 214,410 172,486 Interest 7,058 6,527 4,406 ___________________________________ Total costs and expenses 665,813 590,847 522,331 Income before taxes 129,577 58,902 21,934 Income tax provision 5,183 -- 1,097 ___________________________________ Net income $ 124,394 $ 58,902 $ 20,837 =================================== Net income per share $ 1.04 $ .50 $ .18 =================================== Weighted average number of shares used in computing per share amounts 119,465 117,106 113,992 ===================================
See notes to consolidated financial statements. 40 52 CONSOLIDATED STATEMENTS OF CASH FLOWS (thousands)
Increase (Decrease) in Cash and Cash Equivalents YEAR ENDED DECEMBER 31 1994 1993 1992 _______________________________________________________________________________________ Cash flows from operating activities: Net income $ 124,394 $ 58,902 $ 20,837 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 53,452 44,003 52,170 Gain on sale of equity investments - - (3,946) Reserve for long-term assets 748 600 2,275 Loss on fixed asset dispositions 5,510 1,652 410 Write-down of available-for-sale securities 12,590 - - Deferred income taxes (34,193) - - Changes in assets and liabilities: Receivables and other current assets (16,571) (20,212) (43,843) Inventories (18,475) (19,410) (9,141) Accounts payable, other current liabilities and other long-term liabilities 72,901 48,995 17,251 _____________________________________ Net cash provided by operating activities 200,356 114,530 36,013 Cash flows from investing activities: Purchases of securities held-to-maturity (1,088,737) (564,855) (533,808) Proceeds from maturities of securities held-to-maturity 877,139 535,089 547,250 Purchases of securities available-for-sale (22,644) (8,222) - Purchases of non-marketable equity securities (4,000) - (6,009) Capital expenditures (82,837) (87,461) (126,049) Proceeds from sale of fixed assets - 26,316 2,004 Change in other assets (1,198) (22,181) (9,768) _____________________________________ Net cash used in investing activities (322,277) (121,314) (126,380) Cash flows from financing activities: Stock issuances 71,955 50,582 36,782 Reduction in long-term debt, including current portion (794) (721) (1,171) _____________________________________ Net cash provided by financing activities 71,161 49,861 35,611 _____________________________________ Increase (decrease) in cash and cash equivalents (50,760) 43,077 (54,756) Cash and cash equivalents at beginning of year 117,473 74,396 129,152 _____________________________________ Cash and cash equivalents at end of year $ 66,713 $ 117,473 $ 74,396 ===================================== Supplemental cash flow data: Cash paid during the year for: Interest, net of portion capitalized $ 7,058 $ 6,527 $ 4,406 Income taxes 4,099 2,194 1,002
Non-cash activity: In 1994, income tax benefits realized from employee stock option exercises of $26,038 were recorded as an increase in stockholders' equity. See notes to consolidated financial statements. 41 53 CONSOLIDATED BALANCE SHEETS (dollars in thousands)
DECEMBER 31 1994 1993 ______________________________________________________________________________ ASSETS: Current assets: Cash and cash equivalents $ 66,713 $ 117,473 Short-term investments 652,461 539,638 Accounts receivable (including amounts from a related party: 1994-$13,184;1993-$10,259; less allowances of: 1994-$4,422;1993-$3,572) 146,267 130,469 Inventories 103,200 84,725 Prepaid expenses and other current assets 28,475 13,032 ___________________________ Total current assets 997,116 885,337 Long-term marketable securities 201,726 62,657 Property, plant and equipment, at cost: Land 55,998 49,939 Buildings 245,871 245,923 Equipment 331,392 300,396 Leasehold improvements 11,988 12,535 Construction in progress 55,299 14,893 ____________________________ 700,548 623,686 Less: accumulated depreciation 215,255 166,954 ____________________________ Net property, plant and equipment 485,293 456,732 Other assets 60,989 64,074 ____________________________ Total assets $ 1,745,124 $ 1,468,800 ============================ LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Accounts payable $ 30,963 $ 30,265 Accrued compensation 36,939 32,639 Accrued interest 5,685 5,708 Accrued royalties 25,864 18,889 Accrued marketing and promotion costs 27,463 19,942 Accrued clinical and other studies 36,277 23,324 Income taxes payable 17,839 1,921 Other accrued liabilities 38,598 57,267 Current portion of long-term debt 871 793 ____________________________ Total current liabilities 220,499 190,748 Long-term debt 150,358 151,230 Other long-term liabilities 25,483 10,017 ____________________________ Total liabilities 396,340 351,995 Commitments and contingencies Stockholders' equity: Preferred stock, $.02 par value; authorized 100,000,000 shares, none issued - - Redeemable common stock, $.02 par value; authorized 100,000,000 shares, outstanding: 1994-50,105,925;1993-47,690,108 1,002 954 Common stock, $.02 par value; authorized 200,000,000 shares, outstanding: 1994 and 1993-67,133,409 1,343 1,343 Additional paid-in capital 1,207,720 1,070,121 Retained earnings (since October 1, 1987 quasi-reorganization in which a deficit of $329,457 was eliminated) 129,127 44,387 Net unrealized gain on securities available-for-sale 9,592 - ____________________________ Total stockholders' equity 1,348,784 1,116,805 ____________________________ Total liabilities and stockholders' equity $ 1,745,124 $ 1,468,800 ============================
See notes to consolidated financial statements. 42 54 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (thousands)
Redeemable Common Stock Common Stock Retained Net Total _____________ _____________ Additional Earnings Unrealized Stock- Par Par Paid-In (Accumulated Gain On holders' Shares Value Shares Value Capital Deficit) Securities Equity __________________________________________________________________________________________________________ Balance January 1, 1992 44,165 $ 883 67,133 $1,343 $ 954,755 $ (7,279) - $ 949,702 Issuance of stock upon exercise of options and warrants 989 20 - - 25,094 - - 25,114 Issuance of stock under employee stock plans 590 12 - - 11,656 - - 11,668 Net income - - - - - 20,837 - 20,837 Tax benefits arising prior to quasi-reorganization - - - - 7,457 (7,457) - - ______________________________________________________________________________ Balance December 31,1992 45,744 915 67,133 1,343 998,962 6,101 - 1,007,321 Issuance of stock upon exercise of options and warrants 1,385 28 - - 37,125 - - 37,153 Issuance of stock under employee stock plans 561 11 - - 13,418 - - 13,429 Net income - - - - - 58,902 - 58,902 Tax benefits arising prior to quasi-reorganization - - - - 20,616 (20,616) - - ______________________________________________________________________________ Balance December 31,1993 47,690 954 67,133 1,343 1,070,121 44,387 - 1,116,805 Issuance of stock upon exercise of options and warrants 1,905 38 - - 56,133 - - 56,171 Issuance of stock under employee stock plans 511 10 - - 15,774 - - 15,784 Income tax benefits realized from employee stock option exercises - - - - 26,038 - - 26,038 Net unrealized gain on securities available-for-sale - - - - - - $9,592 9,592 Net income - - - - - 124,394 - 124,394 Tax benefits arising prior to quasi-reorganization - - - - 39,654 (39,654) - - ______________________________________________________________________________ Balance December 31, 1994 50,106 $1,002 67,133 $1,343 $1,207,720 $129,127 $9,592 $1,348,784 ==============================================================================
See notes to consolidated financial statements. 43 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned and majority owned subsidiaries and collaborations. All significant intercompany balances and transactions have been eliminated. Cash and Cash Equivalents The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Short-term Investments and Long-term Marketable Securities The Company invests its excess cash balances in short-term and long-term marketable securities. These investments primarily include corporate notes, certificates of deposit and treasury notes. On January 1, 1994, the Company adopted Statement of Financial Accounting Standard (FAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The effect of adopting this new standard was not material to net income. FAS 115 requires that all investment securities be classified into one of three categories: held-to-maturity, available-for-sale, or trading. Securities are considered held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. These securities are recorded as either short-term investments or long-term marketable securities on the balance sheet depending upon their contractual maturity date. Held-to- maturity securities are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts. Securities are considered trading when bought principally for the purpose of selling in the near term. These securities are recorded as short-term investments and are carried at market value. Unrealized holding gains and losses on trading securities are included in interest income. Securities not classified as held-to-maturity or as trading are considered available-for-sale. These securities are recorded as long-term marketable securities and are carried at market value with unrealized gains and losses included in stockholders' equity net of related tax effects. If a decline in fair value below cost is considered other than temporary, such securities are written down to estimated fair value with a charge to marketing, general and administrative expenses. Prior to adopting FAS 115, marketable debt securities were carried at amortized cost that approximated fair value. Marketable equity securities were carried at the lower of cost or market. The cost of all securities sold is based on the specific identification method. Non-marketable Equity Investments The carrying value, which approximates the fair value, is included in other assets in the consolidated balance sheets. The fair value of non-marketable equity investments is estimated based on the lower of amortized cost or the offering price in the most recent round of financing. Property, Plant and Equipment The costs of buildings and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are generally amortized over the length of the applicable lease. Expenditures for maintenance and repairs are expensed as incurred. Interest on construction-in-progress of $0.6 million in 1994, $1.3 million in 1993 and $3.4 million in 1992 has been capitalized and is included in property, plant and equipment. Patents As a result of its research and development (R&D) programs, the Company owns or is in the process of applying for patents in the United States and other countries which relate to products and processes of significant importance to the Company. Costs of patents and patent applications are capitalized and amortized for financial reporting purposes on a straight-line basis over their estimated useful lives of approximately 12 years. 44 56 Contract Revenue Contract revenue for R&D is recorded as earned based on the performance requirements of the contract. In return for contract payments, contract partners may receive certain marketing and manufacturing rights, products for clinical use and testing or R&D services. Income Taxes The Company accounts for income taxes in conformance with FAS 109, "Accounting for Income Taxes," which requires the asset and liability approach for the financial accounting and reporting for income taxes. Net Income Per Share: Net income per share is computed based on the weighted average number of shares of the Company's redeemable common stock, common stock and redeemable common stock equivalents, if dilutive. The Company's convertible subordinated debentures are redeemable common stock equivalents but have been antidilutive to date; therefore, they have not been included in net income per share calculations. Financial Instruments Certain of the Company's revenues and expenses occur outside of the United States. Since the Company's expenses denominated in foreign currencies are less than revenues denominated in foreign currencies, risk exists that income may be impacted by changes in the exchange rates between the U.S. dollar and foreign currencies. To mitigate this risk, the Company purchases simple foreign currency put options (options) with expiration dates and amounts of currency that match a portion of expected revenues so that the adverse impact of movements in currency exchange rates on the non-dollar denominated revenues will be largely offset by an associated increase in the value of the options. Realized and unrealized gains related to the options are deferred until the designated hedged revenues are recorded. The associated costs, which are amortized over the term of the options, are recorded as a reduction of the hedged revenues. In prior years, the Company also purchased foreign currency forward contracts as hedging instruments. These contracts are currently recorded at fair value and the associated losses are reflected in the income statement. Interest income is subject to fluctuations as U.S. interest rates change. To manage this risk, the Company periodically establishes duration targets for its investment portfolio that reflect its anticipated use of cash and fluctuations in market rates of interest. Swaps are used to adjust the duration of the investment portfolio in order to meet these duration targets. By combining a swap with a pool of short-term securities equal in size to the notional amount of the swap, an instrument with an effective interest rate and maturity equal to the term of the swap is created. The characteristics of the instrument (including interest rate, maturity, and fair value) are similar to the characteristics of a high grade corporate security which could be purchased at the same time the instrument is created. Increases (decreases) in swap variable payments caused by rising (falling) interest rates will be essentially offset by increased (reduced) interest income on the related short-term investments, while the fixed rate payments received from the swap counterparty establishes the Company's interest income. Net payments made or received on swaps are included in interest income as adjustments to the interest received on invested cash. Amounts deferred on terminated swaps are amortized to interest income over the original contractual term of the swaps by a method that approximates the level yield method. 401(k) Plan The Company's 401(k) Plan covers substantially all its U.S. employees. Under the 401(k) Plan, eligible employees may contribute up to 15% of their eligible compensation, subject to certain Internal Revenue Service restrictions. The Company matches a portion of 45 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) employee contributions, up to a maximum of 4% of each employee's eligible compensation. The match is effective December 31 of each year and is fully vested when made. During 1994, 1993 and 1992, the Company provided $5.2 million, $4.4 million, and $4.1 million, respectively, for the Company match under the 401(k) Plan. Note 1: Significant Customer and Geographic Information One major customer in 1994, 1993 and 1992 contributed 10% or more of the Company's total revenues. The portions of revenues attributable to this customer were 21% in 1994, 26% in 1993 and 31% in 1992. This customer distributes Protropin, Nutropin, Pulmozyme and Actimmune through its extensive branch network, and is then reimbursed through a variety of sources. A second customer, a wholesale distributor of all of the Company's products, contributed 11% of revenues in 1994. Approximate foreign sources of revenues were as follows (millions):
1994 1993 1992 _____________________________________________________ Europe $81.8 $41.0 $46.4 Asia 19.5 22.2 16.3 Canada 9.7 12.2 10.1
The Company sells primarily to distributors and hospitals throughout the United States, Canada and Europe, performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral. In 1994, 1993 and 1992 the Company did not record any material additions to, or losses against, its provision for doubtful accounts. Note 2: Research and Development Arrangements To gain access to potential new products and technologies, the Company has established research collaborations, including both marketable and non- marketable equity investments, with companies developing technologies that fall outside the Company's research focus and with companies having the potential to generate new products through technology exchanges and investments. Potential future payments maybe due to selective collaborative partners if the partners achieve certain benchmarks as defined in the collabortive agreements. In addition to the collaborations with F. Hoffmann-La Roche, Ltd. discussed in Note 10, in December 1994, the Company entered into a collaboration with Scios Nova Inc. (Scios Nova) for the U.S. and Canadian development of Scios Nova's Auriculin or the treatment of acute renal failure, which is currently in Phase III clinical trials. Under the terms of the collaboration, both companies will copromote Auriculin in the United States and Canada, sharing profits from its commercialization. The Company received exclusive rights to all markets outside the United States and Canada subject to a royalty obligation to Scios Nova. In connection with the collaboration, the Company purchased Scios Nova non-voting preferred stock, which is convertible into shares of Scios Nova common stock, for $20 million and charged approximately $5 million to research and development expense. The Company established a line of credit for Scios Nova which is described in Note 8. In addition, the Company agreed to pay up to $50 million in benchmark payments, conditional on achieving certain predetermined commercialization goals. 46 58 Note 3: Income Taxes The income tax provision consists of the following amounts (thousands):
1994 1993 1992 _________________________________________________________________ Current: Federal $ 38,331 $ - $ 200 State 1,016 - 711 Foreign 29 - 186 _____________________________________ Total current 39,376 - 1,097 Deferred: Federal (34,193) - - _____________________________________ Total $ 5,183 $ - $ 1,097 =====================================
Actual 1994 current tax liabilities are lower than reflected above by $26 million due to employee stock option-related tax benefits which were credited to stockholders' equity. A reconciliation between the Company's effective tax rate and the U.S. statutory rate follows:
Tax Rate 1994 Amount ____________________________ (thousands) 1994 1993 1992 ______________________________________________________________________________ Tax at U.S. statutory rate $ 45,352 35.0% 35.0% 34.0% Operating losses utilized (39,654) (30.6) (35.0) (33.1) Alternative minimum tax liability 31,900 24.6 - - Adjustment of deferred tax assets valuation allowance (34,193) (26.4) - - Other, including state taxes 1,778 1.4 - 4.1 ___________________________________________ Income tax provision $ 5,183 4.0% - 5.0% ===========================================
The components of deferred taxes consist of the following at December 31 (thousands):
1994 1993 ________________________________________________________________________________ Deferred tax liabilities: Depreciation $ 42,109 $ 34,297 Inventory valuation differences (545) 7,024 Other 20,473 21,443 __________________________ Total deferred tax liabilities 62,037 62,764 Deferred tax assets: Federal net operating loss (NOL) carryforward 43,027 75,612 Federal credit carryforward 86,804 56,097 Reserves not currently deductible 31,688 21,929 State credit carryforward 11,324 14,895 State NOL carryforward 1,893 5,531 Amortization of purchased technology 1,330 2,660 Other 4,616 8,992 __________________________ Total deferred tax assets 180,682 185,716 Valuation allowance (84,452) (122,952) __________________________ Total net deferred tax assets 96,230 62,764 __________________________ Total net deferred taxes $ 34,193 $ - ==========================
47 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The NOL and credit carryforwards, which totaled $123 million and $87 million, respectively, expire in the years 1995 through 2009, except for $20 million of alternative minimum tax credits which never expire. Approximately $26 million of the valuation allowance at December 31, 1994 reflected above relates to the tax benefits of stock option deductions which will be credited to additional paid-in capital when realized. The valuation allowance decreased by $38.5 million in 1994 and $10 million in 1993. Realization of net deferred taxes, as well as future reversals of the valuation allowance (that is, recognition of deferred tax assets) depend on future earnings from existing and new products and new indications for existing products. The timing and amount of future earnings will depend on continued success in marketing and sales of the Company's current products, scientific success, results of clinical trials and regulatory approval of products under development. Note 4: Inventories Inventories are stated at the lower of cost or market. Cost is determined using a weighted-average approach which approximates the first-in, first-out method. Inventories at December 31, 1994 and 1993 are summarized below (thousands):
1994 1993 __________________________________________________________________ Raw materials and supplies $ 13,145 $ 10,995 Work in process 76,974 60,256 Finished goods 13,081 13,474 ______________________ Total $103,200 $ 84,725 ======================
The increase in total inventories in 1994 compared to 1993 is primarily attributable to an increase in the inventories of Activase. 48 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contiued) Note 5: Investment Securities Securities classified as trading, available-for-sale and held-to-maturity at December 31, 1994, are summarized below. Estimated fair value is based on quoted market prices for these or similar investments.
