UNITED STATES
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 fiscal year ended December 31, 2000
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
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
1 DNA Way, South San Francisco, California 94080-4990
(Address of principal executive offices and zip code)
(650) 225-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class Name of Each Exchange on Which Registered
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Common Stock, $0.02 par value New York Stock Exchange
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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 $12,980,808,884 as of January 31, 2001. (A)
Number of shares of Common Stock outstanding as of January 31, 2001:
525,712,793
Documents incorporated by reference:
PARTS INCORPORATED
DOCUMENT BY REFERENCE
(1) Annual Report to stockholders for the year ended II
December 31, 2000 (specified portions)
(2) Definitive Proxy Statement with respect to the 2001 III
Annual Meeting of Stockholders to be filed by Genentech,
Inc. with the Securities and Exchange Commission
(hereinafter referred to as "Proxy Statement")
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(A) Excludes 306,627,411 shares of Common Stock held by Directors and Officers
of Genentech and Roche Holdings, Inc.
In this Form 10-K, "Genentech," "we," "us" and "our" refer to Genentech,
Inc., "Common Stock" refers to Genentech's common stock, par value $0.02
per share, "Special Common Stock" refers to Genentech's callable
putable Common Stock, par value $0.02 per share and "Redeemable Common
Stock" refers to Genentech's redeemable common stock, par value $0.02 per
share. In addition, all numbers relating to the number of shares,
price per share and per share amounts of Common Stock, Special Common
Stock and Redeemable Common Stock give effect to the two-for-one splits
of our Common Stock that were effected in October 2000 and November 1999.
BASIS OF PRESENTATION AND RESTATEMENT
On June 30, 1999, we redeemed all of our outstanding Special Common Stock
held by stockholders other than Roche Holdings, Inc., commonly known
as Roche, with funds deposited by Roche for that purpose. This event,
referred to as the "Redemption" in this report, caused Roche to own 100%
of the outstanding common stock of Genentech on that date. The Redemption
of our Special Common Stock on June 30, 1999 was reflected as a purchase
of a business which, under U.S. generally accepted accounting principles,
required push-down accounting to reflect in our financial statements the
amounts paid for our stock in excess of our net book value. The
Redemption created our New Basis of accounting as discussed further
below. The Redemption was effective as of June 30, 1999, however, the
transaction was reflected as of the end of the day on June 30, 1999 in
the financial statements. We previously issued consolidated financial
statements that presented limited information related to the results of
operations for the period January 1, 1999 through June 30, 1999
immediately prior to the Redemption ("Old Basis"), and the period June
30, 1999 (including and subsequent to the Redemption) to December 31,
1999 ("New Basis"). We did not present separate statements of
operations, stockholders' equity or cash flows reflecting the new basis
of accounting. Upon further review and based on discussions with the
Securities and Exchange Commission, our statements of operations, cash
flows and stockholders' equity have been revised and presented on the New
Basis of accounting that resulted from the Redemption transaction. As
such, a vertical black line is inserted to separate the "Old Basis" and
"New Basis" presentation in the financial statements. For more
information about Old Basis and New Basis, you should read the
"Consolidated Financial Statements" and the "Basis of Presentation and
Restatement" note in the Notes to Consolidated Financial Statements (Part
II, Item 8 of this Form 10-K). Accordingly, the Old Basis reflects the
period January 1 through June 30, 1999, and all periods prior to the
Redemption, and the New Basis reflects the period from June 30 through
December 31, 1999, and all subsequent periods. As a result of the
accounting change, we reclassified $941.5 million from accumulated
deficit to additional paid-in capital.
We also restated our financial statements to correct the accounting
related to the write up of the valuation allowance pertaining to
unrealized gains on certain marketable equity securities, resulting from
the Redemption. As a result of this accounting change, the aggregate
amount of contract and other income in 1999 decreased by $20.3 million,
and net income decreased by $13.6 million ($0.03 per share) for the
quarter and six month period ended June 30, 1999. In addition,
amortization expense decreased by $0.6 million (less than $0.01 per
share) during the six month period ended December 31, 1999, and goodwill,
net of accumulated amortization, decreased by $19.7 million, other
accrued liabilities decreased by $6.8 million and accumulated deficit
increased by $12.9 million at December 31, 1999.
PART I
ITEM 1. Business
Genentech is a leading biotechnology company using human genetic information
to discover, develop, manufacture and market human pharmaceuticals that
address significant unmet medical needs. Fourteen of the approved products
of biotechnology stem from our science. We manufacture and market nine
protein-based pharmaceuticals listed below, and license several additional
products to other companies. See the "Products" section below for further
information.
Redemption of Our Special Common Stock
On June 30, 1999, we redeemed all of our outstanding Special Common Stock
held by stockholders other than Roche Holdings, Inc., commonly known as
Roche, at a price of $20.63 per share in cash with funds deposited by Roche
for that purpose. We refer to this event as the "Redemption." As a result,
on that date, Roche's percentage ownership of our outstanding Common Stock
increased from 65% to 100%. Consequently, under U.S. generally accepted
accounting principles, we were required to use push-down accounting to
reflect in our financial statements the amounts paid for our stock in excess
of our net book value. Push-down accounting required us to record $1,685.7
million of goodwill and $1,499.0 million of other intangible assets onto our
balance sheet on June 30, 1999. Also, as a result of push-down accounting,
we recorded special charges related to the Redemption of $1,207.7 million on
June 30, 1999. For more information about special charges and push-down
accounting, you should read "Special Charges" in the Financial Review section
(Part II, Item 7 of this Form 10-K) and the "Redemption of Our Special Common
Stock" note in the Notes to Consolidated Financial Statements (Part II, Item
8 of this Form 10-K). Roche subsequently made public offerings of our Common
Stock as described below.
Stock Splits
On October 24, 2000, we effected a two-for-one stock split of our Common Stock
in the form of a dividend of one share of Genentech Common Stock for each
share held at the close of business on October 17, 2000. Our stock began
trading on a split-adjusted basis on October 25, 2000. On November 2, 1999,
we effected a two-for-one stock split of our Common Stock in the form of a
dividend of one share of Genentech Common Stock for each share held at the
close of business on October 29, 1999. Our stock began trading on a split-
adjusted basis on November 3, 1999. All information in this report relating
to the number of shares, price per share and per share amounts of Common
Stock, Special Common Stock and Redeemable Common Stock give effect to these
splits. We currently intend to retain all future income for use in the
operation of our business and to fund future growth and, therefore we do not
intend to declare or pay any cash dividends on our Common Stock in the
foreseeable future.
Public Offerings
On July 23, 1999, October 26, 1999, and March 29, 2000, Roche completed
public offerings of our Common Stock. We did not receive any of the net
proceeds from these offerings. On January 19, 2000, Roche completed an
offering of zero-coupon notes that are exchangeable for an aggregate of
13,034,618 shares of our Common Stock held by Roche. Roche's percentage
ownership of our outstanding Common Stock is approximately 58.4% at December
31, 2000.
As a result of the Redemption and the subsequent public offerings, changes
occurred with respect to our stock options as discussed below in "Stock
Options Changes." In addition, we amended our certificate of incorporation
and bylaws, amended our licensing and marketing agreement with F. Hoffmann-La
Roche Ltd, and entered into or amended certain agreements with Roche, which
are discussed below in "Relationship With Roche."
Products
We manufacture and market nine protein-based pharmaceuticals listed below and
license several others to other companies.
- Herceptin, registered trademark, (trastuzumab) antibody for the treatment
of certain patients with metastatic breast cancer whose tumors overexpress
the human epidermal growth factor receptor2, or HER2, protein;
- Rituxan, registered trademark, (rituximab) antibody which we market
together with IDEC Pharmaceuticals Corporation, commonly known as IDEC,
for the treatment of patients with relapsed or refractory low-grade or
follicular, CD20-positive B-cell non-Hodgkin's lymphoma;
- TNKase, registered trademark, (tenecteplase) single-bolus thrombolytic
agent for the treatment of acute myocardial infarction;
- Activase, registered trademark, (alteplase, recombinant) tissue
plasminogen activator, or t-PA, for the treatment of acute myocardial
infarction, acute ischemic stroke within three hours of the onset of
symptoms and acute massive pulmonary embolism;
- Nutropin Depot, registered trademark, [somatropin (rDNA origin) for
injectable suspension] long-acting growth hormone for the treatment of
growth failure associated with pediatric growth hormone deficiency;
- Nutropin AQ, registered trademark, [somatropin (rDNA origin) injection]
liquid formulation growth hormone for the same indications as Nutropin;
- Nutropin, registered trademark, [somatropin (rDNA origin) for injection]
growth hormone for the treatment of growth hormone deficiency in children
and adults, growth failure associated with chronic renal insufficiency
prior to kidney transplantation and short stature associated with Turner
syndrome;
- Protropin, registered trademark, (somatrem for injection) growth hormone
for the treatment of inadequate endogenous growth hormone secretion, or
growth hormone deficiency, in children; and
- Pulmozyme, registered trademark, (dornase alfa, recombinant) inhalation
solution for the treatment of cystic fibrosis.
We receive royalties on sales of rituximab outside of the United States
(excluding Japan), on sales of Pulmozyme and Herceptin outside of the United
States and on sales of certain products in Canada from F. Hoffmann-La Roche
Ltd, an affiliate of Roche Holdings, Inc., that is commonly known as
Hoffmann-La Roche. We receive royalties on sales of growth hormone products
and t-PA outside of the United States and Canada, and we will receive
royalties on sales of rituximab in Japan through other licensees. We also
receive worldwide royalties on seven additional licensed products that are
marketed by other companies. Six of these products originated from our
technology.
Herceptin
In September 1998, we received U.S. Food and Drug Administration, or FDA,
approval to market Herceptin in the United States for use as a first line
therapy in combination with Taxol, registered trademark, (paclitaxel), a
product made by Bristol-Myers Squibb Company, or Bristol-Myers, and as a
single agent in second and third line therapy in patients with metastatic
breast cancer who have tumors that overexpress the HER2 protein.