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ____________________________________________________________________________ (thousands) TOTAL TRADING SECURITIES (carried at estimated fair value) $ 85,295 $ 1,107 $ 1,105 $ 85,297 ============================================== TOTAL AVAILABLE-FOR-SALE(a) (carried at estimated fair value) $ 25,669 $ 10,058 $ 67 $ 35,660 ============================================== SECURITIES HELD-TO-MATURITY: (carried at amortized cost) U.S. Treasury securities and obligations of other U.S. government agencies maturing within: 1 year $ 77,453 $ 15 $ 37 $ 77,431 1-3 years 119,714 - 218 119,496 Other debt securities maturing within: 1 year 482,463 1,770 452 483,781 1-3 years 44,715 285 490 44,510 ______________________________________________ TOTAL HELD-TO-MATURITY $ 724,345 $ 2,070 $ 1,197 $ 725,218 ==============================================
(a) Securities available-for-sale include only equity securities. Net unrealized gains, reduced by related tax effects, of $9.6 million are included in stockholders' equity. At January 1, 1994, the excess of market value over the cost of these securities was $3.9 million. The carrying value of all investment securities (excluding non-marketable securities) held at December 31, 1994, is summarized below (thousands):
Security Carrying Value __________________________________________________________________________ Held-to-maturity securities maturing within one year (at amortized cost) $ 559,916 Accrued interest 7,248 Trading securities (at fair value) 85,297 ---------- Total short-term investments $ 652,461 ========== Held-to-maturity securities maturing within 1-3 years (at amortized cost) $ 164,429 Accrued interest 1,637 Securities available-for-sale (at fair value) 35,660 ---------- Total long-term marketable securities $ 201,726 ==========
49 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) During 1994, no available-for-sale securities were sold and the Company recorded a $12.6 million charge to write down certain available-for-sale biotechnology securities for which the decline in fair value below cost was other than temporary. At December 31, 1993, the fair value of the short-term investments approximated carrying value. The fair value of the long-term marketable debt securities totaled $63.4 million. The carrying value of marketable equity securities at December 31, 1993, totaled $12.1 million and was included in other assets. The carrying value, which approximated the fair value, of non-marketable equity securities totaled $6.8 million and $10.5 million at December 31, 1994 and 1993, respectively. The Company invests its excess cash principally in marketable debt securities with terms ranging from overnight to three years. Marketable debt securities held by the Company are issued by a diversified selection of institutions with strong credit ratings. The Company's investment policy limits the amount of credit exposure with any one institution. These debt securities are generally not collateralized. The Company has not experienced any material losses due to credit impairment on its investments in marketable debt securities in the years 1994, 1993 and 1992. Note 6: Financial Instruments Foreign Currency Instruments As discussed above, the Company currently purchases simple foreign currency put options (options) solely to hedge anticipated non-dollar denominated net revenues. At December 31, 1994, the Company had hedged approximately 85% of net foreign revenues anticipated within 12 months and 35% of net foreign revenues anticipated in the following 12 months. At December 31, 1994, the notional amount of the options totaled $78.3 million and consisted of the following currencies: Australian dollars, Canadian dollars, German marks, Spanish pesetas, French francs, British pounds, Italian lira, Japanese yen, and Swedish krona. All contracts mature within the next two years. The fair value of the options, which is based on exchange rates and market conditions at December 31, 1994, totaled $1.6 million. Previously, the Company had entered into foreign currency forward exchange contracts (forward contracts) as hedging instruments. Unrealized gains and losses were deferred until the revenue was recognized. In 1994, the Company closed out its positions by entering into offsetting contracts so that the net notional amount denominated in foreign currencies was zero. At December 31, 1994, the U.S. dollar equivalent of the notional amount of the forward sell contracts totaled $28.3 million; the forward buy contracts totaled $29.8 million. The difference, an unrealized loss of $1.5 million, was recorded as a reduction of net income in 1994 as a charge to marketing, general and administrative expenses and at December 31, 1994, is included in other accrued liabilities. All contracts mature within two years. 50 62 At December 31, 1993, the Company had simple put option contracts with a notional amount of $6.8 million and forward contracts with a notional amount of $47.0 million to sell various foreign currencies within the next two years. At December 31, 1993, the fair value of the option contracts was $0.4 million and the fair value of the forward contracts was ($1.2) million. Credit exposure is limited to the unrealized gains on these contracts. All agreements are with a diversified selection of institutions with strong credit ratings which minimizes risk of loss due to nonpayment from the counterparty. The Company has not experienced any material losses due to credit impairment of its foreign currency instruments. Interest Rate Swaps The Company enters into interest rate swaps (swaps) as part of its overall strategy of managing the duration of its cash portfolio. For each swap, the Company receives interest based on fixed rates and pays interest to counterparties based on floating rates (three or six month LIBOR) on a notional principal amount. By combining a swap with a pool of short-term securities equal in size to the notional amount of the swap, an instrument with an effective interest rate and maturity equal to the term of the swap is created. The use of swaps in this manner generates net interest income on the swap and associated pool of short-term securities equivalent to interest income that would be earned from a high grade corporate security of the same maturity as the swap, while reducing credit risk (there is no principal invested in a swap). The Company's credit exposure on swaps is limited to the value of the interest rate swaps that have become favorable to the Company and any net interest earned but not yet received. Swap counterparties typically have strong credit ratings which minimize the risk of non-performance on the swaps. The Company has not experienced any material losses due to credit impairment. The Company targets the average maturity of its investment portfolio (including swaps) based on its anticipated use of cash and fluctuations in the market rates of interest. The maturity of the investment portfolio (including swaps) ranges from overnight funds used for near-term working capital purposes, investments maturing within the next one to five years for future working capital, capital expenditures and strategic investments, to maturities of up to seven years which is comparable to the remaining term of the Company's outstanding convertible debt. Due to the increase in market interest rates during 1994 and concern about a continuing rise in rates, the Company gradually reduced the average effective maturity of its investment portfolio (including swaps) from 2.8 years at December 31, 1993 to 1.9 years at December 31, 1994, which approximates the lower end of the range of the Company's average anticipated cash needs. The notional amount of each swap is equal to the amount of designated high quality short-term investments which either mature or reprice within the next six months. The investments include U.S. Treasury securities, U.S. government agency securities, commercial paper and corporate debt obligations. Swaps are used to extend the maturity of the investment portfolio; no speculative activity occurs. 51 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The table below outlines specific information for the swaps outstanding at December 31, 1994. The fair value is based on market prices of similar agreements. Dollars are in millions.
Interest Rate Swaps Short-term Investments ___________________________ ________________________________ Fixed Average Rates Variable Effective Notional To Be Rates To Carrying Average Interest Amounts Received Be Paid* Value Maturity** Rate ______________________________________________________________________________________ Swaps matched to investments to meet maturity target comparable to outstanding debt 3 or 6 [Maturing on: 7.68%- month 1/2/02] $150 7.92% LIBOR $150 84 days 5.45% Swaps matched to other investments to meet specific maturity targets 3 or 6 [Ending dates: 4.08%- month 12/29/95 - 9/20/99] 180 7.20% LIBOR 180 35 days 5.34% Other short-term investments - - - 322 - - __________________________________________________________________ Total $330 - - $652 - - ==================================================================
* 3 and 6-month LIBOR rates are reset every 3 or 6 months. At December 31, 1994, the 3-month LIBOR rate was 6.5% and the 6-month LIBOR rate was 7.0%. ** Average maturity reflects either the maturity date or, for a floating investment, the next reset date. For the year ended December 31, 1994, the weighted average rate received on swaps was 6.30% and the weighted average rate paid on swaps was 5.12%. Net interest income received from swaps totaled $4.3 million in 1994. The carrying amount of the swaps, which reflects the net interest accrued for such swaps, totaled $6.2 million and $7.5 million at December 31, 1994 and 1993, respectively, and is included in accounts receivable. At December 31, 1993, the notional amount totaled $350 million and the fair value totaled $13.0 million. During 1994, to reduce the average effective maturity of its portfolio, the Company terminated certain swap agreements prior to maturity and is amortizing the realized gains and losses over the original contractual term of the swaps as a reduction of interest income. At December 31, 1994, net losses of $6.2 million remained unamortized; $3.1 million will be recognized in 1995 and $3.1 million will be recognized during the following three years. Financial Instruments Held for Trading Purposes As part of its overall investment strategy, in 1994 the Company contracted with two external money managers to manage part of its investment portfolio. One portfolio, which had a carrying value of $31 million at December 31, 1994, consisted of both U.S. dollar and non-dollar denominated investments. To hedge the non-dollar denominated investments, the money manager purchases forward contracts. The fair value at December 31, 1994, of the forward contracts totaled $2.7 million; the average fair 52 64 value during the year totaled $15.3 million. Net realized and unrealized trading gains totaled approximately $389,000 in 1994 and are included in interest income. Counterparties have strong credit ratings which minimizes the risk of non-performance from the counterparties. Summary of Fair Values The table below summarizes the carrying value and fair value at December 31, 1994, of the Company's financial instruments. The fair value of the long-term debt was estimated based on the quoted market price at year end.
Financial Instrument Carrying Value Fair Value _______________________________________________________________________ (thousands) ASSETS Investment securities (including accrued interest and traded forward contracts) (Note 5) $ 854,187 $ 855,060 Non-marketable equity investments (Note 5) 6,820 6,820 Options 1,646 1,600 Outstanding swaps 6,165 (2,044) LIABILITIES Short-term and long-term debt (Note 7) 151,229 125,250 Forward contracts 1,500 1,500
Note 7: Long-term Debt Long-term debt consists of the following (thousands):
1994 1993 _______________________________________________________________________________ Convertible subordinated debentures, interest at 5%, due in 2002 $ 150,000 $ 150,000 Mortgage note payable on buildings and land, interest at 9.5%, due through 1996 1,229 2,023 ______________________ 151,229 152,023 Less current maturities 871 793 ______________________ Total long-term debt $ 150,358 $ 151,230 ======================
Maturities of long-term debt in 1995 and 1996 are $0.9 million and $0.3 million, respectively. Exclusive of the convertible subordinated debentures, no long-term debt maturities are due in 1997 and thereafter. The fair value of the Company debt was $146 million at December 31, 1993. Convertible subordinated debentures are convertible at the option of the holder into shares of the Company's redeemable common stock at a conversion price of $74 in principal amount of the debenture. Upon conversion, the holder receives, for each $74 in principal amount of the debenture converted, one-half share of redeemable common stock and $18 in cash. Under the terms of the Merger (see Note 9), the $18 in cash is reimbursed by Roche Holdings, Inc. (Roche) to the Company. Generally, the Company may redeem the debentures until maturity. 53 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 8: Leases, Commitments and Contingencies
Future minimum lease payments under noncancelable operating leases at December 31, 1994, are as follows (thousands): _______________________________________________________________________ 1995 $ 6,501 1996 2,375 1997 2,041 1998 704 __________ Total minimum lease payments $ 11,621 ==========
The Company has leased certain real property. Under many of its lease arrangements, the Company is responsible for taxes, insurance and maintenance related to the leased properties. Rent expense under operating leases was approximately $6.5 million, $5.1 million and $9.4 million for 1994, 1993 and 1992, respectively. Income from subleases was immaterial. Under two of its lease agreements, the Company is contingently liable to purchase three buildings at the end of their lease terms. These leases expire in 1995, but the Company has the option to extend one lease until 1997 and the other until 1998. If at the end of the final lease renewal term the Company does not purchase the property or arrange a third party purchase, then the Company would be obligated to the lessor for a guaranteed payment equal to a specified percentage of the lessor's purchase price for the properties. The Company would also be obligated to the lessor for all or some portion of this amount if the price paid by a third party for the property is below a specified percentage of the lessor's purchase price. Under these leases, the Company is also required to maintain certain financial ratios and is subject to limits on certain types and amounts of debt. The properties under these leases include a process science laboratory, which is scheduled for completion in 1995, and two office buildings. As of December 31, 1994, the total amount related to these leased facilities, for which the Company would be contingently liable, is $65.0 million. In connection with one of the leases, the Company has pledged securities worth $42.4 million as of December 31, 1994. The Company expects to develop a new manufacturing facility over the next three years with a total expected cost of $150 million. In connection therewith, the Company expects to enter into an operating lease arrangement similar to the arrangements described above. Pursuant to its collaboration agreement with Scios Nova (see Note 2), the Company established a line of credit for $30 million that Scios Nova may draw down at Scios Nova's discretion through 2002. This commitment is supported through December 31, 1997, by a bank letter of credit under which Scios Nova may draw up to $30 million directly from the bank, with immediate repayment of the funds due to the bank by the Company. Amounts drawn by Scios Nova under the bank letter of credit or directly from the Company are repayable in the form of cash or Scios Nova common stock (at the market price prevailing on the date of repayment) at Scios Nova's option any time through December 30, 2002. Interest on amounts borrowed by Scios Nova accrue to the Company at the prime rate of interest. At December 31, 1994, no amounts were drawn. Note 9: Merger With Roche Holdings, Inc. The Company's merger (Merger) with a wholly owned subsidiary of Roche Holdings, Inc. (Roche) was consummated on September 7, 1990 (Effective Date). Pursuant to the merger agreement with Roche, the Company's stockholders of record on the Effective Date received, for each 54 66 share of common stock that they owned, $18 in cash from Roche and one-half share of newly issued redeemable common stock from the Company. In the Merger, Roche acquired one-half of the Company's outstanding common stock for $1,537.2 million. The redeemable common stock is substantially identical to the common stock previously held by stockholders, except that it is redeemable by the Company at the election of Roche, provided that Roche first deposits in trust sufficient funds to pay the aggregate redemption price of all outstanding shares of redeemable common stock. Roche has the right to require the Company to exercise its redemption right, providing it does so for all shares of outstanding redeemable common stock at $58.75 per share in the first calendar quarter of 1995 and increasing to $60.00 per share on April 1, 1995. The redemption right expires on June 30, 1995. For the period of July 1, 1995, until June 30, 1996, Roche may submit a bid to purchase the remaining shares of the Company. The bid must not be for less than $60.00 per share and is subject to the approval of the Board of Directors and, subsequently, of non-Roche stockholders. Independent of its right to have the Company redeem the redeemable common stock, Roche is permitted to acquire additional shares of the Company's stock through open market or privately negotiated purchases, provided that Roche's aggregate holdings do not exceed 75% of the Company's stock outstanding on a fully diluted basis. In connection with the Merger, the Company issued 24,433,951 shares of common stock to Roche for $487.3 million in cash. The common stock Roche acquired in the Merger and redeemable common stock purchased in the open market represents approximately 65% of the outstanding equity of the Company as of December 31, 1994. Note 10: Related Party Transactions The Company has transactions with related parties in the ordinary course of business. Pursuant to contracts, principally regarding R&D projects and product licensing agreements as described below, the Company recorded revenue of approximately $25.6 million in 1994, $14.4 million in 1993 and $12.6 million in 1992 from the following related parties: F. Hoffmann-LaRoche, Ltd. (HLR) (a wholly owned subsidiary of Roche; two officers of HLR serve on the Company's Board of Directors - Note 9) and Genencor, Inc. (in which the Company formerly owned a 25% equity interest). The Company is also developing a mammalian cell line for HLR. In 1994, the Company and HLR began developing an anti-IgE antibody and Pulmozyme in Japan. During 1994 and 1993, the Company collaborated with HLR on four projects, including oral antagonists to platelet gpIIb/IIIa, IL-8, LFA/ICAM and ras farnesyltransferase. In 1992, the Company entered into a collaboration with HLR to codevelop and copromote Pulmozyme in Europe. In connection with this collaboration and the Company's efforts to expand its markets, Genentech Europe Limited (GEL) was established. GEL and affiliates are currently promoting Pulmozyme in the United Kingdom, Ireland, Germany and the Netherlands. HLR is responsible for promoting the drug for cystic fibrosis in the remaining thirteen European countries in the collaboration. In addition to sharing profits related to Pulmozyme sales from all collaborative countries with HLR, the Company has received and will continue to receive milestone payments and technical support from HLR. Also, as part of the agreement with HLR, and in return for royalties on product sales, the Company has granted HLR an exclusive license to sell Pulmozyme in countries outside of Western Europe, the United States and Canada. The Company has three other R&D collaborations with HLR which were entered into in 1992. 55 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 11: Capital Stock Stock Option Plans 1984 PLANS The 1984 Plans are the 1984 Incentive Stock Option Plan and the 1984 Non-Qualified Stock Option Plan. The Company may grant options under the 1984 Incentive Stock Option Plan only to employees (including officers) of the Company. The Company may grant options under the 1984 Non-Qualified Stock Option Plan to employees (including officers) and consultants of the Company. Options granted under the 1984 Incentive Stock Option Plan and the 1984 Non- Qualified Stock Option Plan have a maximum term of ten and 20 years, respectively, from the date of grant. The options generally become exercisable in increments over a period of four years from the date of grant, with the first increment vesting after one year. The Company may grant options with different vesting terms from time to time. Transactions for the 1984 plans for the year ended December 31, 1994, were as follows:
Price Shares Per Share ________________________________________________________________________________ Options outstanding - beginning of year 4,033,276 $ 14.08-49.75 Grants - - Exercises (695,348) 14.08-41.75 Cancellations (28,273) 19.38-49.75 _______________________________ Options outstanding - end of year 3,309,655 14.08-49.75 Options available for future grant - at December 31 ___________ Total shares reserved under the 1984 Plans at December 31 3,309,655 =========== Shares reserved under options exercisable at December 31 2,956,972 $ 14.08-49.75 ===============================
1990 PLAN The 1990 Stock Option/Stock Incentive Plan (1990 Plan) permits the granting of options intended to qualify as incentive stock options and the granting of options that do not so qualify. The Company may only grant incentive options to employees (including officers and employee-directors). The Company may only grant the non-qualified options and other non-option stock incentives under the 1990 Plan to employees (including officers and employee-directors) and consultants of the Company. All non-qualified options have a maximum term of 20 years and all incentive options have a maximum term of ten years. The options generally become exercisable in increments over a period of four years from the date of grant, with the first increment vesting after one year. The Company may grant options with different vesting terms from time to time. The 1990 Plan includes an Automatic Grant Program whereby each individual who was a non-employee member of the Board on July 18, 1990, and/or on April 30, 1992, was automatically granted, on each of those dates, a non-statutory option to purchase 15,000 shares of redeemable common stock. These options have a term of ten years from the date of grant and vest in equal increments over a three-year period from the date of grant. Each non-employee member of the Board who is elected to that position after April 30, 1992, will be automatically granted such an option as will any employee member of the Board who becomes a non-employee member of the Board immediately upon the change in status from employee to non-employee. The 1990 Plan contains a special provision whereby the Company's former Chairman of the Board was granted in 1990 a special non- statutory option for 170,000 shares of redeemable common stock with a per share exercise price of $25.70 in cancellation of outstanding options for the same number of shares with an exercise price of $44.25. 56 68 Transactions for the 1990 Plan for the year ended December 31, 1994, were as follows:
Price Shares Per Share _______________________________________________________________________________ Options outstanding - beginning of year 8,406,451 $ 25.50-46.50 Grants 957,055 48.00-50.75 Exercises (704,875) 25.50-46.50 Cancellations (152,479) 25.50-50.75 ______________________________ Options outstanding - end of year 8,506,152 25.50-50.75 Options available for future grants at December 31 1,893,133 ____________ Total shares reserved under the 1990 Plan at December 31 10,399,285 ============ Shares reserved under options exercisable at December 31 3,770,903 $ 25.50-50.75 ==============================
In addition, the 1990 Plan permits the Company to grant stock appreciation rights in connection with non-qualified options or incentive options and issue shares of redeemable common stock, either fully vested at the time of issuance or vesting according to a pre-determined schedule. The Company may grant three types of stock appreciation rights under the 1990 Plan: tandem stock appreciation rights, concurrent stock appreciation rights and limited stock appreciation rights. At December 31, 1994, no stock appreciation rights for redeemable common stock have been granted under the 1990 Plan. 1994 PLAN The 1994 Stock Option Plan (1994 Plan) permits the granting of options intended to qualify as incentive stock options and the granting of options that do not so qualify. Incentive options may only be granted to employees (including officers and employee-directors). The non-qualified options may only be granted under the 1994 Plan to employees (including officers and employee-directors) and consultants of the Company. All non- qualified options have a maximum term of 20 years and all incentive options have a maximum term of ten years. The options generally become exercisable in increments over a period of five years from the date of grant, with the first increment vesting after two years. Options may be granted with different vesting terms from time to time. The 1994 Plan includes an Automatic Grant Program whereby each individual who is a non-employee member of the Board on April 30, 1995 will be automatically granted a non-statutory option to purchase 15,000 shares of redeemable common stock. These options have a term of ten years from the date of grant and vest in equal increments over a three-year period from the date of grant. Each non-employee member of the Board who is elected to that position after April 30, 1995, will be automatically granted such an option as will any employee member of the Board who becomes a non- employee member of the Board immediately upon the change in status from employee to non-employee. Beginning on April 30, 1995, non-employee members of the Board will no longer receive automatic option grants under the 1990 Plan. 57 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Transactions for the 1994 Plan for the year ended December 31, 1994, were as follows:
Price Shares Per Share ________________________________________________________________________________ Grants 4,180,000 $ 50.13-50.75 Cancellations (15,000) 50.13 ______________________________ Options outstanding - end of year 4,165,000 $ 50.13-50.75 Options available for future grants at December 31 335,000 ____________ Total shares reserved under the 1994 Plan at December 31 4,500,000 ============ Shares reserved under options exercisable 0 at December 31 ============
Employee Stock Plans The Company adopted the 1991 Employee Stock Plan (1991 Plan) on December 4, 1990, and amended it during 1993. All full-time employees of the Company are eligible to participate in the 1991 Plan. Of the 2,900,000 shares of redeemable common stock reserved for issuance under the 1991 Plan, 1,905,018 shares have been issued as of December 31, 1994. During 1994, 2,364 of the eligible employees participated in the 1991 Plan. Warrants In consideration of the grant to the Company by certain limited partners of Genentech Clinical Partners IV (GCP IV) of an option to purchase all of such limited partners' interests in GCP IV, the Company issued warrants with each partnership interest to purchase an aggregate of 2,639,250 shares of common stock (subsequently converted to 1,319,625 shares of redeemable common stock under the terms of the Merger). All previously unexercisable warrants held by nondefaulted limited partners became exercisable upon termination of GCP IV's research program in September 1992. The warrants are exercisable through July 31, 1996. Redeemable common stock activity during 1994 related to the warrants is reflected in the following table:
Price Shares Per Share _______________________________________________________________________________ Shares subject to exercisable warrants - beginning of year 648,357 $ 22.57-28.26 Shares issued upon exercise of warrants (509,442) 22.57-28.26 ________________________________________ Shares subject to exercisable warrants - end of year 138,915 $ 27.57-28.26 ========== Shares reserved for issuance under warrant agreements 138,915 ==========
58 70 Note 12: Legal Proceedings The Company is a party to various legal proceedings including patent infringement cases involving growth hormone; Activase; and antibodies to IgE, a protein central to allergic reactions; and product liability cases involving Activase. In addition, the FDA is investigating the Company's promotional practices in connection with Activase, Protropin and Pulmozyme. The Company and its directors are defendants in two suits filed in California challenging their actions in connection with the Merger. In December 1994, the Company and Eli Lilly and Company (Lilly) reached a settlement regarding all patent infringement and contract actions between the two parties. Under the terms of the settlement Lilly agreed to pay the Company up to $145 million ($25 million initially and 16 quarterly payments of $7.5 million), subject to certain restrictions, and the Company granted Lilly licenses, options to license, or immunities from suit for certain of the Company's patents. Future payments are required from Lilly on sales of these products. The Company will continue to pursue patent invalidity and noninfringement claims against the Regents of the University of California (UC), which has sued Genentech for infringing a patent owned by UC relating to recombinant human growth hormone (hGH). In a related matter, the Company also settled a patent infringement action against Centocor, Inc. whereby the Company granted Centocor a royalty bearing license to its Cabilly patent for Centocor's monoclonal anti-IIb/IIIa antibody. On November 29, 1994, an administrative law judge of the International Trade Commission (ITC) found, on an incomplete record, that Bio-Technology General Corp. and its affiliate (BTG) infringed two of the Company's process patents, and Novo Nordisk A/S and certain of its affiliates (Novo) (BTG and Novo are collectively referred to as the Competitors) infringed one process patent covering hGH; however, the judge refused to recommend a ban on importation of hGH products for treatment of growth hormone inadequacy by the Competitors in the United States because the Company delayed in providing documents to the Competitors. The judge's recommendation was subject to review by the commissioners of the ITC. The Company filed a petition for review by the full Commission of the judge's recommendations dismissing the complaint, but the Commission declined such review. On December 1, 1994, the Company filed suit against the Competitors in the U.S. District Court in Delaware seeking damages from the Competitors, and asking for an injunction blocking the Competitors from marketing hGH in the United States Novo has brought suit against the Company in the U.S. District Court from Southern District New York, alleging that the patents in the ITC action are invalid and not infringed by Novo. BTG has brought suit against the Company in the U.S. District Court from the Southern District of New York seeking to prevent the Company from further patent infringement action against BTG and alleging unfair competition, antitrust and malicious prosecution claims. Based upon the nature of the claims made and the investigation completed to date by the Company and its counsel, the Company believes the outcome of the above actions will not have a material adverse effect on the financial position, results of operations or cash flows of the Company. 59 71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 13: Quasi-reorganization On February 18, 1988, the Company's Board of Directors approved the elimination of the Company's accumulated deficit through an accounting reorganization of its stockholders' equity accounts (a quasi-reorganization) effective October 1, 1987, that did not involve any revaluation of assets or liabilities. The Company eliminated the accumulated deficit of $329.5 million by a transfer from additional paid-in capital in an amount equal to the accumulated deficit. Simultaneous with the quasi-reorganization, the Company FAS 96, providing for recognition of the tax benefits of operating loss and tax credit carryforward items that arose prior to a quasi-reorganization involving only the elimination of a deficit in retained earnings being reported in the income statement and then reclassified from retained earnings to additional paid-in capital. Subsequently, in September 1989, the staff of the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 86 (SAB 86) which states that a quasi-reorganization cannot involve only an elimination of a deficit in retained earnings and, therefore, the tax benefits of prior operating loss and tax credit carryforwards must be reported as a direct addition to additional paid-in capital rather than being recorded in the income statement. In February 1992, the Financial Accounting Standards Board issued FAS 109 which supersedes FAS 96. FAS 109 requires companies that have previously both adopted FAS 96 and effected a quasi-reorganization that involves only a deficit elimination, as did the Company, to continue to report the tax benefits of prior operating losses and tax credit carryforwards in a manner consistent with FAS 96. FAS 109 also provides that companies effecting a quasi-reorganization after February 1992 that involves only a deficit elimination shall report the tax benefits of prior operating losses and tax credit carryforwards in a manner consistent with SAB 86. The Company will continue to report in income the recognition of operating loss and tax credit carryforward items arising prior to the quasi- reorganization due to the Company's adoption of its quasi-reorganization in the context of its interpretation of FAS 96 and the quasi-reorganization literature existing at the date the quasi-reorganization was effected. The SEC staff has indicated that it would not object to the Company's accounting for such tax benefits. If the provisions of SAB 86 had been applied, net income for the year ended December 31, 1994, would have been reduced by $39.7 million or $.33 per share (1993-net income reduced by $20.6 million or $.18 per share; 1992-net income reduced by $7.5 million or $.07 per share). 60 72 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS THE BOARD OF DIRECTORS AND STOCKHOLDERS OF GENENTECH, INC. We have audited the accompanying consolidated balance sheets of Genentech, Inc. as of December 31, 1994 and 1993, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Genentech, Inc. At December 31, 1994 and 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP San Jose, California January 17, 1995 QUARTERLY FINANCIAL DATA (UNAUDITED) (thousands, except per share amounts)
1994 Quarter Ended _________________________________________________ December 31 September 30 June 30 March 31 __________________________________________________________________________________ Total revenues $ 207,760 $ 193,838 $ 194,922 $ 198,870 Product sales 158,137 142,555 152,574 147,798 Gross margin from product sales 133,464 118,095 128,009 125,667 Net income 18,566 33,586 33,387 38,855 Net income per share .15 .28 .28 .33
1993 Quarter Ended _________________________________________________ December 31 September 30 June 30 March 31 __________________________________________________________________________________ Total revenues $ 161,529 $ 165,386 $ 169,837 $ 152,997 Product sales 124,201 119,733 110,768 102,658 Gross margin from product sales 106,517 101,182 93,088 86,059 Net income 18,651 15,516 10,401 14,334 Net income per share .16 .13 .09 .12
61 73 11-YEAR FINANCIAL SUMMARY (UNAUDITED) (millions, except per share and employee data)
1994 1993 1992 1991 ________________________________________________________________________________ Total revenues $ 795.4 $ 649.7 $ 544.3 $ 515.9 Product sales 601.1 457.4 391.0 383.3 Royalties 126.0 112.9 91.7 63.4 Contract & other 25.6 37.9 16.7 20.4 Interest 42.7 41.5 44.9 48.8 _______________________________________ Total costs and expenses $ 665.8 $ 590.8 $ 522.3 $ 469.8 Cost of sales 95.8 70.5 66.8 68.4 Research & development 314.3 299.4 278.6 221.3 Marketing, general & administrative 248.6 214.4 172.5 175.3 Special charge - - - - Interest 7.1 6.5 4.4 4.8 _______________________________________ Income data Income (loss) before taxes $ 129.6 $ 58.9 $ 21.9 $ 46.2 Income tax provision 5.2 - 1.1 1.8 Net income (loss) 124.4 58.9 20.8 44.3 Net income (loss) per share 1.04 0.50 0.18 0.39 _______________________________________ Selected balance sheet data Cash & marketable securities $ 920.9 $ 719.8 $ 646.9 $ 711.4 Accounts receivable 146.3 130.5 93.9 69.0 Inventories 103.2 84.7 65.3 56.2 Property, plant & equipment, net 485.3 456.7 432.5 342.5 Other long-term assets 61.0 64.1 37.1 42.7 Total assets 1,745.1 1,468.8 1,305.1 1,231.4 Total current liabilities 220.5 190.7 133.5 118.6 Long-term debt 150.4 151.2 152.0 152.9 Total liabilities 396.3 352.0 297.8 281.7 Total stockholders' equity 1,348.8 1,116.8 1,007.3 949.7 _______________________________________ Other data Depreciation and amortization expense $ 53.5 $ 44.0 $ 52.2 $ 46.9 Capital expenditures 82.8 87.5 126.0 71.3 _______________________________________ Share information Shares used to compute EPS 119.5 117.1 114.0 112.5 Actual year-end 117.2 114.8 112.9 111.3 _______________________________________ Per share data Market price: High $ 53.50 $ 50.50 $ 39.50 $ 36.25 Low $ 41.75 $ 31.25 $ 25.88 $ 20.75 Book value $ 11.50 $ 9.73 $ 8.92 $ 8.53 _______________________________________ Number of employees 2,738 2,510 2,331 2,202 _______________________________________
The Company has paid no dividends. The Financial Summary above reflects adoption of FAS 115 in 1994, FAS 109 in 1992 and FAS 96 in 1988. All share and per share amounts reflect two-for-one split in 1986, two-for-one split in 1987. *Redeemable common stock began trading September 10, 1990; prior to that date all shares were common stock. Pursuant to the merger agreement with Roche, all shareholders as of effective date September 7, 1990, received for each common share owned, $18 in cash from Roche and one-half share of newly issued redeemable common stock from the Company. (1) Charges primarily related to Roche merger. (2) Primarily inventory-related charge. (3) Charge for purchase of in-process R&D. 62 74
1990 1989 1988 1987 1986 1985 1984 ____________________________________________________________________________________ $ 476.1 $ 400.5 $ 334.8 $ 230.5 $ 134.0 $ 89.6 $ 69.8 367.2 319.1 262.5 141.4 43.6 5.2 - 47.6 36.7 26.7 20.1 12.9 5.3 2.1 31.9 27.5 33.5 57.1 70.9 71.1 63.5 29.4 17.2 12.1 11.9 6.6 8.0 4.2 ____________________________________________________________________________________ $ 572.7 $ 352.9 $ 311.7 $ 186.6 $ 484.6 $ 83.0 $ 66.8 68.3 60.6 46.9 23.8 10.8 1.7 - 173.1 156.9 132.7 96.5 79.8 64.9 55.0 158.1 127.9 101.9 59.5 27.3 16.4 11.8 167.7(1) - 23.3(2) - 366.7(3) - - 5.5 7.5 6.9 6.8 - - - ____________________________________________________________________________________ $ (96.6) $ 47.5 $ 23.1 $ 43.9 $ (350.6) $ 6.6 $ 3.0 1.5 3.6 2.5 1.7 2.4 0.5 0.6 (98.0) 44.0 20.6 42.2 (353.0) 6.1 2.4 (1.05) 0.51 0.24 0.50 (5.10) 0.10 0.04 ____________________________________________________________________________________ $ 691.3 $ 205.0 $ 152.5 $ 158.3 $ 84.3 $ 99.8 $ 32.5 58.8 66.8 63.9 92.2 24.5 26.2 12.7 39.6 49.3 63.4 58.0 14.7 4.6 - 300.2 299.1 289.4 195.7 133.1 87.9 72.9 61.7 85.0 89.7 108.7 114.9 16.6 12.6 1,157.7 711.2 662.9 619.0 376.0 238.6 133.6 101.4 75.9 95.4 82.8 37.8 27.2 18.5 153.5 154.4 155.3 168.1 31.6 6.0 11.5 264.5 242.2 263.6 263.6 83.3 35.7 32.2 893.2 469.0 399.3 355.4 292.6 202.9 101.4 ____________________________________________________________________________________ $ 47.6 $ 44.6 $ 38.3 $ 23.5 $ 8.1 $ 5.7 $ 4.3 36.0 37.2 110.9 65.3 46.3 20.2 16.1 ____________________________________________________________________________________ 93.0 86.0 84.5 84.4 69.3 64.0 57.5 110.6 84.3 82.9 78.7 67.0 65.6 57.6 ____________________________________________________________________________________ $ 30.88 $ 23.38 $ 47.50 $ 64.75 $ 49.38 $18.81 $10.56 $ 27.50* $ 20.13 $ 16.00 $ 14.38 $ 28.00 $ 16.44 $ 8.56 $ 7.19 $ 21.75* $ 8.08 $ 5.56 $ 4.82 $ 4.52 $ 4.37 $ 3.09 $ 1.76 ____________________________________________________________________________________ 1,923 1,790 1,744 1,465 1,168 893 674 ____________________________________________________________________________________
63 75 COMMON STOCK AND REDEEMABLE COMMON STOCK INFORMATION Stock Trading Symbol GNE Stock Exchange Listings The redeemable common stock of the Company has been traded on the New York Stock Exchange and the Pacific Stock Exchange since September 10, 1990. The Company's common stock was traded on the New York Stock Exchange under the symbol GNE from March 2, 1988, until September 7, 1990, and on the Pacific Stock Exchange under the symbol GNE from April 12, 1988, until September 7, 1990. The Company's common stock was previously traded in the NASDAQ National Market System under the symbol GENE. No dividends have been paid on the common stock or redeemable common stock. The Company's merger with a wholly owned subsidiary of Roche Holdings, Inc. (Roche) was consummated on September 7, 1990. The Company's stockholders of record on September 7, 1990, received, for each share of common stock owned, $18 in cash from Roche and one-half share of newly issued redeemable common stock from the Company. See Note 9 to the consolidated financial statements for a further description of the merger transaction. Redeemable Common Stockholders As of December 31, 1994, there were approximately 20,512 stockholders of record of the Company's redeemable common stock.