Herceptin is the first humanized monoclonal antibody for the treatment
of HER2 overexpressing metastatic breast cancer and the second U.S. approval
in this new class of monoclonal antibody biotherapeutic cancer drugs. We
have granted Hoffmann-La Roche exclusive marketing rights to Herceptin
outside of the United States.
In September 1999, Hoffmann-La Roche announced it had obtained
authorization to sell Herceptin in Switzerland as a treatment for breast
cancer. This was the product's first European approval and came shortly
after authorization of the product in Canada for treatment of metastatic or
advanced breast cancer, alone, and in combination with Taxol. During the
third quarter of 2000, Hoffmann-La Roche received approval from the European
Commission to market Herceptin for the treatment of HER2-positive metastatic
breast cancer in Europe. We receive royalties from Hoffmann-La Roche for
these Herceptin product sales.
On May 3, 2000, we sent a letter to physicians advising them of some
serious adverse events that have been reported related to the use of
Herceptin in certain patients and that have occurred subsequent to its
approval. In 15 patients who experienced such serious adverse events
following Herceptin therapy, death ensued. Nine of these patients died
within 24 hours after Herceptin administration. Most of these patients had
significant pre-existing pulmonary compromise as a consequence of lung
disease or malignancies that had spread to the lung. On October 6, 2000, we
issued a follow-up letter to physicians which included an amended package
insert for Herceptin including this information.
Rituxan
Rituxan is marketed in the United States for the treatment of relapsed or
refractory low-grade or follicular, CD20-positive B-cell non-Hodgkin's
lymphoma, a cancer of the immune system. We co-developed Rituxan with IDEC
from whom we license Rituxan. In November 1997, Rituxan was cleared for
marketing in the United States by the FDA. Rituxan was the first monoclonal
antibody approved in the United States to treat cancer. We jointly promote
Rituxan with IDEC in the United States. We shared responsibility with IDEC
for manufacturing the product, until the end of the third quarter of 1999,
when IDEC finished transferring all bulk manufacturing responsibilities for
Rituxan to us. Hoffmann-La Roche is responsible for marketing MabThera,
registered trademark, (rituximab) in the rest of the world, excluding Japan,
and has agreed to pay us royalties and a mark-up on the supply of MabThera.
In 1999, Genentech and IDEC, in consultation with the FDA, updated the
warning section of the package insert for Rituxan to include information on
infusion-related reactions and cardiovascular events. IDEC filed a
supplemental Biologics License Application, or BLA, in October 1999 related
to the use of Rituxan in expanded dosing, including retreatment, times 8 and
bulky disease for the treatment of B-cell non-Hodgkin's lymphoma.
In December 1998, a letter was sent to physicians advising them of some
deaths associated with administration of Rituxan. As a result, Genentech and
IDEC updated the warning section of the package insert to include information
on infusion-related reactions and cardiovascular events.
Activase and TNKase
Tissue plasminogen activator, or t-PA, is an enzyme that is produced
naturally by the body to dissolve blood clots. However, when a blood clot
obstructs blood flow in the coronary artery and causes a heart attack, the
body is unable to produce enough t-PA to dissolve the clot rapidly enough to
prevent damage to the heart. We produce Activase, a recombinant form of t-
PA, in sufficient quantity for therapeutic use. The FDA approved Activase
for marketing in the United States in 1987 for the treatment of acute
myocardial infarction (heart attack); in 1990 for use in the treatment of
acute pulmonary embolism (blood clots in the lungs); and in June 1996 for the
treatment of acute ischemic stroke or brain attack (blood clots in the brain)
within three hours of symptom onset. TNKase received FDA approval in early
June 2000 and was launched in late June 2000.
In exchange for royalty payments, we have licensed marketing rights to a
recombinant t-PA in Japan to Kyowa Hakko Kogyo, Ltd., or Kyowa, and
Mitsubishi Chemical Corporation, formerly Mitsubishi Kasei Corporation, or
Mitsubishi. Kyowa and Mitsubishi are marketing forms of a 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, we have licensed t-PA marketing and manufacturing
rights to Boehringer Ingelheim, GmbH. We have also licensed certain rights
to Boehringer Ingelheim regarding future sales of TNKase. Boehringer
Ingelheim, which markets a recombinant t-PA under the trademark Actilyse,
registered trademark, filed a marketing application for Metalyse, registered
trademark, (tenecteplase), with European regulatory authorities in September
1999. Boehringer Ingelheim has received marketing approval for Metalyse in
Switzerland and Australia.
Nutropin Depot
In December 1999, we received regulatory approval to market Nutropin Depot.
We launched this product in late June 2000. Nutropin Depot is a long-acting
form of our recombinant human growth hormone using ProLease, registered
trademark, an injectable extended-release drug delivery system, which was
developed by our partner Alkermes, Inc. This new formulation was designed to
reduce the frequency of injections by encapsulating the drug in biodegradable
microspheres.
During the first quarter of 1999, we entered into an agreement with
Schwarz Pharma AG, for the development and distribution of Nutropin AQ and
the sustained-release Nutropin Depot for the treatment of certain pediatric
and adult growth disorders in Europe and certain other countries outside of
the United States, Canada and Japan. With our partner, Alkermes, we will
manufacture these products for sale by Schwarz Pharma. The agreement also
entitles us to receive additional benchmark payments upon achievement of
certain product development milestones. As part of a strategic alliance with
Sumitomo Pharmaceuticals Co., Ltd., or Sumitomo, we have agreed to provide
Sumitomo exclusive rights to develop, import and distribute in Japan,
Nutropin Depot.
Nutropin AQ
In December 1995, we received regulatory approval to market Nutropin AQ, a
liquid formulation of Nutropin, aimed at providing improved convenience in
administration. Nutropin AQ is the first and only liquid (aqueous)
recombinant human growth hormone product available in the United States.
Nutropin AQ was approved for the treatment of growth hormone inadequacy in
children, growth hormone failure in children associated with chronic renal
insufficiency up to the time of renal transplantation and short stature
associated with Turner syndrome. In December 1997, we received FDA approval
to market Nutropin AQ for the treatment of growth hormone deficiency in
adults.
Nutropin
Nutropin is a human growth hormone similar to Protropin, see below,; however,
it does not have the additional N-terminal amino acid, methionine, found in
the Protropin chemical structure. Nutropin was approved in November 1993 and
launched in January 1994 for marketing in the United States for the treatment
of growth failure in children associated with chronic renal insufficiency up
to the time of renal transplantation. Nutropin had been designated as a U.S.
Orphan Drug for treatment of growth failure in children with chronic renal
insufficiency. This status terminated in November 2000. Nutropin was
approved by the FDA in March 1994 for the treatment of growth hormone
inadequacy in children. In December 1996, the FDA approved Nutropin for the
treatment of short stature associated with Turner syndrome. In December
1997, we received FDA approval to market Nutropin for the treatment of growth
hormone deficiency in adults.
Protropin
Human growth hormone is a naturally occurring human protein produced in the
pituitary gland that regulates metabolism and is responsible for growth in
children. We developed a recombinant growth hormone product, Protropin, that
was approved by the FDA in 1985 for marketing in the United States for the
treatment of growth hormone inadequacy in children.
In exchange for royalty payments, we licensed rights to manufacture and
market recombinant growth hormone to Pharmacia Corporation, which
manufactures and markets recombinant growth hormone under the trademarks
Genotropin, registered trademark, (somatropin (rDNA) for injection) and
Genotropin MiniQuick, registered trademark.
Pulmozyme
Pulmozyme is marketed in the United States for the treatment of cystic
fibrosis, for which it had U.S. Orphan Drug designation. This status
terminated in December 2000. It was first approved for use in 1993. In
November 1996, Pulmozyme was cleared for marketing by the FDA for the
treatment of cystic fibrosis patients with advanced disease. In February
1998, we received approval from the FDA for a label extension that includes
the safety and alternative administration of Pulmozyme in children with
cystic fibrosis under the age of five, adding to the product's previous
approvals for patients five years of age and older.
Actimmune
Actimmune interferon gamma-lb is approved in the United States for the
treatment of chronic granulomatous disease. In 1998, we licensed certain
U.S. marketing and development rights to interferon gamma, including
Actimmune to Connetics Corporation in return for a royalty on net sales.
Thereafter, Connetics sublicensed all of its rights to InterMune
Pharmaceuticals, Inc., or InterMune. As of January 1999, we no longer sell
Actimmune directly in the United States. We have agreed to sell packaged
drug product to InterMune at cost plus a mark-up. We receive royalty
payments from Boehringer Ingelheim from the sale of interferon gamma in
certain countries outside of the United States, Canada and Japan and The
People's Republic of China.
Licensed Products
In addition to the royalties mentioned above, we also receive royalties on
the following products:
Product Trademark Company
---------------------------- ---------- -----------------------------------
Human growth hormone Humatrope Eli Lilly and Company
Recombinant interferon alpha Roferon-A Hoffmann-La Roche
Hepatitis B vaccine Recombivax Merck and Company, Inc.
Hepatitis B vaccine Engerix-B GlaxoSmithKline plc (formerly
SmithKline Beecham Biologicals S.A.)
Factor VIII Kogenate Bayer Corporation
Bovine growth hormone Posilac Monsanto Company
Interferon gamma-1b Actimmune InterMune
Soluble TNF receptor Enbrel Immunex Corporation
In May 1999, we entered into a license agreement with Immunex Corporation.
We granted to Immunex a worldwide, co-exclusive license under our
immunoadhesin patents to make, use and sell Enbrel, registered trademark,
Immunex's product to treat moderately to severely active rheumatoid
arthritis. Immunex paid us an initial license fee and has agreed to pay
royalties on sales of Enbrel from November 6, 1998, the date of product
launch, through the life of our patents.
Products in Development
A number of other products are in various stages of research and development,
or R&D. Our product development efforts cover a wide range of medical
conditions, including cancer, respiratory disorders, cardiovascular diseases,
endocrine disorders and inflammatory and immune problems.