Stock Prices Redeemable Common Stock 1994 1993 __________________________________________________________________________ High Low High Low _________________________________________________ 4th Quarter $ 53 1/2 $ 42 1/8 $ 50 1/2 $ 42 5/8 3rd Quarter 52 1/2 48 1/8 44 7/8 40 1/2 2nd Quarter 51 5/8 43 1/4 44 31 1/4 1st Quarter 51 3/8 41 3/4 39 3/4 31 7/8
64 76 STOCKHOLDER INFORMATION Stockholder Inquiries Communication concerning transfer requirements, lost certificates and change of address should be directed to Genentech's transfer agent: The First National Bank of Boston Stockholder Services Division Post Office Box 644 M/S 45-02-09 Boston, Massachusetts 02102-0644 Telephone: (617) 575-3400 If you need additional assistance or information regarding the company, or would like to receive a free copy of Genentech's Form 10-K and 10-Q reports filed with the Securities and Exchange Commission, contact the Investor Relations Department at Genentech's corporate offices at (415) 225-1599. Financial Information Genentech invites security analysts and representatives of portfolio management firms to contact: Lisa Brock Director, Investor Relations Telephone: (415) 225-1034 Independent Auditors Ernst & Young LLP San Jose, California 65 77 OFFICES AND BOARD OF DIRECTORS Offices HEADQUARTERS Genentech, Inc. 460 Point San Bruno Boulevard South San Francisco, California 94080-4990 (415) 225-1000 GENENTECH EUROPE LTD. P.O. Box 3255 Klingental 17 CH-4002 Basel Switzerland 41-61-688-9050 GENENTECH GMSH Jechtinger Strasse 11 D-79111 Freiburg l. Br. Germany 49-761-452-7811 GENENTECH (UK) LTD. Verulam Point Station Way St. Albans Herts Al1 SHE United Kingdom 44-707-366-777 GENENTECH B.V. Planetenweg 67 2132 HM Hoofddorp The Netherlands 31-250-34-3355 GENENTECH CANADA, INC. 1100 Burloak Drive Fifth Floor Burlington, Ontario L7L 682 (905) 336-6600 GENENTECH, LTD.-JAPAN Kakimi Kojimachi Bldg. Annex 4F 3-2-5, Kojimachi Chiyoda-Ku Tokyo, 102 Japan 81-33-288-2351 BOARD OF DIRECTORS HERBERT W. BOYER, PH.D. Retired Professor of Biochemistry and Biophysics University of California, San Francisco JURGEN DREWS, M.D. President of International Research and Development and a member of the Executive Committee, the Roche Group, a research- based health care company ARMIN M. KESSLER, PH.D. Member of the Board Roche Holding Ltd., Chief Operating Officer, F. Hoffman La-Roche Ltd. and Head of the Pharmaceutical Division, F. Hoffmann- La Roche and Co. Ltd., a research-based health care company LINDA FAYNE LEVINSON President Fayne Levinson Associates, Inc., a general management consulting firm J. RICHARD MUNRO Chairman of the Executive Committee of the Board, Time-Warner, Inc., a media and entertainment company DONALD L. MURFIN General Partner, Chemicals & Materials Enterprise Associates, L.P., a venture capital firm THOMAS J. PERKINS General Partner Kleiner Perkins Caufield & Byers, a venture capital firm JOHN T. POTTS, JR., M.D. Jackson Professor of Clinical Medicine, Harvard Medical School, Physician-in-Chief, Massachusetts General Hospital G. KIRK RAAB President and Chief Executive Officer, Genentech, Inc. C. THOMAS SMITH, JR. President and Chief Executive Officer, VHA, Inc. an alliance of 1,150 health care organizations in 47 states ROBERT A. SWANSON Chairman of the Board Genentech, Inc. DAVID S. TAPPAN, JR. Retired Director and Chief Executive Officer, Fluor Corporation, an international engineering and construction company 66 78 OFFICERS AND STAFF SCIENTISTS OFFICERS G. KIRK RAAB* President and Chief Executive Officer RICHARD A. BREWER* Senior Vice President LOUIS J. LAVIGNE, JR.* Senior Vice President and Chief Financial Officer ARTHUR D. LEVINSON, PH.D.* Senior Vice President JOHN P. MCLAUGHLIN* Senior Vice President and Secretary BARRY M. SHERMAN, M.D.* Senior Vice President and Chief Medical Officer WILLIAM D. YOUNG* Senior Vice President GREGORY BAIRD* Vice President -- Corporate Communications DAVID W. BEIER Vice President -- Government Affairs ROBERT GARNICK, PH.D. Vice President -- Quality MARTY GLICK Vice President and Treasurer BRADFORD S. GOODWIN Vice President and Controller DENNIS J. HENNER, PH.D. Vice President -- Research Technology PAUL F. HOHENSCHUH Vice President -- Manufacturing EDMON R. JENNINGS Vice President -- Sales and Marketing STEPHEN JUELSGAARD Vice President and General Counsel KURT KOPP Vice President and General Manager, Genentech Europe Ltd. BRYAN LAWLIS, PH.D. Vice President -- Process Science M. DAVID MACFARLANE, PH.D. Vice President -- Regulatory Affairs POLLY MOORE, PH.D. Vice President -- Information Resources HUGH NIALL, M.D. Vice President -- Research Discovery JAMES P. PANEK Vice President -- Engineering and Facilities ERIC J. PATZER, PH.D. Vice President -- Product Development KIM POPOVITS Vice President -- Sales STEPHEN RAINES, PH.D. Vice President -- Intellectual Property and Assistant Secretary LARRY SETREN* Vice President -- Human Resources NICHOLAS J. SIMON Vice President -- Business Development *Member, Operations Committee STAFF SCIENTISTS WILLIAM F. BENNETT, PH.D. Process Science PHILLIP W. BERMAN, PH.D. Immunology STUART E. BUILDER, PH.D. Process Science TIM GREGORY, PH.D. Process Science DENNIS J. HENNER, PH.D. Cell Genetics ROBERT D. HERSHBERG, PH.D. Process Science PAUL JARDIEU, PH.D. Immunology ANDREW J.S. JONES, D. PHIL. Process Science ANTHONY A. KOSSIAKOFF, PH.D. Protein Engineering LAURENCE A. LASKY, PH.D. Immunology ARTHUR D. LEVINSON, PH.D. Gene Expression and Oncogenes JENNIE P. MATHER, PH.D. Cell Biology TIMOTHY A. STEWART, PH.D. Endocrinology GORDON A. VENAR, PH.D. Vascular Biology JAMES A. WELLS, PH.D. Protein Engineering WILLIAM I. WOOD, PH.D. Molecular Biology 67 79 GENENTECH, INC. [PHOTO] Genentech, Inc. 460 Point San Bruno Boulevard South San Francisco, CA 94080-4990 (414) 225-1000 80 [PHOTO] Actimmune, Activase, Nutropin, Protropin and Pulmozyme are registered trademarks of Genentech, Inc. Auriculln is a registered trademark of Scios Nova Inc. Copyright 1995, Genentech, Inc. [logo] This entire report is printed on partially recycled paper. EX-99.G2 3 FORM 10-K FOR THE YEAR ENDED 12-31-94 1 Exhibit (g)(2) SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended: December 31, 1994 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission file number: 1-9813 GENENTECH, INC. A Delaware Corporation 94-2347624 (I.R.S. employer identification number) 460 Point San Bruno Boulevard (415) 225-1000 South San Francisco, California 94080-4990 (telephone number) Securities registered pursuant to Section 12(b) of the Act: ============================================================================== Title of Each Class Name of Each Exchange on Which Registered - ------------------------------------------------------------------------------ Redeemable Common Stock, New York Stock Exchange $.02 par value Pacific Stock Exchange ============================================================================== Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The approximate aggregate market value of voting stock held by nonaffiliates of the registrant is $1,938,520,599 as of March 13, 1995. (A) Number of shares of Common Stock outstanding as of March 13, 1995: 67,133,409 Number of shares of Redeemable Common Stock outstanding as of March 13, 1995: 50,427,615 Documents incorporated by reference: PARTS INCORPORATED DOCUMENT BY REFERENCE -------- ------------------- (1) Annual Report to stockholders for the year ended II December 31, 1994 (specified portions) (2) Definitive Proxy Statement with respect to the 1995 III Annual Meeting of Stockholders filed by Genentech, Inc. (SEC file No. 1-9813) with the Securities and Exchange Commission (hereinafter referred to as "Proxy Statement") - ----------------------------------------------------------------------------- (A) Excludes 79,457,425 shares of Common Stock and Redeemable Common Stock held by Directors, Officers and stockholders whose ownership exceeds five percent of either the Common Stock or Redeemable Common Stock outstanding at March 13, 1995. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant, or that such person is controlled by or under common control with the registrant. 2 PART I ITEM 1. BUSINESS Genentech, Inc. (the "Company") is an international biotechnology company that discovers, develops, manufactures and markets human pharmaceuticals for significant unmet medical needs. Genentech was organized in April 1976 as a California corporation and was reincorporated in Delaware in January 1987. The science of biotechnology product discovery and development is at the core of the Company's business and has led to ten of the approved pharmaceutical products of biotechnology. In September 1990, Roche Holdings, Inc. (Roche) acquired approximately 60% of the Company's voting stock in a merger transaction (Merger). The common stock Roche acquired in the Merger and redeemable common stock subsequently purchased on the open market represented approximately 65% of the outstanding equity of the Company as of March 13, 1995. Roche has the option to purchase all shares of outstanding redeemable common stock at $58.75 per share in the first calendar quarter of 1995, increasing to $60.00 per share on April 1, 1995. The redemption right expires on June 30, 1995. For the period of July 1, 1995 until June 30, 1996, Roche may submit a bid to purchase the remaining shares of the Company. The bid must not be for less than $60.00 per share and is subject to the approval of the Board of Directors and, subsequently, the non-Roche shareholders. Independent of its right to have the Company redeem the redeemable common stock, Roche is permitted to acquire additional shares of the Company's stock through open market or privately negotiated purchases, provided that Roche's aggregate holdings do not exceed 75% of the Company's stock outstanding on a fully diluted basis. As used in this report, except where the context otherwise indicates, the "Company" means Genentech, Inc. and its subsidiaries, including subsidiary operations in Europe, Canada and Japan. Products Genentech has five products that it has developed and currently manufactures and markets in the United States: Activase, registered trademark, (Alteplase, recombinant) recombinant tissue plasminogen activator; Protropin, registered trademark, (somatrem for injection) recombinant growth hormone; Nutropin, registered trademark, [somatropin (rDNA origin) for injection] human growth hormone; Pulmozyme, registered trademark, (dornase alfa) inhalation solution; and Actimmune, registered trademark, (Interferon gamma-1b) recombinant interferon gamma. Genentech also markets Activase, Protropin and Pulmozyme in Canada. Activase: Tissue plasminogen activator (t-PA) is an enzyme that is produced naturally by the body to dissolve blood clots. However, when a blood clot obstructs blood flow in the coronary artery and causes a heart attack, the body is unable to produce enough t-PA to dissolve the clot rapidly enough to prevent damage to the heart. Through recombinant DNA technology, Genentech produces Activase, a recombinant form of t-PA, in sufficient quantity for therapeutic use. The United States Food and Drug Administration (FDA) approved Activase for marketing in the United States in 1987 for the treatment of acute myocardial infarction (AMI or heart attack) and in 1990 for use in the treatment of acute pulmonary embolism (blood clots in the lungs). Phase III clinical trials are currently underway to evaluate Activase for ischemic stroke (stroke caused by blood clots in the arteries to the brain). Phase I studies are being performed to evaluate a second generation of t-PA which is anticipated to be easier to administer, work faster, cause less unwanted bleeding and require smaller doses than Activase. 3 In exchange for royalty payments, Genentech has licensed marketing rights to recombinant t-PA in Japan to Kyowa Hakko Kogyo, Ltd. (Kyowa) and Mitsubishi Kasei Corporation (Mitsubishi). Kyowa and Mitsubishi are marketing forms of recombinant t-PA under the trademarks Activacin, registered trademark, and GRTPA, registered trademark, respectively. In a number of countries outside of the United States, Canada and Japan, Genentech has licensed t-PA marketing rights to Boehringer Ingelheim International GmbH (Boehringer). Boehringer markets recombinant t-PA under the trademark Actilyse, registered trademark. Prior to February 1995 t-PA was marketed in Canada by Genentech under the Activase trademark and by Boehringer under the trademark Lysatec. In February 1995, Genentech purchased all t-PA Canadian marketing rights from Boehringer. Protropin: Human growth hormone is a naturally occurring human protein produced in the pituitary gland. It regulates metabolism and is responsible for growth in children. A recombinant growth hormone product developed by Genentech, Protropin 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, Genentech has licensed rights to recombinant growth hormone outside the United States and Canada to Pharmacia AB (formerly Kabivitrum AB), which manufactures and markets recombinant growth hormone under the trademarks Somatonorm, registered trademark, and Genotropin, registered trademark. Under the terms of the agreement with Pharmacia, Genentech will have the right to begin selling growth hormone in certain European countries in late 1995, and Pharmacia will have the right in late 1995 to begin selling their own growth hormone in the United States and Canada provided they have received regulatory approval. Nutropin: Nutropin is a human growth hormone similar to Protropin; however, it does not have the additional amino acid, methionine, found in the Protropin chemical structure. It was approved by the FDA in March 1994 for marketing for the treatment of growth hormone inadequacy in children. Nutropin was approved in November 1993 and launched in January 1994 for marketing in the United States for the treatment of growth hormone inadequacy in children due to chronic renal insufficiency (CRI); CRI causes irreversible damage to the kidneys and a variety of medical problems, including growth hormone inadequacy. The condition affects an estimated 3,000 children in the United States. Nutropin has been designated an Orphan Drug for treatment of growth hormone inadequacy in children with CRI in the United States. The Company is awaiting regulatory approvals to market a liquid formulation of Nutropin, aimed at providing improved convenience in administration. Phase III clinical trials are underway to evaluate Nutropin as a treatment for children with short stature associated with Turner Syndrome (a genetic disorder). Phase II clinical trials are currently underway with Nutropin to treat growth hormone inadequacy in adults. Pulmozyme: Pulmozyme is marketed in the United States, Canada and Europe for the management of cystic fibrosis, for which it has Orphan Drug designation in the United States. There are an estimated 53,000 patients with cystic fibrosis worldwide, a significant portion of whom are expected to be candidates for treatment. In 1992, the Company entered into a collaboration with F. Hoffmann-LaRoche, Ltd. (HLR) to codevelop and copromote Pulmozyme in Europe. In connection with this collaboration and the Company's efforts to expand its markets, Genentech Europe Limited (GEL), a Bermuda company, was established. GEL and affiliates are currently copromoting Pulmozyme in the United Kingdom, Ireland, Germany and the Netherlands. Presently, HLR is responsible for promoting the drug for cystic fibrosis in the remaining western European countries in the collaboration. In addition to sharing profits related to Pulmozyme sales from all Western European collaborative countries with HLR, the Company has received and will continue to receive milestone payments and technical support from HLR. Also, as part of the agreement with HLR, and in return for 4 royalties on product sales, the Company has granted HLR an exclusive license to distribute Pulmozyme in countries outside of Western Europe, the United States and Canada. Phase III international trials are ongoing to study the use of Pulmozyme to treat Chronic Obstructive Pulmonary Disease (COPD), a clinical syndrome of airway inflammation, infection and obstruction that leads to lung destruction. Actimmune: Actimmune is approved in the United States for the treatment of chronic granulomatous disease (CGD), a rare, inherited disorder of the immune system which affects an estimated 250 to 400 Americans. Actimmune received designation by the FDA in 1990 as an Orphan Drug for the treatment of CGD in the United States. Phase III clinical trials are ongoing to investigate the use of Actimmune to treat renal cell carcinoma, a cancer of the kidneys. Depending on clinical trial results, the Company hopes to expand the market potential of Actimmune over time by obtaining new approvals for indications with larger populations, but such expansion is not assured. Additionally, the Company receives royalty payments from Boehringer from the sale of interferon gamma in certain countries outside of the United States, Canada and Japan. Licensed Products: In addition to the royalties mentioned above, the Company also receives royalties on the following human health care products:
Product Trademark Company ____________________________ ____________ ______________________________ Recombinant human insulin Humulin Eli Lilly and Company (Lilly) Recombinant interferon alpha Roferon-A Hoffmann-La Roche, Inc. Hepatitis B vaccine Recombivax Merck and Company, Inc. Hepatitis B vaccine Engerix-B Smith-Kline Beecham Pharmaceuticals (SKB) Factor VIII Kogenate Miles, Inc. Bovine growth hormone Posilac Monsanto Corporation
In December 1994, the Company and Lilly reached an agreement regarding all patent infringement and breach of contract actions then pending between the two parties. Under the terms of the settlement, Lilly agreed to pay the Company up to $145 million ($25 million initially and 16 quarterly payments of $7.5 million), subject to certain restrictions, and the Company granted Lilly licenses, options to licenses, or immunities from suit for certain of the Company's patents. Future payments are required from Lilly on sales of these products. See "Item 3 Legal Proceedings" for further information. Products in Development: As part of Genentech's program of research and development, a number of other products are in various stages of development. Product development efforts cover a wide range of disorders or medical conditions, including cancer, respiratory disorders, cardiovascular diseases, endocrine disorders, inflammatory and immune problems, AIDS and neurological disorders. In addition to the new indications for existing products discussed above, below is a summary of products in clinical development: 5
Product Description - -------------------------------- ------------------------------------------------ Phase III Anti-HER2 Humanized Monoclonal A humanized monoclonal antibody targeted against Antibody a protein receptor, which may be useful in the treatment of severe breast cancer. Auriculin (registered trademark) A hormone that occurs naturally in the heart Anaritide which may be useful in treating acute renal failure (a collaboration between the Company and Scios Nova Inc.) Phase II Anti-IgE Humanized Monoclonal A humanized IgE monoclonal antibody designed to Antibody interfere early in the process that leads to symptoms of allergy such as allergic rhinitis and asthma. Nerve Growth Factor Nerve growth factor may aid the treatment of peripheral neuropathy. IGF-I IGF-I is being studied to determine if it can improve blood glucose control in type II diabetics. gp120 A protein on the surface of HIV-1, it is being studied as a prophylactic vaccine. IDEC-C2B8 A monoclonal antibody which may be useful in the treatment of non-Hodgkin's B-cell lymphomas (a collaboration between the Company and IDEC Pharmaceuticals Corporation).
Preclinical development products include an anti-VEGF humanized monoclonal antibody to treat cancer and diabetic retinopathies, a ras farnesyltransferase inhibitor for pancreatic and colon cancers, thrombopoietin for thrombocytopenia related to cancer treatment, and an oral IIb/IIIa antagonist for cardiovascular indications. In cases where a product does not fit with Genentech's marketing strategy, the Company may license the product to another company. These contract partners are chosen for their ability to both fund and perform advanced product development and to facilitate effective entry into major markets. Genentech has agreed to negotiate in good faith with Roche for a period of at least three months, but no more than six months, with a view towards reaching a mutually beneficial licensing or marketing arrangement, prior to entering into any material licensing or marketing agreement with a third party for any products, processes, inventions or developments made by Genentech or its subsidiaries. In the past Genentech has licensed the foreign rights to some of its products to major foreign pharmaceutical companies and actively coordinated development and clinical programs with these partners. In some cases Genentech has retained manufacturing rights to the licensed products. The Company has retained United States and European marketing rights for most of its products currently under development. These European marketing rights represent a significant expansion opportunity for the Company. In December 1994, the Company entered into a collaboration with Scios Nova Inc. (Scios Nova) for the United States and Canadian development of Scios Nova's Auriculin for the treatment of acute renal failure, which is currently in Phase III clinical trials. Under the terms of the collaboration, both companies will copromote Auriculin in the United States and Canada, sharing profits from its commercialization. The Company received exclusive rights to all markets outside the United States and Canada subject to a royalty obligation to Scios Nova. In connection with the collaboration, Genentech purchased Scios Nova non-voting preferred stock, which is convertible into shares of Scios Nova common stock, for $20 million. The Company established a line of credit for $30 million that Scios Nova may draw down at Scios Nova's discretion through 2002. This commitment is supported through December 31, 1997, by a bank letter of credit under which Scios Nova may draw up to $30 6 million directly from the bank, with immediate repayment of the funds due to the bank by the Company. Amounts drawn by Scios Nova under the bank letter of credit or directly from the Company are repayable in the form of cash or Scios Nova common stock (at the market price prevailing on the date of repayment) at Scios Nova's option any time through December 30, 2002. Interest on amounts borrowed by Scios Nova accrue to the Company at the prime rate of interest. At December 31, 1994, no amounts were drawn. In addition, the Company agreed to pay up to $50 million in benchmark payments, conditional on achieving certain predetermined commercialization goals. In March 1995, Genentech entered into a collaboration with IDEC Pharmaceuticals Corporation (IDEC) to develop IDEC's anti-CD20 monoclonal antibody, IDEC-C2B8, for the treatment of non-Hodgkin's B-cell lymphomas, for which Phase III clinical trials have begun. Under the terms of the agreement, Genentech and IDEC will copromote IDEC-C2B8 in the United Sates and Canada, with IDEC receiving a share of the profits. Genentech will retain commercialization rights throughout the rest of the world except certain countries in Asia, where Genentech has certain option rights. IDEC will receive royalties on sales outside the U.S. and Canada. In connection with the collaboration, Genentech will provide $9 million in preferred equity investments and licensing fees, up to $17.5 million in additional equity funding prior to U.S. approval, and up to $30.5 million in milestone and option payments. Distribution Genentech has a marketing department and a United States-based and Canada- based pharmaceutical sales and distribution organization for its human pharmaceuticals. Genentech's sales efforts are focused on specialist physicians based at major medical centers in the United States and Canada. Products are sold to distributors or directly to hospital pharmacies or medical centers. The distribution network for Pulmozyme in Western Europe is discussed in the "Products" section above. Genentech utilizes common pharmaceutical company marketing techniques, including advertisements, direct mail, and other methods. Genentech's products are available at no charge to qualified patients under Genentech's Uninsured Patient Programs in the United States. Genentech has 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 1994, Genentech provided certain marketing programs relating to Activase. The Activase Stocking Assistance Program provided extended payment terms, up to 195 days, to wholesalers on certain orders, subject to certain restrictions on the timing and quantities of the orders. Additionally, a comprehensive wastage replacement program exists for Activase which, subject to specific conditions, provides customers the right to return Activase to Genentech for replacement related to both patient related product wastage and product expiry. Genentech maintains the right to renew, modify or discontinue the above programs. As discussed in Note 1 in the "Notes to Consolidated Financial Statements" in the Company's 1994 Annual Report to Stockholders, the Company has certain customers who provided over 10% of total revenues. Also discussed in Note 1 are revenues from foreign customers in 1994, 1993 and 1992. Raw Materials Raw materials and supplies required for the production of Genentech's principal products are generally available in quantities adequate to meet the Company's needs. Proprietary Technology - Patents and Trade Secrets Genentech has a policy of seeking patents on inventions arising from its 7 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. The Company has either been granted patents or has patent applications pending which relate to a number of current and potential products, including products licensed to others. Genentech considers that in the aggregate its patent applications, patents and licenses under patents owned by third parties are of material importance to its 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. Genentech expects that litigation will likely be necessary to determine the validity and scope of certain of its proprietary rights. Genentech is currently involved in a number of patent lawsuits, as either a plaintiff or defendant, and administrative proceedings relating to the scope of protection of its patents and those of others. These lawsuits and proceedings may result in a significant commitment of Company resources in the future. There can be no assurance that the patents Genentech obtains or the unpatented proprietary technology it holds will afford Genentech significant commercial protection. Genentech has obtained licenses from various parties which it deems to be necessary or desirable for the manufacture, use or sale of its products. These licenses (both exclusive and non-exclusive) generally require Genentech to pay royalties to the parties on product sales. The Company's trademarks, ACTIVASE, PROTROPIN, NUTROPIN, PULMOZYME and ACTIMMUNE in the aggregate are considered to be of material importance and are registered in the United States Patent and Trademark Office and in other countries throughout the world. Royalty income recognized by the Company during 1994, 1993 and 1992 for patent licenses, know-how and other related rights amounted to $126.0 million, $112.9 million and $91.7 million, respectively. In 1994, 1993 and 1992 the Company incurred royalty expenses amounting to $50.5 million, $41.9 million and $35.9 million, respectively, under licenses from others. Competition Genentech faces competition, and believes significant long-term competition can be expected, from large pharmaceutical and 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 Genentech. Many of these companies have commercial arrangements with other companies in the biotechnology industry to supplement their own basic 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, the Company believes its competitive position is enhanced by its commitment to research leading to the discovery and development of new products and manufacturing methods. Additionally, other factors which should help the Company meet competition include ancillary services provided to support its products, customer service and dissemination of technical information to prescribers of its products and the health care community. Over the longer term, the Company's (and its partners') ability to successfully market current products, expand their usage and bring new products to the marketplace will depend on many factors, including 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, Orphan Drug Act legislation, the possible future enactments of biotechnology product protection in the United States as well as in Europe and Japan and the 8 possible enactment in the United States of health care reform legislation which may include expanded coverage for prescription drugs and cost containment measures. The Company believes it has strong patent protection or the potential for strong patent protection for a number of its products that generate royalty revenue or that it is developing; however, the courts will determine the ultimate strength of the patent protection of the Company's products and those on which the Company earns royalties. Loss of Orphan Drug Act protection for the Company's products that are currently marketed or in development, resulting from expiration of Orphan Drug status or amendment of the Orphan Drug Act, could lead to increased competition for those products and potentially lower future product revenues. Activase: In 1990, the Company began co-sponsorship of a major comparative mortality trial in AMI known as GUSTO (Global Utilization of Streptokinase and Activase for occluded coronary arteries). The GUSTO trial results, as reported in the "New England Journal of Medicine" in 1993, demonstrated that the use of an accelerated administration of Activase with intravenous heparin is a key to saving more lives following a heart attack than the use of streptokinase. The GUSTO trial showed that among patients receiving treatment using an accelerated dose of Activase, combined with the blood thinning agent heparin, administered intravenously, heart attack patient mortality was reduced by as much as 14% over other thrombolytic regimens studied in the trial. The positive results from the GUSTO trial have helped increase Activase's market share in 1994 to more than 70% in the United States for the treatment of AMI. In June 1994, an FDA advisory committee unanimously agreed that the accelerated infusion of Activase used in the GUSTO trial has a clinically significant mortality benefit in the treatment of heart attacks and recommended that the new dosing regimen be incorporated into the product's labeling. Factors which may influence future Activase sales include: the increase in market demand for thrombolytic therapies; the continued impact of the GUSTO trial results; and physicians' personal experiences in the administration of thrombolytic therapy. Genentech is aware of other companies or combinations of companies actively pursuing the development for the United States market of nonrecombinant or recombinant t-PA or derivatives of that substance, and additional companies or combinations of companies pursuing the development of other types of potentially competitive thrombolytic agents. Genentech is conducting Phase I clinical trials on a second generation of t-PA which, subject to the ultimate outcome of the studies, could have a favorable impact on the Company's competitive position. Although Genentech believes it will have a strong patent position with respect to t-PA, its patents may not cover products with similar functions which are not based on t-PA, and competitors have been and may continue to be successful in developing effective thrombolytic agents which are not covered by Genentech's patents. Protropin and Nutropin: Protropin was approved in late 1985 and was designated an Orphan Drug which provided seven years of market exclusivity for its use in the treatment of growth hormone inadequacy in children. In 1987, a product similar to Nutropin, produced by Lilly (and marketed under the trademark Humatrope, registered trademark, human growth hormone), was approved for treatment of growth hormone inadequacy in children and was designated an Orphan Drug. Protropin was protected from some possible additional competition until March 1994, by virtue of the designation of Lilly's Humatrope as an Orphan Drug. While several potential competitors are preparing to independently market a version of human growth hormone similar to that currently sold by Lilly since Lilly's Orphan Drug exclusivity expired, the Company is not aware of any third party efforts to market a version of human growth hormone similar to Protropin. Based on information currently available, Protropin and Nutropin have approximately a 66% share of the United States market for treatment of children with growth hormone inadequacy. Factors that may influence future Protropin and Nutropin sales include: the number and market entry dates of new competitive products and their effect on the Company's market share and pricing; the availability of third party reimbursement for the costs of such 9 therapies; and the outcome of litigation involving the Company's patents for growth hormone and related processes, including actions described below. Pulmozyme: Sales of Pulmozyme for the management of cystic fibrosis in the United States, Canada and some countries in Europe began in early 1994. As approvals for marketing the product in other European countries are received, the Company expects sales to grow. Other factors which may influence future sales of Pulmozyme for the management of cystic fibrosis include: the number and kinds of patients benefiting from such therapy; physicians' personal experiences in the use and administration of the therapy; the availability of third party reimbursement for the cost of such therapy; the development of alternative therapies for the treatment and cure of cystic fibrosis; the development of additional indications for using Pulmozyme; and the cost of Pulmozyme therapy. Actimmune: Actimmune received designation as an Orphan Drug by the FDA in 1990 for the treatment of CGD. Government Regulation 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 marketing of drugs for human use. Regulations similar to the requirements of the FDA with respect to the approval of new drugs are encountered in most foreign countries where the Company's principal products are sold. 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 an NDA (New Drug Application), a PLA (Product License Application) or an ELA (Establishment License Application) are substantial and can require a number of years, although recently revised regulations are designed to reduce somewhat the time for approval of new products. Although it is difficult to predict the ultimate effect, if any, these matters or any other pending or future legislation, regulations or government actions may have on its business, the Company believes that the development of new and improved products which address critical unmet medical needs through its research should enable it to compete effectively within this environment. Research and Development A major portion of the Company's operating expenses to date have been related to the research and development of products either on its own behalf or under contracts. During 1994, 1993 and 1992 the Company's research and development expenses were $314.3 million, $299.4 million and $278.6 million, respectively. The Company has sponsored approximately 98%, 99% and 97% of its research and development for the years 1994, 1993 and 1992, respectively. Prior to 1987, licensees of the Company's products had provided significant funding of research and development expenses. However, with the increase in product sales, and as a result of the Merger, the Company has been able to fund most of its own research and development. The Company's research efforts have been the primary source of the Company's products. The Company intends to maintain its strong commitment to research as an essential component of its product development effort. In the future, licensed technology developed by outside parties could become an additional source of potential products. Human Resources As of December 31, 1994 Genentech had 2,738 employees in the United States, 10 Europe, Canada and Japan. Environment Genentech seeks to comply with all applicable statutory and administrative requirements concerning environmental quality. The Company has made, and will continue to make, the necessary 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 the Company's capital expenditures, earnings or competitive position. ITEM 2. PROPERTIES Genentech's major facilities are located in a research and industrial park in South San Francisco, California in both leased and owned properties. The Company currently utilizes approximately 1.6 million square feet of its facilities for research and development, manufacturing, marketing and administrative activities. Approximately two-thirds of the square footage is in owned property, a portion of which is subject to a $1.2 million mortgage, and the remainder is leased. The Company has made and continues to make improvements to these properties to accommodate its growth. In addition, the Company owns approximately 16 acres adjacent to its current facilities that may be used for future expansion. The Company expects to develop a new manufacturing facility of approximately 0.4 million square feet in Vacaville, California over the next three years under a leasing arrangement. The Company also has leases for certain additional facilities in several locations in the United States, Europe, Canada and Japan. Genentech believes its facilities are in good operating condition and that the real property owned or leased, combined with the new Vacaville site, are adequate for all present and foreseeable future uses. Genentech believes any additional facilities could be obtained or constructed with the Company's capital resources. ITEM 