Below is a summary of products in clinical development:
Product Description
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Awaiting Regulatory Approval
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Activase t-PA A protein that is an approved treatment for
heart attack, acute ischemic stroke within
three hours of symptom onset, and acute
massive pulmonary embolism. We have
completed a Phase III trial of this product
for intravenous catheter clearance and have
submitted U.S. regulatory filings seeking
marketing approval.
Xolair, trademark, An anti-IgE monoclonal antibody
(Anti-IgE Antibody) designed to interfere early in the process
leading to symptoms of allergic asthma
and seasonal allergic rhinitis. In
collaboration with Novartis
Pharmaceuticals Corporation,or
Novartis, and Tanox, Inc., Phase III
clinical trials have been completed in
patients with allergic asthma and in
patients with seasonal allergic rhinitis
and we have submitted U.S. and European
regulatory filings seeking marketing
approval.
Phase III
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Xanelim, trademark An antibody designed to block certain
immune cells as a potential treatment for
psoriasis. In collaboration with XOMA
Corporation, we are currently conducting
Phase III trials in patients with
psoriasis.
TNKase A second generation tissue-plasminogen
activator (t-PA) that is a selectively
mutated version of wild-type t-PA. TNKase
is being studied in combination with
various anti-thrombotic agents in the
potential treatment of acute myocardial
infarction. This product is being
developed in collaboration with
Boehringer Ingelheim.
Rituxan antibody A monoclonal antibody approved for the
treatment of relapsed or refractory low-
grade or follicular, CD20-positive B-cell
non-Hodgkin's lymphoma, a cancer of the
immune system. We are in Phase III
clinical trials for the treatment of
intermediate- and high-grade non-Hodgkin's
lymphoma. This product is being developed
in collaboration with IDEC.
Thrombopoietin (TPO) A protein that is being studied for
treatment of thrombocytopenia, a reduction
in platelets, in cancer patients treated
with chemotherapy. This molecule has been
exclusively licensed to Pharmacia.
Tezosentan Tezosentan, a small molecule, is an
endothelin receptor antagonist being
developed as a potential treatment for
patients with acute heart failure.
Tezosentan, which is currently in
Phase III clinical trials, is being
developed in collaboration with Actelion,
Ltd.
Anti-VEGF antibody An antibody developed to inhibit
angiogenesis (the formation of new blood
vessels) as a potential treatment for
solid-tumor cancers. Phase III trials are
ongoing to treat several types of solid
tumors.
Herceptin antibody An antibody that is an approved treatment
for metastatic breast cancer. In
collaboration with Hoffmann-La Roche and
U.S. national cooperative groups, we are
conducting Phase III trials for
adjuvant treatment of early-stage breast
cancer in patients who overexpress the
HER2 protein.
Tracleer (Bosentan) An orally administered endothelin
receptor antagonist that is being
developed for the potential treatment
of pulmonary hypertension (New Drug
Application, or NDA, filed) and congestive
heart failure (Phase III). The development
effort is being led by our partner
Actelion.
Preparing for Phase III trials
------------------------------
Nutropin Depot for adult Nutropin Depot is a long-acting formulation
growth hormone deficiency of growth hormone developed in collaboration
with Alkermes. The product is approved for
the treatment of growth failure associated
with pediatric growth hormone deficiency.
Phase III trials are being planned for the
treatment of adults with growth hormone
deficiency.
Phase II
--------
Herceptin antibody An antibody that is an approved treatment
for metastatic breast cancer. Herceptin
is being evaluated for application in other
tumor types in which the HER2 protein is
overexpressed, including lung cancer. We
are conducting Phase II studies alone or in
collaboration with Hoffmann-La Roche, the
National Cancer Institute or other clinical
research groups.
LDP-02 A monoclonal antibody for the treatment of
inflammatory bowel diseases. This product
is licensed from and being developed in
collaboration with Millennium
Pharmaceuticals, Inc., formerly Leukosite,
Inc., or Millennium. Millennium is
conducting Phase II clinical trials in
Canada.
INS365 A second generation P2Y2 agonist, for the
potential treatment of patients with
chronic bronchitis. Our partner, Inspire
Pharmaceuticals, Inc., or Inspire, is
currently planning to initiate a Phase II
trial.
Dornase alfa inhalation A recombinant human protein used for the
solution with Aradigm's treatment of cystic fibrosis. Aradigm
delivery system Corporation completed a Phase IIa clinical
trial of dornase alfa delivery via
Aradigm's AERx, trademark, delivery system.
We canceled the program in late January
2001.
Phase I
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AMD Fab A customized fragment of an anti-VEGF
antibody for the potential treatment of
age-related macular degeneration, or AMD.
In this condition, excessive blood vessel
growth in the retina of the eye can lead to
blindness. Phase I trials are being
conducted.
E-26 A second generation anti-IgE monoclonal
antibody for the potential treatment of
allergic asthma and allergic rhinitis. E26
is being developed in collaboration with
Novartis and Tanox. The product has
completed Phase I trials.
Anti-CD11a Antibody An antibody designed to block certain
immune cells as a potential treatment to
prevent solid organ transplant rejection.
Our collaborator, Xoma, is conducting Phase
I trials.
INS37217 A second generation P2Y2 agonist, for the
potential treatment of patients with cystic
fibrosis, being developed in collaboration
with Inspire.
Preparing for Phase I trials
----------------------------
Apo2 Ligand/TRAIL A protein, also known as tumor necrosis
factor-related apoptosis-inducing ligand,
for the potential treatment of cancer. In
collaboration with Immunex, we are
currently conducting preclinical studies in
order to enable an Investigational New Drug
exemption application, or IND, filing.
2C4 2C4 is a monoclonal antibody directed
against the human epidermal growth factor
receptor, type 2 (HER2) as a potential
treatment for cancer. 2C4 is designed to
block the association of HER2 with other
HER family members, thereby inhibiting
intra-cellular signaling through the HER
pathway. We are currently conducting
preclinical studies in order to enable an
IND filing.
In conjunction with our amended licensing and marketing agreement with
Hoffmann-La Roche in July, 1999, Hoffmann-La Roche was granted an option
until at least 2015 for licenses to use and sell certain of our products in
non-U.S. markets (the Licensing Agreement). See "Relationship With Roche"
below for further information.
In general, with respect to our products, Hoffmann-La Roche pays us a royalty
on aggregate sales outside of the United States. Hoffmann-La Roche has
rights to, and pays us royalties for, Canadian sales of Activase, Nutropin
Depot, Nutropin AQ, Nutropin, Protropin, Pulmozyme, Actimmune and Rituxan,
and outside of the United States, excluding Japan, sales of Pulmozyme,
Herceptin and MabThera. We supply the products to Hoffmann-La Roche, and
have agreed to supply the products for which Hoffmann-La Roche has exercised
its option, for sales outside of the United States.
In addition to the products described above, we are working on additional
products and new indications for currently marketed products. In May 1999,
we entered into a license and collaboration agreement with Aradigm
Corporation to develop an advanced pulmonary delivery system for our
Pulmozyme product in the United States. As part of the agreement, we agreed
to provide Aradigm a loan of up to $10.4 million for development costs. In
late January 2001, we canceled the program and we forgave the loan. We
expect to record a charge of approximately $7.0 million to development costs
in the first quarter of 2001 related to this cancellation.
In November 1997, we entered into a research collaboration agreement with
CuraGen Corporation, whereby we made a $5.0 million equity investment in
CuraGen and agreed to provide a convertible equity loan to CuraGen of up to
$26.0 million. In October 1999, CuraGen exercised its right to borrow $16.0
million. Simultaneously, with this draw down, CuraGen repaid the loan by
issuing 977,636 shares of CuraGen stock valued at $16.37 per share at such
issuance, or an aggregate of $16.0 million. At December 31, 2000, there were
no outstanding loans to CuraGen.
In December 1997, we entered into a collaboration agreement with Millennium
to develop and commercialize Millennium's LDP-02, a humanized monoclonal
antibody for the potential treatment of inflammatory bowel diseases. Under
the terms of the agreement, we made a $4.0 million equity investment in
Millennium and have agreed to provide a convertible equity loan for
approximately $15.0 million to fund Phase II development costs. Upon
successful completion of Phase II, if Millennium agrees to fund 25% of Phase
III development costs, we have agreed to provide a second loan to Millennium
for such funding. As of December 31, 2000, there were no outstanding loans
to Millennium.
Distribution
We have a U.S.-based pharmaceutical marketing, sales and distribution
organization. Our sales efforts are focused on specialist physicians at
major medical centers in the United States. In general, our products are
sold to distributors or directly to hospital pharmacies or medical centers.
We utilize common pharmaceutical company marketing techniques, including
advertisements, professional symposia, direct mail, public relations and
other methods.
Our products are also available at no charge to qualified patients under
our uninsured patient programs in the United States. We have established the
Genentech Endowment for Cystic Fibrosis to assist cystic fibrosis patients in
the United States with obtaining Pulmozyme.
During the year, we provided certain marketing programs relating to
Activase, including comprehensive wastage replacement and expired product
programs for Activase that, subject to specific conditions, provides
customers the right to return Activase to us for replacement related to both
patient-related product wastage and product expiration. We maintain the
right to renew, modify or discontinue the above programs.
As discussed in the "Segment, Significant Customer And Geographic
Information" note in the Notes to Consolidated Financial Statements (Part II,
Item 8 of this Form 10-K), we had four major customers, including Hoffmann-La
Roche, who individually provided over 10% of our total revenues in at least
one of the last three years. Also discussed in the note are material foreign
revenues by country in 2000, 1999 and 1998.
Raw Materials
Raw materials and supplies required for the production of our principal
products are generally available in quantities adequate to meet our needs.
Proprietary Technology - Patents and Trade Secrets
We seek patents on inventions originating from our ongoing R&D activities.
Patents issued or applied for cover inventions ranging from basic recombinant
DNA techniques to processes relating to specific products and to the products
themselves. We have either been granted patents or have patent applications
pending that relate to a number of current and potential products including
products licensed to others. We consider that in the aggregate our patent
applications, patents and licenses under patents owned by third-parties are
of material importance to our operations. Important legal issues remain to
be resolved as to the extent and scope of available patent protection for
biotechnology products and processes in the United States and other important
markets outside of the United States. We expect that litigation will likely
be necessary to determine the validity and scope of certain of our
proprietary rights. We are currently involved in a number of patent
lawsuits, as either a plaintiff or defendant, and administrative proceedings
relating to the scope of protection of our patents and those of others.
These lawsuits and proceedings may result in a significant commitment of our
resources in the future. We cannot assure you that the patents we obtain or
the unpatented proprietary technology we hold will afford us significant
commercial protection.
In general, we have obtained licenses from various parties that we deem
to be necessary or desirable for the manufacture, use or sale of our
products. These licenses (both exclusive and non-exclusive) generally
require us to pay royalties to the parties on product sales.
Our trademarks, Actimmune, Activase, Herceptin, Nutropin Depot, Nutropin
AQ, Nutropin, Protropin, Pulmozyme, Rituxan (licensed from IDEC), TNKase
(licensed from Boehringer Ingelheim), Xolair (licensed from Novartis) and
Xanelim in the aggregate are considered to be of material importance. All
are covered by registrations or pending applications for registration in the
U.S. Patent and Trademark Office and in other countries.
Our royalty income for patent licenses, know-how and other related rights
amounted to $207.2 million in 2000, $189.3 million in 1999, and $229.6
million in 1998. Royalty expenses were $100.3 million in 2000, $88.8 million
in 1999, and $66.3 million in 1998.
Competition
We face competition, and believe significant long-term competition can be
expected, from large pharmaceutical companies and pharmaceutical divisions of
chemical companies as well as biotechnology companies. This competition can
be expected to become more intense as commercial applications for
biotechnology products increase. Some competitors, primarily large
pharmaceutical companies, have greater clinical, regulatory and marketing
resources and experience than us. Many of these companies have commercial
arrangements with other companies in the biotechnology industry to supplement
their own research capabilities.
The introduction of new products or the development of new processes by
competitors or new information about existing products may result in price
reductions or product replacements, even for products protected by patents.
However, we believe our competitive position is enhanced by our commitment to
research leading to the discovery and development of new products and
manufacturing methods. Other factors that should help us meet competition
include ancillary services provided to support our products, customer
service, and dissemination of technical information to prescribers of our
products and to the health care community, including payers.
Over the longer term, our and our collaborators' ability to successfully
market current products, expand their usage and bring new products to the
marketplace will depend on many factors, including but not limited to the
effectiveness and safety of the products, FDA and foreign regulatory
agencies' approvals for new indications, the degree of patent protection
afforded to particular products, and the effect of managed care as an
important purchaser of pharmaceutical products.
Herceptin
Herceptin is the first humanized monoclonal antibody for the treatment of
HER2 overexpressing metastatic breast cancer and the second United States
approval in this new class of monoclonal antibody biotherapeutic cancer
drugs. The first was Rituxan. We are aware of other potentially competitive
biologic therapies in development.
Rituxan
Rituxan received designation as a U.S. Orphan Drug by the FDA in 1994 for the
treatment of relapsed or refractory low-grade or follicular, CD20-positive B-
cell non-Hodgkin's lymphoma. We are aware of other potentially competitive
biologic therapies in development. Corixa Corporation, formerly Coulter
Pharmaceuticals, Inc., has filed and received an expedited review of a
revised BLA in 2000 for Bexxar, trademark, (tositumomab and iodine I 131
tositumomab), which may compete with our product Rituxan and IDEC has filed a
BLA for Zevalin, trademark, (ibritumomab tiuxetan), a product which could
also potentially compete with Rituxan. Both Bexxar and Zevalin are
radiolabeled molecules while Rituxan is not. We are also aware of other
potentially competitive biologic therapies for non-Hodgkin's lymphoma in
development.
Activase and TNKase
We continue to face competition in the thrombolytic market. Activase has
lost market share and could lose additional market share to Centocor Inc.'s
Retavase, registered trademark, either alone or in combination with the use
of another Centocor product, ReoPro, registered trademark; the resulting
adverse effect on sales could be material. Retavase received approval from
the FDA in October 1996 for the treatment of acute myocardial infarction. In
addition, the market for thrombolytic therapy has declined as there is an
increasing use of mechanical reperfusion in lieu of thrombolytic therapy for
the treatment of acute myocardial infarction. In June 2000, TNKase was
approved by the FDA for the treatment of acute myocardial infarction.
Nutropin Depot, Nutropin AQ, Nutropin and Protropin
Eli Lilly and Company received FDA approval in 1987 to market its growth
hormone product for treatment of growth hormone inadequacy in children.
Three other companies-Bio-Technology General Corporation, or BTG, Novo
Nordisk A/S, or Novo, and Pharmacia-received FDA approval in 1995 to market
their growth hormone products in the United States. BTG was preliminarily
enjoined from selling its product, but it is now free to enter the market. A
fifth competitor, Serono, Inc., received FDA approval in October 1996 to
market its growth hormone product. In the first quarter of 1997, Serono,
Novo and Pharmacia began selling their growth hormone products in the United
States. On June 21, 2000, Novo announced that the FDA approved Norditropin,
registered trademark, SimpleXx, trademark, a liquid form of its recombinant
somatropin product, for the long-term treatment of children who have growth
hormone failure due to inadequate secretion of endogenous growth hormone. In
addition, three of our competitors have received approval to market their
existing human growth hormone products in the United States for additional
indications.
In December 1999, we received FDA approval for Nutropin Depot, the first
long-acting dosage form of recombinant growth hormone for pediatric growth
hormone deficiency. We launched the product in late June 2000. We are not
aware of any competing sustained-release formulations of human growth hormone
in clinical development.
Pulmozyme
Pulmozyme is used for the treatment of cystic fibrosis, including cystic
fibrosis in children under the age of five. We are not aware of any directly
competing products in development.
Stock Option Changes
In connection with the Redemption of our Special Common Stock, the following
changes occurred with respect to our stock options that were outstanding as
of June 30, 1999:
- Options for the purchase of approximately 27.2 million shares of Special
Common Stock were canceled in accordance with the terms of the applicable
stock option plans, and the holders received cash payments in the amount
of $20.63 per share, less the exercise price;
- Options for the purchase of approximately 16.0 million shares of Special
Common Stock were converted into options to purchase a like number of
shares of Common Stock at the same exercise price; and
- Options for the purchase of approximately 19.6 million shares of Special
Common Stock were canceled in accordance with the terms of our 1996 Stock
Option/Stock Incentive Plan, or the 1996 Plan. With certain exceptions,
we granted new options for the purchase of 1.333 times the number of
shares under the previous options with an exercise price of $24.25 per
share, which was the July 23, 1999 public offering price of the Common
Stock. The number of shares that were the subject of these new options,
which were issued under our 1999 Stock Plan, or the 1999 Plan, was
approximately 20.0 million. Alternative arrangements were provided for
certain holders of some of the unvested options under the 1996 Plan.
Of the approximately 16.0 million shares of converted options, options
with respect to approximately 4.0 million shares were outstanding at December
31, 2000, all of which are currently exercisable except for options with
respect to approximately 320,507 shares. These outstanding options are held
by 1,420 employees; no non-employee directors hold these options.
Our board of directors and Roche, then our sole stockholder, approved
the 1999 Plan on July 16, 1999. Under the 1999 Plan, we granted new options
to purchase approximately 26.0 million shares (including the 20.0 million
shares referred to above) of Common Stock to approximately 2,400 employees at
an exercise price of $24.25 per share, with the grant of such options made
effective as of July 16, 1999. Of the options to purchase these 26.0 million
shares, options to purchase approximately 19.8 million shares were
outstanding at December 31, 2000, of which options to purchase approximately
7.7 million shares are currently exercisable.
In connection with these stock option transactions, we recorded:
- (1) cash compensation expense of approximately $284.5 million associated
with the cash-out of such stock options and (2) non-cash compensation
expense of approximately $160.1 million associated with the remeasurement,
for accounting purposes, of the converted options, which non-cash amount
represents the difference between each applicable option exercise price
and the redemption price of the Special Common Stock; and
- Over a two-year period beginning July 1, 1999, an aggregate of
approximately $27.4 million of deferred cash compensation available to be
earned by a limited number of employees who elected the alternative
arrangements described above. As of December 31, 2000, $11.1 million and
as of December 31 1999, $7.3 million, of compensation expense has been
recorded related to these alternative arrangements.
Relationship With Roche
As a result of the Redemption of our Special Common Stock, the then-existing
governance agreement between us and Roche terminated, except for provisions
relating to indemnification and stock options, warrants and convertible
securities. In July 1999, we entered into certain affiliation arrangements
with Roche, amended our licensing and marketing agreement with Hoffmann-La
Roche, and entered into a tax sharing agreement with Roche as follows:
Affiliation Arrangements
Our board of directors consists of two Roche directors, three independent
directors nominated by a nominating committee currently controlled by Roche,
and one Genentech employee. However, under the affiliation agreement, Roche
has the right to obtain proportional representation on our board at any time.
Roche intends to continue to allow our current management to conduct our
business and operations as we have done in the past. However, we cannot
ensure that Roche will not implement a new business plan in the future.
Except as follows, the affiliation arrangements do not limit Roche's
ability to buy or sell our Common Stock. If Roche and its affiliates sell
their majority ownership of shares of our Common Stock to a successor, Roche
has agreed that it will cause the successor to purchase all shares of our
Common Stock not held by Roche as follows:
- with consideration, if that consideration is composed entirely of either
cash or equity traded on a U.S. national securities exchange, in the same
form and amounts per share as received by Roche and its affiliates; and
- in all other cases, with consideration that has a value per share not less
than the weighted average value per share received by Roche and its
affiliates as determined by a nationally recognized investment bank.
If Roche owns more than 90% of our Common Stock for more than two
months, Roche has agreed that it will, as soon as reasonably practicable,
effect a merger of Genentech with Roche or an affiliate of Roche.