3. LEGAL PROCEEDINGS The Company and its directors are defendants in two suits filed in California in 1990 challenging their actions in connection with the Merger. In December 1994, the Company and Eli Lilly and Company (Lilly) reached a settlement regarding all patent infringement and breach of contract actions then pending between the two parties regarding recombinant human growth hormone (hGH) and recombinant human insulin. All of these actions had been previously consolidated in the Federal District Court for the Southern District of Indiana. Under the terms of the settlement Lilly agreed to pay the Company up to $145 million ($25 million initially and 16 quarterly payments of $7.5 million), subject to certain restrictions, and the Company granted Lilly licenses, options to licenses, or immunities from suit for certain of the Company's patents. Future payments are required from Lilly on sales of these products. The Company will continue to pursue patent invalidity and non- infringement claims against the Regents of the University of California (UC), which has sued Genentech for infringing a patent owned by UC relating to hGH. In a related matter, in December 1994, the Company also settled its patent infringement action against Centocor, Inc. whereby the Company granted Centocor a royalty bearing license to its Cabilly patent for Centocor's monoclonal anti-IIb/IIIa antibody. The suit was orginally filed in the Federal District Court for Northern California. On September 21, 1993, the United States International Trade Commission (the "ITC") voted in favor of instituting an investigation based on a recombinant human growth hormone patent infringement complaint filed by Genentech against Bio-Technology General Corporation and its affiliate ("BTG") and Novo Nordisk A/S and certain of its affiliates ("Novo") (BTG and Novo are collectively referred to as the "Competitors"). The complaint asked the ITC to impose a ban on importation of hGH products for treatment of growth hormone inadequacy by 11 the Competitors in the United States. On November 29, 1994, the administrative law judge of the ITC found, on an incomplete record, that BTG infringed two Genentech process patents and Novo infringed one process patent covering hGH; however, the judge recommended that the case be dismissed because Genentech delayed in providing documents to the Competitors. Genentech did not initially produce the documents because it believed that they were protected by the attorney-client privilege. Genentech filed a petition for a review by the full Commission of the judge's recommendation dismissing the complaint, but on January 17, 1995 the Commission declined such review and agreed that the case be dismissed. On March 16, 1995 the Company filed an appeal of the Commission's decision in the United States Court of Appeals for the Federal Circuit. On December 1, 1994 the Company filed suit against the Competitors in the U.S. District Court in Delaware seeking damages from the Competitors, and asking for an injunction blocking the Competitors from marketing hGH in the United States. On November 30, 1994, Novo brought suit against the Company in the U.S. District Court for the Southern District New York, alleging that the patents in the ITC action are invalid and not infringed by Novo. On January 6, 1995, BTG brought suit against the Company in the U.S. District Court from the Southern District of New York seeking to prevent the Company from further patent infringement action against BTG and alleging unfair competition, antitrust and malicious prosecution claims. On December 22, 1993, Tanox Biosystems, Inc. (Tanox) sued the Company, Roche Holdings, Inc., Roche Holdings Ltd., and Hoffmann-LaRoche Inc. in the State District Court of Harris County, Texas alleging, among other things, trade secret misappropriation, breach of contract, breach of the duty of good faith and fair dealing, and breach of confidential relationship relating to a 1989 confidentiality agreement and a materials transfer agreement between the Company and Tanox. The suit seeks injuctive relief, unspecified punitive damages, a royalty free sublicense to certain third party patents and legal fees. On January 21, 1994, the Company filed suit against Tanox in the Federal District Court for the Southern District of Texas, for infringing a Genentech patent that covers antibody technology related to chimeric and humanized immunoglobulin compositions, expression vectors and methods. Genentech's suit encompasses all of Tanox's infringing activities, including development efforts for antibodies to IgE, a protein central to allergic reactions, and seeks injunctive relief, an accounting for damages, including interest and costs, trebling of the damages due to the willful nature of Tanox's infringement and legal fees. Genentech's suit also seeks a declaratory judgement that it has not breached any agreement with Tanox. In April, 1994, Tanox's suit and Genentech's suit were consolidated in the Federal District Court for the Southern District of Texas. On February 1, 1995, Tanox filed its First Amended Complaint that added additional defendants, additional causes of action and specified an alleged monetary damage amount. On February 1, 1995, Genentech filed an Amended Complaint and added claims against Ciba- Geigy, Ltd. (Tanox's exclusive licensee of its technology) for patent infringement of the Genentech patent described above. The Company is also a defendant or plaintiff in other patent infringement and product liability cases. In addition, the FDA is investigating the Company's promotional practices in connection with Activase, Protropin and Pulmozyme. Based upon the nature of the claims made and the investigations completed to date by the Company and its counsel, the Company believes the outcome of all of the actions described above will not have a material effect on the financial position, results of operations or cash flows of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 12 GENENTECH, INC. EXECUTIVE OFFICERS The executive officers of the Company and their respective ages and positions with the Company are as follows:
Name Age Position - ---- --- -------- G. Kirk Raab 59 President and Chief Executive Officer Richard B. Brewer 43 Senior Vice President Louis J. Lavigne, Jr. 46 Senior Vice President and Chief Financial Officer Arthur D. Levinson, Ph.D. 44 Senior Vice President John P. McLaughlin 43 Senior Vice President and Secretary Barry M. Sherman, M.D. 53 Senior Vice President and Chief Medical Officer William D. Young 50 Senior Vice President Gregory Baird 44 Vice President - Corporate Communications David W. Beier 46 Vice President - Government Affairs Robert Garnick, Ph.D. 45 Vice President - Quality Marty Glick 45 Vice President and Treasurer Bradford S. Goodwin 40 Vice President and Controller Dennis J. Henner, Ph.D. 43 Vice President - Research Technology Paul F. Hohenschuh 52 Vice President - Manufacturing Edmon R. Jennings 47 Vice President - Sales and Marketing Stephen G. Juelsgaard 46 Vice President, General Counsel and Assistant Secretary Kurt Kopp 46 Vice President and General Manager, Europe Bryan Lawlis, Ph.D. 43 Vice President - Process Science M. David MacFarlane, Ph.D. 54 Vice President - Regulatory Affairs Polly Moore, Ph.D. 47 Vice President - Information Resources Hugh D. Niall, M.D. 57 Vice President - Research Discovery James P. Panek 41 Vice President - Engineering and Facilities Eric J. Patzer, Ph.D. 45 Vice President - Development Kim Popovits 36 Vice President - Sales Stephen Raines, Ph.D. 57 Vice President - Intellectual Property and Assistant Secretary Larry Setren 43 Vice President - Human Resources Nicholas J. Simon 40 Vice President - Business Development All officers are elected annually by the Board of Directors. There is no family relationship among any of the officers or directors.
Business Experience Mr. Raab was elected Chief Executive Officer in February 1990. He joined the Company in February 1985 as President, Chief Operating Officer and Director. Mr. Raab was President, Chief Operating Officer and Director of Abbott Laboratories, a health care company, from July 1981 to January 1985. Mr. Brewer was elected Senior Vice President in December 1992. Mr. Brewer has held a number of other positions in the Marketing Department including Vice President of Sales and Marketing. He joined the Company in April 1984 as Product Manager for endocrine products. Mr. Lavigne was elected Senior Vice President in July 1994. He was elected Chief Financial Officer in August 1988 and elected Vice President in July 1986. Prior to that, he had been Controller since May 1983 and an officer of the Company since February 1984. Mr. Lavigne joined the Company in July 1982 as Assistant Controller. 13 Dr. Levinson was elected Senior Vice President in December 1992. Dr. Levinson has held a number of other positions, including Vice President of Research, subsequent to joining the Company in May 1980 as a Senior Scientist. Mr. McLaughlin has served as Senior Vice President and Secretary since July 1994. He was elected Senior Vice President, General Counsel and Secretary in 1993, and elected Vice President, General Counsel and Secretary in 1989. He joined the Company as Vice President of Government Affairs in September 1987 from Royer, Shacknai & Mehle, a Washington, D.C. law firm, where he was a partner. Mr. McLaughlin was Counsel to the House Energy and Commerce Subcommittee on Health and the Environment and earlier served as counsel to the House Subcommittee on Consumer Protection and Finance. Dr. Sherman was elected Senior Vice President and Chief Medical Officer in February 1995 and had served as Vice President of Medical Affairs since February 1989. He joined the Company in 1985 as Director of Clinical Research. Prior to joining the Company, he was Professor of Medicine, Associate Chairman of the Department of Internal Medicine and Director of the Clinical Research Center at the University of Iowa. Mr. Young was elected Senior Vice President in August 1988. He was Vice President of Manufacturing and Process Science from April 1983 until 1988. Mr. Young joined the Company in September 1980 as Director of Manufacturing from Eli Lilly and Company. Mr. Baird joined the Company in February 1992 as Vice President of Corporate Communications. Prior to joining Genentech, Mr. Baird was employed by G.D. Searle & Co. for five years as Vice President of Corporate Communications. Mr. Beier joined the Company in March 1989 as Vice President of Government Affairs. Prior to joining Genentech, Mr. Beier spent 10 years as counsel to the Committee on the Judiciary of the United States House of Representatives where he was responsible for intellectual property and international trade issues. Dr. Garnick was elected Vice President of Quality in April 1994. He was Senior Director of Quality Control from 1990 to 1994 and Director of Quality Control from 1988 to 1990. Dr. Garnick joined the Company in August 1984 from Armour Pharmaceutical. Mr. Glick was elected Vice President in July 1991. He joined the Company in June 1987 as Director of Tax and was elected Treasurer in July 1990. Before joining Genentech, Mr. Glick was employed by Levi Strauss & Co. for seven years, most recently as Director of Tax Planning. Mr. Goodwin was promoted to Controller in June 1989 and elected Vice President in July 1993. Prior to Mr. Goodwin's current position, he was the Director of Financial Planning and Analysis, the Assistant Controller and the General Auditor. Before joining Genentech in April 1987, Mr. Goodwin worked for Price Waterhouse, an international public accounting firm, for 10 years, most recently as Senior Audit Manager. Dr. Henner was elected Vice President of Research Technology in July 1994. From 1990 to 1994 he was Senior Director of Research Technology. Dr. Henner joined the Company in 1981 as a Scientist in Research. Prior to joining Genentech, Dr. Henner was at Scripps Clinic and Research Foundation. Mr. Hohenschuh was elected Vice President of Manufacturing in September 1989 He was Vice President of Biochemical Manufacturing from July 1986 until 1989 and Senior Director of Biochemical Manufacturing from June 1985 to June 1986 Mr. Hohenschuh joined the Company in October 1982 as Director of Biochemical Manufacturing. Mr. Jennings was elected to Vice President of Sales and Marketing in January 1994 and had served as Vice President of Sales since December 1990. He joined 14 the Company in September 1985 as Western Area Sales Manager. Prior to joining Genentech, Mr. Jennings was Western Region Sales Manager of Bristol-Myers' Oncology Division. Mr. Jennings held various sales and management positions during his twelve-year career with Bristol-Myers. Mr. Juelsgaard was elected Vice President, General Counsel and Assistant Secretary in July 1994, and was elected Vice President of Corporate Law in February 1993. He joined the Company in 1985 as Corporate Counsel and subsequently held the positions of Senior Corporate Counsel and Chief Corporate Counsel. Mr. Kopp joined the Company in January 1993 as Vice President and General Manager, Europe. Mr. Kopp was employed by F. Hoffmann-La Roche, Ltd from 1980 until December 1992, most recently as Regional Director for Latin America. Dr. Lawlis was elected Vice President of Process Science in July 1994. Dr. Lawlis joined the Company in February 1981 as a Scientist in Biocatalysis; most recently he was Senior Director of Process Science. Prior to joining Genentech, Dr. Lawlis was a National Institutes of Health Post Doctoral Fellow at Kansas State University. Dr. MacFarlane joined the Company in August 1989 as Vice President of Regulatory Affairs. Dr. MacFarlane was employed by Glaxo, Inc. from 1978 until he joined Genentech. At Glaxo, Dr. MacFarlane had served as Vice President of Regulatory Affairs, Director of Regulatory Affairs, and Director of Research and Professional Services. Dr. Moore was elected Vice President of Information Resources in April 1994. She was Senior Director of Information Resources from July 1992 to 1994 and Director of Computer Resources from November 1987 to June 1992. Dr. Moore joined Genentech in August 1982 as a Senior Systems Analyst in Scientific Computing. Dr. Niall was elected Vice President of Research Discovery in July 1991. He joined the Company in 1985 as Director of Protein Chemistry and subsequently held the positions of Director of Developmental Biology and Senior Director of Research Discovery. Mr. Panek was elected Vice President of Engineering and Facilities in July 1993. He joined the Company in 1982 and held a number of positions in the manufacturing division before becoming Director of Engineering and Facilities in 1988. Prior to joining Genentech, Mr. Panek was employed by Eli Lilly and Company for six years. Dr. Patzer was elected Vice President of Development in February 1993. He joined the Company in 1981 as a Scientist and subsequently held the positions of Senior Scientist, Director and Senior Director. Ms. Popovits was elected Vice President of Sales in October 1994. She was Director of Field Sales from January 1993 to 1994 and Regional Manager of the Sales Department from October 1989 to December 1992. Ms. Popovits was at Dupont Critical Care for six years prior to joining the Company in November 1987 as Division Manager in the Southeast region. Dr. Raines was elected Vice President of Intellectual Property in March 1989 and Assistant Secretary in April 1989. He joined the Company as Vice President of Patents in May 1988. Dr. Raines was employed by Warner-Lambert Company from 1973 to 1988 holding numerous positions in the Legal Division and ultimately acted as Counsel for the Intellectual Property Department. Mr. Setren was elected Vice President of Human Resources in April 1989. He joined the Company in February 1986 as Director of Human Resources. Before joining Genentech, Mr. Setren was Vice President of Human Resources at the Getz Corporation. Mr. Simon was elected Vice President of Business Development in December 1994. 15 He was Senior Director of Business Development from December 1993 to 1994. Mr. Simon joined Genentech as a Director in Business Development in December 1989 from Koma Corporation. Mr. Jennings is named as a defendant in a criminal proceeding pending in the U.S. District Court for the District of Minnesota alleging conspiracy, mail fraud and wire fraud in connection with prescribing Protropin. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The sections labeled "Common Stock and Redeemable Common Stock Information" and Notes 9 and 11 of the Notes to Consolidated Financial Statements appearing on pages 64, 54 through 55, and 56 through 58, respectively, of the Company's 1994 Annual Report to Stockholders are incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The section labeled "11-Year Financial Summary" appearing on pages 62 and 63 of the Company's 1994 Annual Report to Stockholders is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The section labeled "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing on pages 33 through 38 of the Company's 1994 Annual Report to Stockholders is incorporated herein by reference. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements and Notes to Consolidated Financial Statements appearing on pages 40 through 60, the Report of Ernst & Young LLP, Independent Auditors, appearing on page 61 and the section entitled "Quarterly Financial Data (unaudited)" appearing on page 61 of the Company's 1994 Annual Report to Stockholders are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) The sections labeled "Nominees" and "Section 16 Reporting" appearing in the Company's Proxy Statement in connection with the 1995 Annual Meeting of Stockholders on pages 3 through 5 and 11 are incorporated herein by reference. (b) Information concerning the Company's Executive Officers is set forth in Part I of the Form 10-K. 16 ITEM 11. EXECUTIVE COMPENSATION The sections labeled "Executive Compensation", "Compensation of Directors", "Compensation of Executive Officers", "Summary of Compensation", "Stock Option Grants and Exercises", "Employment Agreements", "Loans and Other Compensation" and "Compensation Committee Interlocks and Insider Participation" appearing in the Company's Proxy Statement in connection with the 1995 Annual Meeting of Stockholders on pages 11 through 18 and 20 are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The sections labeled "Merger with Roche Holdings, Inc.", "Principal Stockholders of Genentech" and "Security Ownership of Management" appearing in the Company's Proxy Statement in connection with the 1995 Annual Meeting of Stockholders on pages 1 through 2 and 10 through 11 are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The section labeled "Certain Relationships and Related Transactions" appearing in the Company's Proxy Statement in connection with the 1995 Annual Meeting of Stockholders on pages 21 through 23 is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Index to Financial Statements The following Financial Statements and supplementary data are included in the Company's 1994 Annual Report to Stockholders and are incorporated herein by reference pursuant to Item 8 of this Form 10-K.
Page(s) in 1994 Annual Report to Stockholders ---------------------- Consolidated Statements of Income for each of the three years in the period ended December 31, 1994 40 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1994 41 Consolidated Balance Sheets at December 31, 1994 and 1993 42 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1994 43 Notes to Consolidated Financial Statements 44-60 Report of Ernst & Young LLP, Independent Auditors 61 Quarterly Financial Data (unaudited) 61
2. Financial Statement Schedule The following schedule is filed as part of this Form 10-K: 17 Schedule II- Valuation and Qualifying Accounts for each of the three years in the period ended December 31, 1994. All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements or notes thereto. 3. Exhibits Exhibit No. Description ----------- ----------- 3.1 Certificate of Incorporation.(2) 3.2 By-laws.(2) 3.3 Amended Certificate of Incorporation.(8) 3.4 Restated By-Laws.(9) 4.1 Indenture, dated March 27, 1988 ("Indenture") for U.S. $150,000,000 5% Convertible Subordinated Debentures due 2002.(3) 4.2 First Supplemental to Indenture, dated August 17, 1990.(9) 4.3 Rights Agreement, dated April 21, 1988, between the Company and The First National Bank of Boston, as Rights Agent.(4) 10.1* 1984 Incentive Stock Option Plan.(2) 10.2* Restated 1984 Non-Qualified Stock Option Plan.(11) 10.3* Agreements dated February 12, 1985 and May 14, 1985 between the Company and G. Kirk Raab.(1) 10.4 Patent License Agreement with Columbia University dated October 12, 1988.(3) 10.5 Amended and Restated Contract for the Sale and Distribution of Protropin dated as of March 1, 1991.(10) 10.6* Agreement dated April 15, 1988 between the Company and G. Kirk Raab.(5) 10.7* Restated Relocation Loan Program.(10) 10.8* Employment Agreement, dated October 25, 1989, between the Company and G. Kirk Raab.(7) 10.9* Employment Agreement, dated October 25, 1989, between the Company and William D. Young.(7) 10.10* Employment Agreement, dated October 25, 1989, between the Company and Louis J. Lavigne, Jr.(7) 10.11* Employment Agreement, dated October 25, 1989, between the Company and John P. McLaughlin.(7) 10.12 Agreement and Plan of Merger, dated as of February 2, 1990, among 18 the Company, Roche Holdings, Inc. and HLR (U.S.), Inc. with exhibits.(6) 10.13* Restated 401(k) Plan.(11) 10.14* Agreements dated June 27, 1989 between the Company and G. Kirk Raab.(7) 10.15* 1991 Employee Stock Plan, as amended.(12) 10.16* Amended 1990 Stock Option/Stock Incentive Plan.(11) 10.17* Amended Employment Agreement, dated July 31, 1990, between the Company and G. Kirk Raab.(9) 10.18* Amended Employment Agreement, dated July 31, 1990, between the Company and William D. Young.(9) 10.19* Amended Employment Agreement, dated July 31, 1990, between the Company and Louis J. Lavigne, Jr.(9) 10.20* Amended Employment Agreement, dated July 31, 1990, between the Company and John P. McLaughlin.(9) 10.21 Governance Agreement, dated September 7, 1990, between the Company and Roche Holdings, Inc.(9) 10.22 Heads of Agreement, dated as of February 11, 1992, between the Company and F. Hoffmann-LaRoche Ltd.(10) 10.23 Agreement dated June 6, 1991 between the Company and Grandview Drive Joint Venture.(10) 10.24* Supplemental Plan.(10) 10.25* Agreements dated October 17, 1990 between the Company and G. Kirk Raab.(10) 10.26* Agreement dated March 17, 1992 between the Company and Robert A. Swanson.(10) 10.27* 1994 Stock Option Plan.(11) 13.1 1994 Annual Report to Stockholders.(12) 23.1 Consent of Ernst & Young LLP, Independent Auditors.(12) 27.1 Financial Data Schedule.(12) 28.1 Description of the Company's capital stock.(2) (b) Reports on Form 8-K There were no reports on Form 8-K filed for the quarter ended December 31, 1994. - -------------------- (1) Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31, 1985 and incorporated herein by reference. (2) Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31, 1986 and incorporated herein by reference. 19 (3) Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31, 1988 and incorporated herein by reference. (4) Filed as an exhibit to Form 8-K dated May 3, 1988 and incorporated herein by reference. (5) Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31, 1988 and incorporated herein by reference. (6) Filed as an exhibit to Form 8-K dated February 15, 1990 and incorporated herein by reference. (7) Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31, 1989 and incorporated herein by reference. (8) Filed as an exhibit to Form S-4 dated May 2, 1990 and incorporated herein by reference. (9) Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31, 1990 and incorporated herein by reference. (10) Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated herein by reference. (11) Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. (12) Filed with this document. * As required by Item 14(a)(3) of Form 10-K, the Company identifies this Exhibit as a management contract or compensatory plan or arrangement of the Company. For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statements on Form S-8 Nos. 2-95744, 33-9292, 33-16671, 33-39631 and 33-60816: 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 foregoing provisions, 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 Securities Act of 1933 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, 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 whether such indemnification by it is against public policy as expressed in the Act and shall be governed by the final adjudication of such issue. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GENENTECH, INC. Registrant Date: March 30, 1995 By: /s/ BRADFORD S. GOODWIN ---------------------------------- Bradford S. Goodwin Vice President and Controller (Principal Accounting Officer) POWER OF ATTORNEY 20 KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Louis J. Lavigne, Jr., Senior Vice President and Chief Financial Officer, and Bradford S. Goodwin, Vice President and Controller, his attorney-in-fact, with the full power of substitution, for him in any and all capacities, to sign any amendments to this report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signature Title Date --------- ----- ---- Chief Executive Officer: /s/ G. KIRK RAAB President, Chief Executive March 30, 1995 - --------------------------- Officer and Director G. Kirk Raab Principal Financial Officer: /s/ LOUIS J. LAVIGNE, JR. Senior Vice President and March 30, 1995 - --------------------------- Chief Financial Officer Louis J. Lavigne, Jr. Director: /s/ HERBERT W. BOYER Director March 30, 1995 - --------------------------- Herbert W. Boyer /s/ JURGEN DREWS Director March 30, 1995 - --------------------------- Jurgen Drews /s/ ARMIN M. KESSLER Director March 30, 1995 - --------------------------- Armin M. Kessler /s/ LINDA F. LEVINSON Director March 30, 1995 - --------------------------- Linda F. Levinson /s/ J. RICHARD MUNRO Director March 30, 1995 - --------------------------- J. Richard Munro /s/ DONALD L. MURFIN Director March 30, 1995 - --------------------------- Donald L. Murfin /s/ JOHN T. POTTS, JR. Director March 30, 1995 21 - --------------------------- John T. Potts, Jr. /s/ C. THOMAS SMITH, JR. Director March 30, 1995 - --------------------------- C. Thomas Smith, Jr. /s/ ROBERT A. SWANSON Director March 30, 1995 - --------------------------- Robert A. Swanson /s/ DAVID S. TAPPAN, JR. Director March 30, 1995 - --------------------------- David S. Tappan, Jr. SCHEDULE II GENENTECH, INC. VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 1994, 1993 and 1992 (in thousands)
Additions Balance at Charged to Balance at Beginning of Costs and End of Period Expenses Deductions(1) Period ------------ ---------- ---------- ---------- Allowance for doubtful accounts and returns: Year Ended December 31, 1994: $ 3,572 $ 5,583 $ (4,733) $ 4,422 ========= ========= ========= ========= Year Ended December 31, 1993: $ 2,220 $ 4,003 $ (2,651) $ 3,572 ========= ========= ========= ========= Year Ended December 31, 1992: $ 3,780 $ 2,460 $ (4,020) $ 2,220 ========= ========= ========= ========= Inventory reserves: Year Ended December 31, 1994: $ 2,606 $ 11,940 $ (1,538) $ 13,008 ========= ========= ========= ========= Year Ended December 31, 1993: $ 3,094 $ 1,194 $ (1,682) $ 2,606 ========= ========= ========= ========= Year Ended December 31, 1992: $ 3,395 $ 289 $ (590) $ 3,094 ========= ========= ========= ========= Reserve for non-marketable equity securities:
22 Year Ended December 31, 1994: $ 3,875 $ 748 $ - $ 4,623 ========= ========= ========= ========= Year Ended December 31, 1993: $ 3,275 $ 600 $ - $ 3,875 ========= ========= ========= ========= Year Ended December 31, 1992: $ 1,000 $ 2,275 $ - $ 3,275 ========= ========= ========= ========= (1) Represents amounts written off or returned against the allowance or reserves.
INDEX OF EXHIBITS FILED WITH FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1994 Exhibit No. Description - ----------- ----------- 10.15 1991 Employee Stock Plan, as amended. 13.1 1994 Annual Report to Stockholders 23.1 Consent of Ernst & Young LLP, Independent Auditors 27.1 Financial Data Schedule 23 Exhibit 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Genentech, Inc. of our report dated January 17, 1995, included in the 1994 Annual Report to Stockholders of Genentech, Inc. Our audits also included the financial statement schedule of Genentech, Inc. listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements pertaining to the 1991 Employee Stock Plan, the 1990 Stock Option/Stock Incentive Plan, the 1984 Incentive Stock Option Plan and the 1984 Non-Qualified Stock Option Plan, the shares issuable to certain warrant holders, the shares issuable to certain convertible subordinated debenture holders and the Genentech, Inc. Tax Reduction Investment Plan and in the related Prospectuses of our report dated January 17, 1995, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedules included in this Annual Report (Form 10-K) of Genentech, Inc. Ernst & Young LLP San Jose, California March 28, 1995 EX-99.G3 4 FORM 10-Q FOR QUARTER ENDED 3-31-95 1 Exhibit (g)(3) SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) /X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended MARCH 31, 1995. Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from to . Commission File Number 1-9813 GENENTECH, INC. (Exact name of registrant as specified in its charter) Delaware 94-2347624 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number) 460 Point San Bruno Boulevard, South San Francisco, California 94080 (Address of principal executive offices and zip code) (415) 225-1000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock $.02 par value 67,133,409 Class Outstanding at March 31, 1995 Redeemable Common Stock $.02 par value 50,447,727 Class Outstanding at March 31, 1995 2 GENENTECH, INC. INDEX PART I. FINANCIAL INFORMATION PAGE NO. -------- Condensed Consolidated Statements of Income - for the three months ended March 31, 1995 and 1994 3 Condensed Consolidated Statements of Cash Flows - for the three months ended March 31, 1995 and 1994 4 Condensed Consolidated Balance Sheets - March 31, 1995 and December 31, 1994 5 Notes to Condensed Consolidated Financial Statements 6-8 Management's Discussion and Analysis of Financial Condition and Results of Operations 9-12 Independent Accountants' Review Report 13 PART II. OTHER INFORMATION 14 SIGNATURES 15 Page 2 3 PART I. FINANCIAL INFORMATION GENENTECH, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (thousands, except per share amounts) (unaudited)
Three Months Ended March 31 ---------------------- 1995 1994 ---------- ---------- Revenues: Product sales $ 162,067 $ 147,798 Royalties 47,149 33,679 Contract and other 16,222 7,527 Interest 13,529 9,866 ---------- ---------- Total revenues 238,967 198,870 Costs and expenses: Cost of sales 26,750 22,131 Research and development 94,959 74,376 Marketing, general and administrative 64,323 60,111 Interest 1,871 1,778 ---------- ---------- Total costs and expenses 187,903 158,396 Income before taxes 51,064 40,474 Income tax provision 7,660 1,619 ---------- ---------- Net income $ 43,404 $ 38,855 ========== ========== Net income per share $ .36 $ .33 ========== ========== Weighted average number of shares used in computing per share amounts 120,493 118,806 ========== ==========
See notes to condensed consolidated financial statements. Page 3 4 GENENTECH, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (thousands) (unaudited)
Three Months Ended March 31 ----------------------- 1995 1994 ---------- ---------- Cash flows from operating activities: Net income $ 43,404 $ 38,855 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 14,345 12,394 Gain on sales of securities available-for-sale (4,034) - Writedown of a security available-for-sale 427 - Net loss on fixed asset dispositions 2 99 Changes in assets and liabilities: Receivables and other current assets (27,272) 5,250 Inventories 8,900 (6,998) Accounts payable, other current liabilities and other long-term liabilities (16,754) (3,010) ---------- ---------- Net cash provided by operating activities 19,018 46,590 Cash flows from investing activities: Purchases of securities held-to-maturity (154,860) (316,849) Proceeds from maturities of securities held-to-maturity 316,319 220,917 Purchases of securities available-for-sale (139,276) - Proceeds from sales of securities available-for-sale 5,053 - Capital expenditures (9,558) (21,600) Increase in other assets (27,771) (186) ---------- ---------- Net cash used in investing activities (10,093) (117,718) Cash flows from financing activities: Stock issuances 9,062 13,003 Additions to long-term debt and short-term borrowings 25,624 - Repayment of long-term debt, including current portion (211) (191) ---------- ---------- Net cash provided by financing activities 34,475 12,812 ---------- ---------- Net increase (decrease) in cash and cash equivalents 43,400 (58,316) Cash and cash equivalents at beginning of period 66,713 117,473 ---------- ---------- Cash and cash equivalents at end of period $ 110,113 $ 59,157 ========== ==========
See notes to condensed consolidated financial statements. Page 4 5 GENENTECH, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (thousands)
March 31, December 31, 1995 1994 ------------ ------------ ASSETS (unaudited) Current assets: Cash and cash equivalents $ 110,113 $ 66,713 Short-term investments 612,261 652,461 Accounts receivable, net 166,143 146,267 Inventories 94,300 103,200 Prepaid expenses and other current assets 33,386 28,475 ------------ ------------ Total current assets 1,016,203 997,116 Long-term marketable securities 219,975 201,726 Property, plant and equipment, less accumulated depreciation (1995-$232,844; 1994-$215,255) 482,117 485,293 Other assets 88,551 60,989 ------------ ------------ Total assets $ 1,806,846 $ 1,745,124 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts and notes payable $ 24,593 $ 30,963 Other current liabilities 181,209 189,536 ------------ ------------ Total current liabilities 205,802 220,499 Long-term debt 175,140 150,358 Other long-term liabilities 23,658 25,483 ------------ ------------ Total liabilities 404,600 396,340 Stockholders' equity: Preferred stock - - Redeemable common stock 1,009 1,002 Common stock 1,343 1,343 Other stockholders' equity 1,399,894 1,346,439 ------------ ------------ Total stockholders' equity 1,402,246 1,348,784 ------------ ------------ Total liabilities and stockholders' equity $ 1,806,846 $ 1,745,124 ============ ============
See notes to condensed consolidated financial statements. Page 5 6 GENENTECH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) NOTE 1. STATEMENT OF ACCOUNTING PRESENTATION In the opinion of Genentech, Inc. (the Company), the accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of adjustments of a normal recurring nature) considered necessary for a fair presentation have been included. Operating results for the three-month periods ended March 31, 1995 and 1994 are not necessarily indicative of the results that may be expected for the year ending December 31, 1995. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report to Stockholders for the year ended December 31, 1994. NOTE 2. CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. These debt instruments are recorded at amortized cost which approximates fair value. NOTE 3. INVENTORIES Inventories at March 31, 1995 and December 31, 1994 are summarized below:
1995 1994 ---------- ---------- (thousands) Raw materials $ 13,697 $ 13,145 Work in process 66,275 76,974 Finished goods 14,328 13,081 ---------- ---------- Total $ 94,300 $ 103,200 ========== ==========