Roche has agreed, as a condition to any merger of Genentech with Roche
or the sale of our assets to Roche, that either:
- the merger or sale must be authorized by the favorable vote of a majority
of non-Roche stockholders, provided no person will be entitled to cast
more than 5% of the votes at the meeting; or
- in the event such a favorable vote is not obtained, the value of the
consideration to be received by non-Roche stockholders would be equal to
or greater than the average of the means of the ranges of fair values for
the Common Stock as determined by two nationally recognized investment
banks.
We have agreed not to approve, without the prior approval of the
directors designated by Roche:
- any acquisition, sale or other disposal of all or a portion of our
business representing 10% or more of our assets, net income or revenues;
- any issuance of capital stock except under certain circumstances; or
- any repurchase or redemption of our capital stock other than a redemption
required by the terms of any security and purchases made at fair market
value in connection with any of our deferred compensation plans.
Licensing Agreement
In 1995, we entered into a licensing and marketing agreement with Hoffmann-La
Roche and its affiliates granting it a ten-year option to license to use and
sell our products in non-U.S. markets. In July 1999, we amended that
agreement, the major provisions of which include:
- extending Hoffmann-La Roche's option until at least 2015;
- Hoffmann-La Roche may exercise its option to license our products upon the
occurrence of any of the following: (1) our decision to file an IND for a
product, (2) completion of a Phase II trial for a product or (3) if
Hoffmann-La Roche previously paid us a fee of $10.0 million to extend its
option on a product, completion of a Phase III trial for that product;
- we agreed, in general, to manufacture for and supply to Hoffmann-La Roche
its clinical requirements of our products at cost, and its commercial
requirements at cost plus a margin of 20%; however, Hoffmann-La Roche will
have the right to manufacture our products under certain circumstances;
- Hoffmann-La Roche has agreed to pay, for each product for which Hoffmann-
La Roche exercises its option upon either a decision to file an IND with
the FDA or completion of the Phase II trials, a royalty of 12.5% on the
first $100.0 million on its aggregate sales of that product and thereafter
a royalty of 15% on its aggregate sales of that product in excess of
$100.0 million until the later in each country of the expiration of our
last relevant patent or 25 years from the first commercial introduction of
that product; and
- Hoffmann-La Roche will pay, for each product for which Hoffmann-La Roche
exercises its option after completion of the Phase III trials, a royalty
of 15% on its sales of that product until the later in each country of the
expiration of our relevant patent or 25 years from the first commercial
introduction of that product; however, $5.0 million of any option
extension fee paid by Hoffmann-La Roche will be credited against royalties
payable to us in the first calendar year of sales by Hoffmann-La Roche in
which aggregate sales of that product exceed $100.0 million.
Tax Sharing Agreement
Since the redemption of our Special Common Stock, and until Roche completed
its second public offering of our Common Stock in October 1999, we were
included in Roche's U.S. federal consolidated income tax group. Accordingly,
we entered into a tax sharing agreement with Roche. Pursuant to the tax
sharing agreement, we and Roche are to make payments such that the net amount
paid by us on account of consolidated or combined income taxes is determined
as if we had filed separate, stand-alone federal, state and local income tax
returns as the common parent of an affiliated group of corporations filing
consolidated or combined federal, state and local returns.
Effective with the consummation of the second public offering on October
26, 1999, we ceased to be a member of the consolidated federal income tax
group (and certain consolidated or combined state and local income tax
groups) of which Roche is the common parent. Accordingly, our tax sharing
agreement with Roche now pertains only to the state and local tax returns in
which we will be consolidated or combined with Roche. We will continue to
calculate our tax liability or refund with Roche for these state and local
jurisdictions as if we were a stand-alone entity.
Roche's Right to Maintain Its Percentage Ownership Interest in Our Stock
We expect from time to time to issue additional shares of common stock in
connection with our stock option and stock purchase plans, and we may issue
additional shares for other purposes. The affiliation agreement provides
that we will, among other things, establish a stock repurchase program
designed to maintain Roche's percentage ownership interest in our common
stock. In addition, Roche has a continuing option to buy stock from us at
prevailing market prices to maintain its percentage ownership interest. In
connection with that provision, with respect to any issuance of common stock
by Genentech in the future, the percentage of Genentech common stock owned by
Roche immediately after such issuance is to be no lower than Roche's lowest
percentage ownership of Genentech common stock at any time after the offering
of common stock occurring in July 1999 and prior to the time of such
issuance, except that Genentech may issue shares up to an amount that would
cause Roche's lowest percentage ownership to be no more than 2% below the
"Minimum Percentage." The Minimum Percentage equals the lowest number of
shares of Genentech common stock owned by Roche since the July 1999 offering
(to be adjusted in the future for dispositions of shares of Genentech common
stock by Roche) divided by 509,194,352 (to be adjusted in the future for
stock splits or stock combinations), which is the number of shares of
Genentech common stock outstanding at the time of the July 1999 offering
adjusted for the two-for-one splits of our common stock in October 2000 and
November 1999. As long as Roche's percentage ownership is greater than 50%,
prior to issuing any shares, Genentech has agreed to repurchase a sufficient
number of shares of its common stock to provide that, immediately after its
issuance of shares, Roche's percentage ownership will be greater than 50%.
We have also agreed, upon request, to repurchase shares of our common stock
to increase Roche's ownership to the Minimum Percentage.
FORWARD-LOOKING INFORMATION AND CAUTIONARY FACTORS THAT MAY AFFECT FUTURE
RESULTS
The following section contains forward-looking information based on our
current expectations. Because our actual results may differ materially from
this and any other forward-looking statements made by or on behalf of
Genentech, this section also includes a discussion of important factors that
could affect our actual future results, including, but not limited to, our
product sales, royalties, contract revenues, expenses and net income.
Fluctuations in Our Operating Results Could Affect the Price of Our Common
Stock
Our operating results may vary from period to period for several reasons
including:
- The overall competitive environment for our products.
For example, sales of our Activase product decreased in 2000, 1999 and
1998 primarily due to competition from Centocor Inc.'s Retavase and more
recently to a decreasing size of the thrombolytic marketplace as other
forms of acute myocardial infarction treatment gain acceptance.
- The amount and timing of sales to customers in the United States.
For example, sales of our Growth Hormone products increased in 2000 and
1999 due to fluctuations in distributor ordering patterns.
- The amount and timing of our sales to Hoffmann-La Roche of products for
sale outside of the United States and the amount and timing of its sales
to its customers, which directly impact both our product sales and royalty
revenues.
For example, in the third quarter of 2000, Hoffmann-La Roche's approval of
Herceptin in Europe increased our sales of Herceptin product.
- The timing and volume of bulk shipments to licensees.
- The availability of third-party reimbursements for the cost of therapy.
- The effectiveness and safety of our various products as determined both in
clinical testing and by the accumulation of additional information on each
product after it is approved by the FDA for sale.
- The rate of adoption and use of our products for approved indications and
additional indications.
For example, sales of Pulmozyme increased in 1998 due, in part, to new
patients who were attracted to our product as a result of an FDA approval
for a label extension to include cystic fibrosis patients under the age of
five.
- The potential introduction of new products and additional indications for
existing products in 2001 and beyond.
- The ability to successfully manufacture sufficient quantities of any
particular marketed product.
- The number and size of any product price increases we may issue.
The Successful Development of Pharmaceutical Products Is Highly Uncertain
Successful pharmaceutical product development is highly uncertain and is
dependent on numerous factors, many of which are beyond our control.
Products that appear promising in the early phases of development may fail to
reach the market for several reasons including:
- Preclinical and clinical trial results that may show the product to be
less effective than desired or to have harmful problematic side effects;
For example:
- In June 2000, we announced that the preliminary results from
our 415-patient Phase II clinical trial of our recombinant humanized
anti-CD18 monoclonal antibody fragment, which is known as rhuMAb
CD18, for the treatment of myocardial infarction, more commonly known
as a heart attack, did not meet its primary objectives.
- In 1999, our Phase III clinical trial of recombinant human nerve
growth factor, which is known as rhNGF, for use in diabetic
peripheral neuropathy did not meet its objectives and we decided not
to file for product approval with the FDA.
- In 1999, our Phase II clinical study of recombinant human vascular
endothelial growth factor, which is known as VEGF, protein failed to
meet the primary endpoints of the study.
- Failure to receive the necessary regulatory approvals or delay in
receiving such approvals;
- Manufacturing costs or other factors that make the product uneconomical;
or
- The proprietary rights of others and their competing products and
technologies that may prevent the product from being commercialized.
Success in preclinical and early clinical trials does not ensure that large-
scale clinical trials will be successful. Clinical results are frequently
susceptible to varying interpretations that may delay, limit or prevent
regulatory approvals. The length of time necessary to complete clinical
trials and to submit an application for marketing approval for a final
decision by a regulatory authority varies significantly and may be difficult
to predict.
Factors affecting our research and development, or R&D, expenses include, but
are not limited to:
- The number of and the outcome of clinical trials currently being conducted
by us and/or our collaborators.
- The number of products entering into development from late-stage research.
For example, there is no guarantee that internal research efforts will
succeed in generating sufficient data for us to make a positive
development decision or that an external candidate will be available on
terms acceptable to us. In the past, promising candidates have not
yielded sufficiently positive preclinical results to meet our stringent
development criteria.
- Hoffmann-La Roche's decisions whether to exercise its options to develop
and sell our future products in non-U.S. markets and the timing and amount
of any related development cost reimbursements.
- In-licensing activities, including the timing and amount of related
development funding or milestone payments.
For example, in February 2000, we entered into an agreement with Actelion
Ltd. for the purchase of rights for the development and co-promotion in
the United States of tezosentan and paid Actelion an upfront fee of $15.0
million which was recorded as a R&D expense.
- As part of our strategy, we invest in R&D. R&D as a percent of revenues
can fluctuate with the changes in future levels of revenue. Lower
revenues can lead to more disciplined spending of R&D efforts.
- Future levels of revenue.
Roche, Our Controlling Stockholder, May Have Interests That Are Adverse to
Other Stockholders
Roche, as our majority stockholder, controls the outcome of actions requiring
the approval of our stockholders. Our bylaws provide, among other things,
that the composition of our board of directors shall consist of two Roche
directors, three independent directors nominated by a nominating committee
and one Genentech employee nominated by the nominating committee. As long as
Roche owns in excess of 50% of our common stock, Roche directors will
comprise two of the three members of the nominating committee. However, at
any time until Roche owns less than 5% of our stock, Roche will have the
right to obtain proportional representation on our board. Roche intends to
continue to allow our current management to conduct our business and
operations as we have done in the past. However, we cannot assure
stockholders that Roche will not institute a new business plan in the future.
Roche's interests may conflict with your interests.
Our Affiliation Agreement With Roche Could Limit Our Ability to Make
Acquisitions and Could Have a Material Negative Impact on Our Liquidity
The affiliation agreement between us and Roche contains provisions that:
- Require the approval of the directors designated by Roche to make any
acquisition or any sale or disposal of all or a portion of our business
representing 10% or more of our assets, net income or revenues;
- Enable Roche to maintain its percentage ownership interest in our common
stock; and
- Establish a stock repurchase program designed to maintain Roche's
percentage ownership interest in our common stock.
These provisions may have the effect of limiting our ability to make
acquisitions and while the dollar amounts associated with the stock
repurchase program cannot currently be estimated, these stock repurchases
could have a material adverse impact on our liquidity, credit rating and
ability to access capital in the financial markets.
Our Stockholders May Be Unable to Prevent Transactions That Are Favorable to
Roche but Adverse to Us
Our certificate of incorporation includes provisions relating to:
- Competition by Roche with us;
- Offering of corporate opportunities;
- Transactions with interested parties;
- Intercompany agreements; and
- Provisions limiting the liability of specified employees.
Our certificate of incorporation provides that any person purchasing or
acquiring an interest in shares of our capital stock shall be deemed to have
consented to the provisions in the certificate of incorporation relating to
competition with Roche, conflicts of interest with Roche, the offer of
corporate opportunities to Roche and intercompany agreements with Roche.
This deemed consent may restrict your ability to challenge transactions
carried out in compliance with these provisions.
Potential Conflicts of Interest Could Limit Our Ability to Act on
Opportunities That Are Adverse to Roche
Persons who are directors and/or officers of Genentech and who are also
directors and/or officers of Roche may decline to take action in a manner
that might be favorable to us but adverse to Roche. Two of our directors,
Dr. Franz B. Humer and Dr. Jonathan K.C. Knowles, currently serve as
directors, officers and employees of Roche Holding Ltd and its affiliates.
We May Be Unable to Retain Skilled Personnel and Maintain Key Relationships
The success of our business depends, in large part, on our continued ability
to attract and retain highly qualified management, scientific, manufacturing
and sales and marketing personnel, and on our ability to develop and maintain
important relationships with leading research institutions and key
distributors. Competition for these types of personnel and relationships is
intense.
Roche has the right to maintain its percentage ownership interest in our
common stock. Our affiliation agreement with Roche provides that, among
other things, we will establish a stock repurchase program designed to
maintain Roche's percentage ownership in our common stock if we issue or sell
any shares. This right of Roche may limit our flexibility as to the number
of shares we are able to grant under our stock option plans. We therefore
cannot assure you that we will be able to attract or retain skilled personnel
or maintain key relationships.
We Face Growing and New Competition
We face growing competition in two of our therapeutic markets and expect new
competition in a third market. First, in the thrombolytic market, Activase
has lost market share and could lose additional market share to Centocor's
Retavase, either alone or in combination with the use of another Centocor
product, ReoPro, registered trademark, (abciximab) and to the use of other
mechanical therapies to treat acute myocardial infarction; the resulting
adverse effect on sales has been and could continue to be material. Retavase
received approval from the FDA in October 1996 for the treatment of acute
myocardial infarction. We expect that the use of mechanical reperfusion in
lieu of thrombolytic therapy for the treatment of acute myocardial infarction
will continue to grow.
Second, in the growth hormone market, we continue to face increased
competition from four other companies currently selling growth hormone and an
additional company which may enter the market in the near future. As a
result of that competition, we have experienced a loss in market share. The
four competitors have also received approval to market their existing human
growth hormone products for additional indications. As a result of this
competition, sales of our Growth Hormone products may decline, perhaps
significantly.
Third, in the non-Hodgkin's lymphoma market, Corixa Corporation,
formerly Coulter Pharmaceutical, Inc., has filed and received an expedited
review of a revised Biologics License Application, or BLA, in 2000 for
Bexxar, trademark, (tositumomab and iodine I 131 tositumomab), which may
potentially compete with our product Rituxan and IDEC has filed a BLA for
Zevalin, trademark, (ibritumomab tiuxetan), a product which could also
potentially compete with Rituxan. Both Bexxar and Zevalin are radiolabeled
molecules while Rituxan is not. We are also aware of other potentially
competitive biologic therapies for non-Hodgkin's lymphoma in development.
Other Competitive Factors Could Affect Our Product Sales
Other competitive factors that could affect our product sales include, but
are not limited to:
- The timing of FDA approval, if any, of competitive products.
For example, in June 2000 one of our competitors, Novo, received FDA
approval for a liquid formulation of its growth hormone product that
will directly compete with our liquid formulation, Nutropin AQ. Also in
June 2000, another of our competitors, Serono S.A., received FDA approval
to deliver its competitive growth hormone product in a needle-free device.
- Our pricing decisions and the pricing decisions of our competitors.
For example, we raised the prices of Rituxan in May 2000 and Pulmozyme in
June 2000 by approximately 5%.
- The degree of patent protection afforded our products by patents granted
to us and by the outcome of litigation involving our patents.
For example, in January 2000, a federal court judge lifted a preliminary
injunction that had been in effect since 1995 against Bio-Technology
General Corporation, or BTG. Although an appeal of the judge's decision
is pending, BTG is now permitted to sell its competitive growth hormone
product in the United States.
- The outcome of litigation involving patents of other companies concerning
our products or processes related to production and formulation of those
products or uses of those products.
For example, as further described in "Protecting Our Proprietary Rights Is
Difficult and Costly," in May 1999, June 2000 and September 2000, several
companies filed patent infringement lawsuits against us alleging that we
are infringing certain of their patents.
- The increasing use and development of alternate therapies.
For example, the overall size of the market for thrombolytic therapies,
such as our Activase product, continues to decline as a result of the
increasing use of mechanical reperfusion.
- The rate of market penetration by competing products.
For example, in the past, we have lost market share to new competitors in
the thrombolytic and growth hormone markets.
In Connection With the Redemption of Our Special Common Stock, We Recorded
Substantial Goodwill and Other Intangibles, the Amortization of Which May
Adversely Affect Our Earnings
As a result of the redemption of our special common stock, Roche owned all of
our outstanding common stock. Consequently, push-down accounting under
generally accepted accounting principles was required. Push-down accounting
required us to establish a new accounting basis for our assets and
liabilities, based on Roche's cost in acquiring all of our stock. In other
words, Roche's cost of acquiring Genentech was "pushed down" to us and
reflected on our financial statements. Push-down accounting required us to
record goodwill and other intangible assets of approximately $1,685.7 million
and $1,499.0 million, respectively, on June 30, 1999. The amortization of
this goodwill and other intangible assets will have a significant negative
impact on our financial results in future years. In addition, we will
continuously evaluate whether events and circumstances have occurred that
indicate the remaining balance of this and other intangible assets may not be
recoverable. If our assets need to be evaluated for possible impairment, we
may have to reduce the carrying value of our intangible assets. This could
have a material adverse effect on our financial condition and results of
operations during the periods in which we recognize a reduction. We may have
to write down intangible assets in future periods. For more information
about push-down accounting, see the "Redemption of Our Special Common Stock"
note in the Notes to Consolidated Financial Statements (Part II, Item 8 of
this Form 10-K).
Our Royalty and Contract Revenues Could Decline
Royalty and contract revenues in future periods could vary significantly.
Major factors affecting these revenues include, but are not limited to:
- Hoffmann-La Roche's decisions whether to exercise its options and option
extensions to develop and sell our future products in non-U.S. markets and
the timing and amount of any related development cost reimbursements.
- Variations in Hoffmann-La Roche's sales and other licensees' sales of
licensed products.
For example, we began receiving royalty revenues from Immunex's sale of
Enbrel in 1999.
- The conclusion of existing arrangements with other companies and Hoffmann-
La Roche.
For example, royalty revenues decreased in 1999 from 1998 due to the
expiration of royalty payments primarily on sales of human insulin, from
Eli Lilly and Company in August 1998.
- The timing of non-U.S. approvals, if any, for products licensed to
Hoffmann-La Roche and other licensees.
For example, we expect the approval of Herceptin outside the United States
which occurred in third quarter of 2000 to have a continuing positive
impact on royalties.
- Fluctuations in foreign currency exchange rates.
- The initiation of new contractual arrangements with other companies.
For example, license fees from Immunex and Schwarz Pharma increased
contract revenues in 1999.
- Whether and when contract benchmarks are achieved.
For example, milestone payments from Pharmacia increased contract
revenue in 1997.
- The failure of or refusal of a licensee to pay royalties.
- The expiration or invalidation of patents or licensed intellectual
property.
Protecting Our Proprietary Rights Is Difficult and Costly
The patent positions of pharmaceutical and biotechnology companies can be
highly uncertain and involve complex legal and factual questions.
Accordingly, we cannot predict the breadth of claims allowed in these
companies' patents. Patent disputes are frequent and can preclude the
commercialization of products. We have in the past been, are currently, and
may in the future be involved in material patent litigation. Patent
litigation is costly in its own right and could subject us to significant
liabilities to third parties. In addition, an adverse decision could force
us to either obtain third-party licenses at a material cost or cease using
the technology or product in dispute. For example, in late 1999 we settled a
patent infringement lawsuit brought against us by the Regents of the
University of California in which the University alleged that the manufacture
and sale of our Protropin and Nutropin growth hormone products infringed a
patent owned by the University. In connection with that settlement we paid
the University of California $150.0 million and donated $50.0 million for the
construction of a new life sciences building on the University of California,
San Francisco campus.