Inventories are stated at the lower of cost or market. Cost is determined using a weighted-average approach which approximates the first-in, first-out method. NOTE 4. QUASI-REORGANIZATION On February 18, 1988 the Company's Board of Directors approved the elimination of the Company's accumulated deficit through an accounting reorganization of its stockholders' equity accounts (a quasi-reorganization) effective October 1, 1987 that did not involve any revaluation of assets or liabilities. The quasi-reorganization did not involve any revaluation of assets or liabilities because for similar classes of assets their fair values were no less than their book values and for similar classes of liabilities their book values were no less than their fair values. The accumulated deficit of $329.5 million was eliminated by a transfer from additional paid-in capital in an amount equal to the accumulated deficit. Simultaneously with the quasi- reorganization, the Company adopted Financial Accounting Standards Board Page 6 7 GENENTECH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Statement (FAS) 96. FAS 96 provided for recognition of the tax benefits of operating loss and tax credit carryforward items that arose prior to a quasi- reorganization involving only the elimination of a deficit in retained earnings being reported in the income statement and then being reclassified from retained earnings to additional paid-in capital. Subsequently, in September 1989, the staff of the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) 86 which states that a quasi- reorganization cannot involve only an elimination of a deficit in retained earnings and, therefore, the tax benefits of prior operating loss and tax credit carry-forwards must be reported as a direct addition to additional paid-in capital rather than being recorded in the income statement. In February 1992, the Financial Accounting Standards Board issued FAS 109, which supersedes FAS 96. FAS 109 requires companies that have previously both adopted FAS 96 and effected a quasi-reorganization that involves only a deficit elimination, as did the Company, to continue to report the tax benefits of prior operating losses and tax credit carryforwards in a manner consistent with FAS 96. FAS 109 also provides that companies effecting a quasi-reorganization after February 1992 that involves only a deficit elimination shall report the tax benefits of prior operating losses and tax credit carryforwards in a manner consistent with SAB 86. The Company will continue to report in income the recognition of operating loss and tax credit carryforward items arising prior to the quasi- reorganization due to the Company's adoption of its quasi-reorganization in the context of its interpretation of FAS 96 and the quasi-reorganization literature existing at the date the quasi-reorganization was effected. The SEC staff has indicated that it would not object to the Company's accounting for such tax benefits. If the provisions of SAB 86 had been applied, net income for the three months ended March 31, 1995 would have been reduced by approximately $10.0 million or $.08 per share (1994 - net income reduced by $13.6 million or $.11 per share). NOTE 5. LEGAL PROCEEDINGS The Company is a party to various legal proceedings including patent infringement cases involving human growth hormone, Activase and antibodies to IgE (a protein central to allergic reactions), and product liability cases involving Activase. The Company and its directors are defendants in two suits filed in California challenging their actions in connection with the Company's 1990 merger with a wholly owned subsidiary of Roche Holdings, Inc. (Roche). In addition, the Company, its directors, a former director and Roche are defendants in a number of suits filed in Delaware by certain individual shareholders purporting to represent shareholders as a class alleging, in general, breach of their fiduciary duties to the Company in connection with the proposed extension of Roche's option to cause the Company to redeem its Redeemable Common Stock and transactions related thereto. See also Note 6 - Subsequent Event - Roche Holdings, Inc. Based upon the nature of the claims made and the investigation completed to date by the Company and its counsel, the Company believes the outcome of the above actions will not have a material adverse effect on the financial position, results of operations or cash flows of the Company. Page 7 8 GENENTECH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) NOTE 6. SUBSEQUENT EVENT - ROCHE HOLDINGS, INC. On May 1, 1995 the Company announced a proposed agreement with Roche, subject to the approval of a majority of shares not held by Roche or its affiliates, to extend for four years Roche's option to cause Genentech to redeem the outstanding redeemable common stock of the Company at a predetermined price. The option price is set at $61.25 per share on July 1, 1995, increasing by $1.25 per share each quarter through June 30, 1997, and thereafter escalating at $1.50 per share each quarter, to $82.00 per share at the end of the option period on June 30, 1999. If Roche does not cause the redemption as of June 30, 1999, or the Company is insolvent, Genentech's stockholders will have the option to cause the Company to redeem some or all of their shares (and Roche will concurrently purchase a like number of shares of common stock at $60.00 per share) at $60.00 per share within thirty business days following July 1, 1999 and sixty business days in an insolvency situation. Under the agreement Roche may increase its ownership of the Company up to 79.9% by making purchases on the open market. Roche currently holds approximately 65% of the outstanding common equity of the Company. As part of the agreement, Roche will be granted an option at terms discussed below for ten years for licenses to use and sell certain of Genentech's products in non-U.S. markets. As a general matter, such option for a Genentech product must be exercised at, or prior to, the conclusion of Phase II clinical trials. If Roche exercises such an option, the Company and Roche will split equally all development expenses, including preclinical, clinical, process development and related expenses, both prospectively, and retroactively, incurred by the Company with respect to the development of the product in the United States. Roche will pay all non-U.S. development expenses. In general, Roche will pay a royalty of 12.5% until a product reaches $100 million in aggregate sales outside of the U.S., when the royalty rate increases to 15%. As part of the agreement, Roche will have exclusive rights to, and pay the Company 20% royalties on, Canadian sales of the Company's existing products, as well as European sales of Pulmozyme. The Company will supply its products to Roche for sales outside of the U.S. at cost plus 20 percent. Roche retains its right to cause the Company to redeem all of its redemmable common stock on or prior to June 30, 1995 at $60.00 per share. NOTE 7. SUBSEQUENT EVENT - RESEARCH AND DEVELOPMENT ARRANGEMENTS In December 1994, the Company entered into a collaboration with Scios Nova Inc. (Scios Nova) for the development of Scios Nova's Auriculin for the treatment of acute renal failure, as previously disclosed. In May 1995, the preliminary results of the drug's Phase III clinical trials were announced, indicating that, except for a subpopulation of acute renal failure patients, the drug did not either decrease the need for dialysis or decrease mortality in the population studied. Subsequent to the announcement, the market price of Scios Nova's common stock lost approximately 46% of its value. Upon further analysis of the clinical data, Scios Nova and the Company will determine the next appropriate steps for the development of Auriculin. Subject to the outcome of this analysis, and the stock market's reaction to it, the decline in the market value of Scios Nova's common stock may be deemed to be other than temporary. If so, and based upon the current value of the shares of Scios Nova, the Company could record a loss on its investment in Scios Nova's stock of approximately $6 million in future periods. Page 8 9 GENENTECH, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL As discussed in Note 6 in the Notes to Condensed Consolidated Financial Statements, under the proposed agreement with Roche, Roche will have exclusive rights to Canadian sales of the Company's existing products, and European sales of Pulmozyme. In return the Company will receive royalties at the rate of 20% of sales. Roche will receive at commercial terms an option to collaborate on the development and sales of future drugs. Subject to stockholder approval of the agreement and Roche's exercise of rights to develop or sell the Company's products, product sales, royalties and contract revenue, as well as R & D and other expenses, could be significantly affected in future periods. RESULTS OF OPERATIONS (dollars in millions, except per share amounts)
Three Months Ended March 31 ------------------------------- REVENUES 1995 1994 % Change - --------- -------- -------- --------- Revenues $239.0 $198.9 20% ======== ======== ========= PRODUCT SALES - ---------------------- Activase $ 78.2 $ 70.2 11% Protropin and Nutropin 54.4 53.6 1 Pulmozyme 28.5 22.4 27 Actimmune 1.0 1.6 (38) -------- -------- --------- Total product sales $162.1 $147.8 10% ======== ======== =========
Sales of Activase, registered trademark, (Alteplase, recombinant) tissue- plasminogen activator increased 11% in the quarter ended March 31, 1995 compared to the quarter ended March 31, 1994. Total Activase sales in 1995 included $3.8 million of sales to Japanese licensees. Sales in the U.S. and Canada were higher due to an increase in the number of patients receiving thrombolytic therapy and the continued positive impact of the results of the worldwide Global Utilization of Activase and Streptokinase in Occluded Coronary Arteries (GUSTO) clinical trial. This international trial showed that a new accelerated infusion regimen for Activase was superior compared to another clot-dissolving agent for the management of acute myocardial infarction (heart attack). In April 1995, the Food and Drug Administration (FDA) approved for marketing the accelerated infusion of Activase, allowing revised labeling for the product incorporating data from the GUSTO study. Page 9 10 Sales of the Company's two growth hormone products - Protropin, registered trademark, (somatrem for injection) and Nutropin, registered trademark, (somatropin [rDNA origin] for injection)- increased to $54.4 million in the first quarter of 1995 from $53.6 million in the first quarter of 1994. In May 1995, a competitor received Food and Drug Administration approval to market its growth hormone product in the United States. Decreases in sales may occur as competitors enter the market. Sales of Pulmozyme, registered trademark, (dornase alfa), increased 27% in the first three months of 1995 over the comparable period in the prior year. The product was launched in the United States and Canada during the first quarter of 1994, and launched in Europe at the end of that quarter. The increase between quarters reflects market launches in additional European countries and continued adoption of this new therapy by physicians to treat cystic fibrosis patients. The Company currently markets the drug in the United States and, through its Canadian subsidiary, in Canada. Under the existing collaboration with F. Hoffmann-LaRoche, Ltd. (HLR), Genentech Europe Limited and its affiliates promote Pulmozyme in the United Kingdom, Ireland, the Netherlands and Germany, while HLR is responsible for promoting the product in the remaining Western European countries in the collaboration.
Three Months Ended March 31 ROYALTIES, CONTRACT AND ------------------------------ OTHER, AND INTEREST INCOME 1995 1994 % Change - ----------------------------- -------- -------- -------- Royalties $47.1 $33.7 40% Contract and other 16.2 7.5 116 Interest income 13.6 9.9 37
Royalty income increased primarily as a result of increases in licensees' net sales subject to royalties and the recognition of $7.5 million of royalties in the first quarter of 1995 relating to the December 1994 settlement with Eli Lilly and Company. The impact on total royalties of changes in foreign currency translation rates, net of gains and losses recognized on foreign exchange hedging instruments and the amortization of expense related to foreign currency options outstanding during the period, was not material. Contract revenues increased between quarters due to variations in the timing of contract benchmark achievements, varying payment amounts and the initiation of new arrangements. Other revenues in 1995 included $4.0 million of gains recorded from the sales of biotechnology equity securities owned by the Company. The increase in interest income occurred due to higher available interest rates and a larger investment portfolio in 1995. The total investment portfolio, consisting of cash, cash equivalents, short-term marketable securities and long-term marketable securities increased from $780.7 million as of March 31, 1994 to $942.3 million as of March 31, 1995. Page 10 11
Three Months Ended March 31 ------------------------------ COSTS AND EXPENSES 1995 1994 % Change - -------------------------- -------- -------- -------- Cost of sales $ 26.8 $ 22.1 21% Research and development 94.9 74.4 28 Marketing, general and administrative 64.3 60.1 7 Interest expense 1.9 1.8 6 -------- -------- -------- Total costs and expenses $187.9 $158.4 19% ======== ======== ========
Cost of sales increased in the first quarter of 1995 due to a change in product mix, a 10% increase in product sales and inventory write offs in 1995. R&D expenses for the first three months of 1995 increased over the comparable period in 1994 due to increased production of products for clinical trials and higher in-licensing expenses. In-licensing expenses in the first quarter of 1995 included $4.0 million paid to IDEC Pharmaceutical Corporation (IDEC) under the previously disclosed collaboration to develop IDEC's anti-CD20 monoclonal antibody, IDEC-C2B8. Marketing, general and administrative expenses increased in the first quarter of 1995 due to higher marketing and selling expenses in Europe, as Pulmozyme is now sold in more European countries than in the first quarter of 1994, and due to an overall increase in other corporate expenses. Interest expense relates primarily to interest on the Company's 5% convertible subordinated debentures, net of capitalized interest, and interest on a new $25.0 million long-term borrowing arrangement of the Company's Canadian subsidary.
Three Months Ended March 31 ------------------------------ INCOME TAXES 1995 1994 % Change - ------------- -------- -------- --------- Income taxes $ 7.7 $ 1.6 381%
The increase in income tax expense was due to higher income before taxes and an increase in the effective income tax rate, from 4% in the first quarter of 1994 to 15% in the first quarter of 1995. The increase in the effective tax rate was primarily related to a higher alternative minimum tax (AMT) in 1995, due to the complete utilization of available AMT loss carryforwards in 1994. Page 11 12
Three Months Ended March 31 ------------------------------ NET INCOME 1995 1994 % Change - ------------------- -------- -------- -------- Net income $43.4 $38.9 12% Earnings per share .36 .33 9
Net income increased in 1995 due to overall higher revenues from all sources, partially offset by increases in research and development and other expenses, including income taxes.
LIQUIDITY AND CAPITAL RESOURCES March 31, 1995 December 31, 1994 - -------------------------- ---------------- ------------------- Cash, cash equivalents, short-term investments and long-term marketable securities $942.3 $920.9 Working capital 810.4 776.6
Cash generated from operations, maturities of short-term investments, stock issuances and proceeds from borrowings, was used to make investments in long- term marketable securities, other assets and capital expenditures. Cash and cash equivalents at March 31, 1995 increased $43.4 million compared to December 31, 1994. Working capital increased $33.8 million. The Company believes that its cash, cash equivalents, and short-term and long-term investments, together with funds provided by operations and leasing arrangements, will be sufficient to meet its operating cash requirements. Page 12 13 GENENTECH, INC. INDEPENDENT ACCOUNTANTS' REVIEW REPORT The Board of Directors and Stockholders Genentech, Inc. We have reviewed the accompanying condensed consolidated balance sheet of Genentech, Inc. as of March 31, 1995, and the related condensed consolidated statements of income and cash flows for the three-month periods ended March 31, 1995 and 1994. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Genentech, Inc. as of December 31, 1994, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended (not presented herein) and in our report dated January 17, 1995, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1994, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. ERNST & YOUNG LLP San Jose, California April 10, 1995 Page 13 14 GENENTECH, INC. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In May 1995, a number of purported shareholder class action lawsuits were filed in Delaware's Chancery Court against the Company, its directors, a former director, and Roche alleging, in general, breach of their fiduciary duties to the Company in connection with the proposed extension of Roche's option to cause the Company to redeem its redeemable common stock and transactions related thereto. See also Note 5, "Legal Proceedings" in Part I, "Notes to Consolidated Financial Statements." ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 15.1 Letter re: Unaudited Interim Financial Information 27.1 Financial Data Schedule (b) Reports on Form 8-K There were no reports on Form 8-K filed for the quarter ended March 31, 1995. Page 14 15 GENENTECH, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 15, 1995 GENENTECH, INC. /S/G. KIRK RAAB /S/LOUIS J. LAVIGNE, JR. ----------------------------- ----------------------------- G. Kirk Raab Louis J. Lavigne, Jr. President and Chief Executive Officer Senior Vice President and Chief Financial Officer /S/BRADFORD S. GOODWIN ----------------------------- Bradford S. Goodwin Vice President and Controller Page 15 16 Exhibit 15.1 May 15, 1995 Securities and Exchange Commission Washington, DC 20549 We are aware of the incorporation by reference in the Registration Statements pertaining to the 1994 Stock Option Plan, the 1991 Employee Stock Plan, the 1990 Stock Option/Stock Incentive Plan, the 1984 Incentive Stock Option Plan and the 1984 Non-Qualified Stock Option Plan, the shares issuable to certain warrant holders, the shares issuable to certain convertible subordinated debenture holders, the Genentech, Inc. Tax Reduction Investment Plan and in the related prospectuses, as applicable, contained in such Registration Statements of our report dated April 10, 1995 relating to the unaudited condensed consolidated interim financial statements of Genentech, Inc. which are included in its Form 10-Q for the quarter ended March 31, 1995. Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a part of the registration statement prepared or certified by accountants within the meaning of Section 7 or 11 of the Securities Act of 1933. Very truly yours, ERNST & YOUNG LLP -----END PRIVACY-ENHANCED MESSAGE-----