The presence of patents or other proprietary rights belonging to other
parties may lead to our termination of the R&D of a particular product.
We believe that we have strong patent protection or the potential for
strong patent protection for a number of our products that generate sales and
royalty revenue or that we are developing. However, the courts will
determine the ultimate strength of patent protection of our products and
those on which we earn royalties.
Three lawsuits have been filed against us in which the companies
involved allege that we have infringed their patents by the manufacture and
sale of certain of our products:
- In May 1999, GlaxoSmithKline plc, or Glaxo, filed a complaint in which it
appears to claim that our manufacture, use and sale of Rituxan and
Herceptin antibody products infringe four Glaxo patents that relate to
certain uses and preparations of antibodies.
- In June 2000, Chiron Corporation filed a complaint in which it claims that
our manufacture and sale of Herceptin infringe a patent it owns.
- In September 2000, Glaxo filed another complaint in which it appears to
claim that our manufacture, use and sale of Rituxan and Herceptin antibody
products infringe a Glaxo patent that relates to certain cell culture
methods.
We May Incur Material Litigation Costs
Litigation to which we are currently or have been subjected relates to, among
other things, our patent and intellectual property rights, licensing
arrangements with other persons, product liability and financing activities.
We cannot predict with certainty the eventual outcome of pending litigation,
and we might have to incur substantial expense in defending these lawsuits.
We have in the past taken substantial special charges relating to litigation,
including $230.0 million in 1999.
We May Incur Material Product Liability Costs
The testing and marketing of medical products entail an inherent risk of
product liability. Pharmaceutical product liability exposures could be
extremely large and pose a material risk. Our business may be materially and
adversely affected by a successful product liability claim in excess of any
insurance coverage that we may have.
We May Be Unable to Obtain Regulatory Approvals for Our Products
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
R&D, testing, manufacturing, quality control, labeling and promotion of drugs
for human use. A pharmaceutical product cannot be marketed in the United
States until it has been approved by the FDA, and then can only be marketed
for the indications and claims approved by the FDA. As a result of these
requirements, the length of time, the level of expenditures and the
laboratory and clinical information required for approval of a New Drug
Application, or NDA, or a BLA, are substantial and can require a number of
years. In addition, after any of our products receive regulatory approval,
they remain subject to ongoing FDA regulation, including, for example,
changes to their label, written advisements to physicians and product recall.
We cannot be sure that we can obtain necessary regulatory approvals on a
timely basis, if at all, for any of the products we are developing or that we
can maintain necessary regulatory approvals for our existing products, and
all of the following could have a material adverse effect on our business:
- Significant delays in obtaining or failing to obtain required approvals.
- Loss of or changes to previously obtained approvals.
For example, in May 2000, we issued letters to physicians advising them of
some serious adverse events associated with the administration of
Herceptin. In October 2000, we issued a new package insert for Herceptin
including this information.
- Failure to comply with existing or future regulatory requirements.
For example, in 1999, we paid a $50.0 million settlement to the federal
government in connection with a federal investigation of our former
clinical, sales and marketing activities associated with our human growth
hormone products.
Moreover, it is possible that the current regulatory framework could
change or additional regulations could arise at any stage during our product
development, which may affect our ability to obtain approval of our products.
Difficulties or Delays in Product Manufacturing Could Harm Our Business
We currently produce all of our products at our manufacturing facilities
located in South San Francisco, California and Vacaville, California or
through various contract manufacturing arrangements. Problems with any of
our or our contractors' manufacturing processes could result in product
defects, which could require us to delay shipment of products, recall
products previously shipped or be unable to supply products at all.
For example, in March 2000, we issued an important drug notification
regarding a defect in the packaging of our Pulmozyme product. During a
quality assurance inspection, we had discovered that there was a defect in
the packaging of Pulmozyme which occasionally caused a small puncture in
ampules of that product. We suspended shipping the product while we
determined the source and extent of the defect. We ultimately recalled some
of the product.
On December 27, 2000, we received a Warning Letter from the FDA
regarding our quality control at our South San Francisco manufacturing plant.
The products cited were for cystic fibrosis, breast cancer and acute
myocardial infarction. On February 7, 2001, we received a letter from the
FDA accepting our responses and corrective actions with respect to the
Warning Letter.
In addition, any prolonged interruption in the operations of our or our
contractors' manufacturing facilities could result in cancellations of
shipments. A number of factors could cause interruptions, including
equipment malfunctions or failures, or damage to a facility due to natural
disasters or otherwise. Because our manufacturing processes and those of our
contractors are highly complex and are subject to a lengthy FDA approval
process, alternative qualified production capacity may not be available on a
timely basis or at all. Difficulties or delays in our and our contractors'
manufacturing of existing or new products could increase our costs, cause us
to lose revenue or market share and damage our reputation.
Our Stock Price, Like That of Many Biotechnology Companies, Is Highly
Volatile
The market prices for securities of biotechnology companies in general have
been highly volatile and may continue to be highly volatile in the future.
In addition, due to the absence of the put and call that were associated with
our special common stock, the market price of our common stock has been and
may continue to be more volatile than our special common stock was in the
past.
In addition, the following factors may have a significant impact on the
market price of our common stock:
- Announcements of technological innovations or new commercial products by
us or our competitors.
For example, our stock increased by approximately 4% on the day we
announced FDA approval for our Nutropin Depot product.
- Developments concerning proprietary rights, including patents.
For example, our stock price decreased by approximately 4% on the day one
of our competitors, Chiron, announced a patent infringement suit against
us.
- Publicity regarding actual or potential medical results relating to
products under development by us or our competitors.
For example, our stock price increased by approximately 9% on the day we
announced positive preliminary Phase III results from the Anti-IgE asthma
clinic.
- Regulatory developments in the United States and foreign countries.
- Public concern as to the safety of biotechnology products.
For example, on May 8, 2000, we issued a warning concerning our Herceptin
drug after 15 deaths resulted from the administration of Herceptin. Our
stock price decreased by approximately 2% at that time.
- Economic and other external factors or other disaster or crisis.
For example, our stock reached a high of $122.50 per share in March 2000
and decreased, as the biotech sector and stock market in general
decreased, to a low of $42.25 per share in late May 2000.
- Period-to-period fluctuations in financial results.
For example, our stock price has historically been affected by whether we
met or exceeded analyst expectations.
Our Affiliation Agreement With Roche Could Adversely Affect Our Cash Position
Our affiliation agreement with Roche provides that we will establish a stock
repurchase program designed to maintain Roche's percentage ownership interest
in our common stock. While the dollar amounts associated with these future
purchases cannot currently be estimated, these stock repurchases could have a
material adverse effect on our cash position and may have the effect of
limiting our ability to use our capital stock as consideration for
acquisitions.
These provisions may have the effect of limiting our ability to make
acquisitions and while the dollar amounts associated with the stock
repurchase program cannot currently be estimated, those stock repurchases
could have a material adverse impact on our liquidity, credit rating and
ability to access capital in the financial markets.
Future Sales by Roche Could Cause the Price of Our Common Stock to Decline
As of December 31, 2000, Roche owned 306,594,352 shares of our common stock
or approximately 58.4% of our outstanding shares. All of our shares owned by
Roche are eligible for sale in the public market subject to compliance with
the applicable securities laws. We have agreed that, upon Roche's request,
we will file one or more registration statements under the Securities Act in
order to permit Roche to offer and sell shares of our common stock. We have
agreed to use our best efforts to facilitate the registration and offering of
those shares designated for sale by Roche. Sales of a substantial number of
shares of our common stock by Roche in the public market could adversely
affect the market price of our common stock.
We Are Exposed to Market Risk
We are exposed to market risk, including changes to interest rates, foreign
currency exchange rates and equity investment prices. To reduce the
volatility relating to these exposures, we enter into various derivative
investment transactions pursuant to our investment and risk management
policies and procedures in areas such as hedging and counterparty exposure
practices. We do not use derivatives for speculative purposes.
We maintain risk management control systems to monitor the risks
associated with interest rates, foreign currency exchange rates and equity
investment price changes, and our derivative and financial instrument
positions. The risk management control systems use analytical techniques,
including sensitivity analysis and market values. Though we intend for our
risk management control systems to be comprehensive, there are inherent risks
that may only be partially offset by our hedging programs should there be
unfavorable movements in interest rates, foreign currency exchange rates or
equity investment prices.
The estimated exposures discussed below are intended to measure the
maximum amount we could lose from adverse market movements in interest rates,
foreign currency exchange rates and equity investment prices, given a
specified confidence level, over a given period of time. Loss is defined in
the value at risk estimation as fair market value loss. The exposures to
interest rate, foreign currency exchange rate and equity investment price
changes are calculated based on proprietary modeling techniques from a Monte
Carlo simulation value at risk model using a 30-day holding period and a 95%
confidence level. The value at risk model assumes non-linear financial
returns and generates potential paths various market prices could take and
tracks the hypothetical performance of a portfolio under each scenario to
approximate its financial return. The value at risk model takes into account
correlations and diversification across market factors, including interest
rates, foreign currencies and equity prices. Market volatilities and
correlations are based on J.P. Morgan Riskmetrics, trademark, dataset as of
December 31, 2000.
Our Interest Income is Subject to Fluctuations in Interest Rates
Our material interest bearing assets, or interest bearing portfolio,
consisted of cash equivalents, restricted cash, short-term investments,
convertible preferred stock investments, convertible loans and long-term
investments. The balance of our interest bearing portfolio was $1,879.6
million or 28% of total assets at December 31, 2000. Interest income related
to this portfolio was $90.4 million or 5% of total revenues. Our interest
income is sensitive to changes in the general level of interest rates,
primarily U.S. interest rates. In this regard, changes in U.S. interest
rates affect the interest bearing portfolio. To mitigate the impact of
fluctuations in U.S. interest rates, for a portion of our portfolio, we have
entered into swap transactions, which involve the receipt of fixed rate
interest and the payment of floating rate interest without the exchange of
the underlying principal.
Based on our overall interest rate exposure at December 31, 2000, 1999
and 1998, including derivative and other interest rate sensitive instruments,
a near-term change in interest rates, within a 95% confidence level based on
historical interest rate movements would not materially affect the fair value
of interest rate sensitive instruments.
We Are Exposed to Risks Relating to Foreign Currency Exchange Rates and
Foreign Economic Conditions
We evaluate our foreign currency exposure on a net basis. We receive royalty
revenues from licensees selling products in countries throughout the world.
Increasingly however, these royalties are being offset by expenses arising
from our foreign facility as well as non-U.S. dollar expenses incurred in our
collaborations. Currently, our foreign royalty revenues exceed our expenses.
As a result, our financial results could be significantly affected by factors
such as changes in foreign currency exchange rates or weak economic
conditions in the foreign markets in which our licensed products are sold.
We are exposed to changes in exchange rates in Europe, Asia (primarily Japan)
and Canada. Our exposure to foreign exchange rates primarily exists with the
Euro. When the U.S. dollar strengthens against the currencies in these
countries, the U.S. dollar value of non-U.S. dollar-based revenue decreases;
when the U.S. dollar weakens, the U.S. dollar value of the non-U.S. dollar-
based revenues increases. Accordingly, changes in exchange rates, and in
particular a strengthening of the U.S. dollar, may adversely affect our
royalty revenues as expressed in U.S. dollars. In addition, as part of our
overall investment strategy, a portion of our portfolio is primarily in non-
dollar denominated investments. As a result, we are exposed to changes in
the exchange rates of the countries in which these non-dollar denominated
investments are made.
To mitigate our net foreign exchange exposure, we could hedge certain of
our anticipated revenues by purchasing option contracts with expiration dates
and amounts of currency that are based on 25% to 90% of probable future
revenues so that the potential adverse impact of movements in currency
exchange rates on the non-dollar denominated revenues will be at least partly
offset by an associated increase in the value of the option. Currently, the
term of these options is generally one to two years. We may also enter into
foreign currency forward contracts to lock in the dollar value of a portion
of these anticipated revenues. To hedge the non-dollar denominated
investment portfolio, we enter into forward contracts.
Based on our overall currency rate exposure at December 31, 2000, 1999
and 1998, including derivative and other foreign currency sensitive
instruments, a near-term change in currency rates within a 95% confidence
level based on historical currency rate movements, would not materially
affect the fair value of foreign currency sensitive instruments.
Our Investments in Equity Securities Are Subject to Market Risks
As part of our strategic alliance efforts, we invest in equity instruments of
biotechnology companies. Our biotechnology equity investment portfolio
totaled $652.7 million or 10% of total assets at December 31, 2000. These
investments are subject to fluctuations from market value changes in stock
prices. To mitigate this risk, certain equity securities are hedged with
costless collars and equity swaps. A costless collar is a purchased put
option and a written call option in which the cost of the purchased put and
the proceeds of the written call offset each other; therefore, there is no
initial cost or cash outflow for these instruments at the time of purchase.
The purchased put protects us from a decline in the market value of the
security below a certain minimum level (the put "strike" level), while the
call effectively limits our potential to benefit from an increase in the
market value of the security above a certain maximum level (the call "strike"
level). An equity swap is a derivative instrument where we pay the
counterparty the total return of the security above the current spot price
and receives interest income on the notional amount for the swap term. The
equity swap protects us from a decline in the market value of the security
below the spot price and limits our potential benefit from an increase in the
market value of the security above the spot price. In addition, as part of
our strategic alliance efforts, we hold dividend-bearing convertible
preferred stock and have made interest-bearing loans that are convertible
into the equity securities of the debtor.
Based on our overall exposure to fluctuations from market value changes
in marketable equity prices at December 31, 2000, a near-term change in
equity prices within a 95% confidence level based on historic volatilities
could result in a potential loss in fair value of the equity securities
portfolio of $94.0 million. We estimated that the potential loss in fair
value of the equity securities portfolio was $43.2 million at December 31,
1999 and $10.6 million at December 31, 1998.
Recent Accounting Pronouncements Could Impact Our Financial Position and
Results of Operations
We will adopt Statement of Financial Accounting Standards 133, or FAS 133,
"Accounting for Derivative Instruments and Hedging Activities," on January 1,
2001. FAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires companies to recognize
all derivatives as either assets or liabilities on the balance sheet and
measure those instruments at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending
on the use of the derivative and whether it qualifies for hedge accounting
under FAS 133. Based on our derivative positions at December 31, 2000, we
estimate that upon adoption, we will record a charge from the cumulative
effect of a change in accounting principle of approximately $9.0 million
being recognized in the consolidated statement of operations and an increase
of approximately $8.0 million in other comprehensive income.
We Are Exposed to Credit Risk of Counterparties
We could be exposed to losses related to the financial instruments described
above under "We Are Exposed to Market Risk" should one of our counterparties
default. We attempt to mitigate this risk through credit monitoring
procedures.
Government Regulation
Regulation by governmental authorities in the United States and other
countries is a significant factor in the manufacture and marketing of our
products and in ongoing research and product development activities. All of
our products require regulatory approval by governmental agencies prior to
commercialization. In particular, our products are subject to rigorous
preclinical and clinical testing and other premarket approval requirements by
the FDA and regulatory authorities in other countries. Various statutes and
regulations also govern or influence the manufacturing, safety, labeling,
storage, record keeping and marketing of such products. The lengthy process
of seeking these approvals, and the subsequent compliance with applicable
statutes and regulations, require the expenditure of substantial resources.
We believe that we are currently in compliance with such statutes and
regulations. Any failure by us to obtain, or any delay in obtaining,
regulatory approvals could materially adversely affect our business.
The activities required before a pharmaceutical product may be marketed
in the United States begin with preclinical testing. Preclinical tests
include laboratory evaluation of product chemistry and animal studies to
assess the potential safety and efficacy of the product and its formulations.
The results of these studies must be submitted to the FDA as part of an IND
application, which must be reviewed by the FDA before proposed clinical
testing can begin. Typically, clinical testing involves a three-phase
process. In Phase I, clinical trials are conducted with a small number of
subjects to determine the early safety profile and the pattern of drug
distribution and metabolism. In Phase II, clinical trials are conducted with
groups of patients afflicted with a specified disease in order to provide
enough data to statistically evaluate the preliminary efficacy, optimal
dosages and expanded evidence of safety. In Phase III, large scale,
multicenter, comparative clinical trials are conducted with patients
afflicted with a target disease in order to provide enough data to
statistically evaluate the efficacy and safety of the product, as required by
the FDA. The results of the preclinical and clinical testing of a chemical
pharmaceutical product are then submitted to the FDA in the form of a NDA, or
for a biological pharmaceutical product in the form of a BLA, for approval to
commence commercial sales. In responding to a NDA or a BLA, the FDA may
grant marketing approval, request additional information or deny the
application if it determines that the application does not provide an
adequate basis for approval. We can not assure you that any approval
required by the FDA will be obtained on a timely basis, if at all.
Among the conditions for a NDA or a BLA approval is the requirement that
the prospective manufacturer's quality control and manufacturing procedures
conform on an ongoing basis with Good Manufacturing Practices, or GMP.
Before approval of a BLA, the FDA will perform a prelicensing inspection of
the facility to determine its compliance with GMP and other rules and
regulations. In complying with GMP, manufacturers must continue to expend
time, money and effort in the area of production and quality control to
ensure full compliance. After the establishment is licensed for the
manufacture of any product, manufacturers are subject to periodic inspections
by the FDA.
The requirements that we must satisfy to obtain regulatory approval by
governmental agencies in other countries prior to commercialization of our
products in such countries can be as rigorous, costly and uncertain.
We are also subject to various laws and regulations relating to safe
working conditions, laboratory and manufacturing practices, the experimental
use of animals and the use and disposal of hazardous or potentially hazardous
substances, including radioactive compounds and infectious disease agents,
used in connection with our research. We believe we are currently in
compliance with all these laws and regulations. The extent of governmental
regulation that might result from any legislative or administrative action
cannot be accurately predicted.
The levels of revenues and profitability of biopharmaceutical companies
may be affected by the continuing efforts of government and third party
payers to contain or reduce the costs of health care through various means.
For example, in certain foreign markets pricing or profitability of
therapeutic and other pharmaceutical products is subject to governmental
control. In the United States there have been, and we expect that there will
continue to be, a number of federal and state proposals to implement similar
governmental control. While we cannot predict whether any such legislative
or regulatory proposals will be adopted, the adoption of such proposals could
have a material adverse effect on our business, financial condition and
profitability. In addition, in the United States and elsewhere, sales of
therapeutic and other pharmaceutical products are dependent in part on the
availability of reimbursement to the consumer from third party payers, such
as government and private insurance plans. Third party payers are
increasingly challenging the prices charged for medical products and
services. We cannot assure you that any of our products will be considered
cost effective and that reimbursement to the consumer will be available or
will be sufficient to allow us to sell our products on a competitive and
profitable basis.
Research and Development
A major portion of our operating expenses to date are related to the R&D of
products either on our own behalf or under contracts. During 2000, 1999 and
1998, our R&D expenses were $489.9 million, $367.3 million and $396.2
million, respectively.
Our R&D efforts have been the primary source of our products. We intend
to maintain our strong commitment to R&D as an essential component of our
product development effort. Licensed technology developed by outside parties
is an additional source of potential products.
Human Resources
As of December 31, 2000, we had 4,459 employees.
Environment
We seek to comply with all applicable statutory and administrative
requirements concerning environmental quality. We have made, and will
continue to make, expenditures for environmental compliance and protection.
Expenditures for compliance with environmental laws have not had and are not
expected to have a material effect on our capital expenditures, results of
operation, financial position or competitive position.
ITEM 2. Properties
Our primary facilities are located in a research and industrial park in South
San Francisco, California in both leased and owned properties. We currently
occupy 25 buildings for our research and development, manufacturing,
marketing and administrative activities. Of the buildings, 14 are owned and
11 are leased. We have made and continue to make improvements to these
properties to accommodate our growth. In addition, we own approximately 17
acres adjacent to our current facilities that may be used for future
expansion. In 1995, we began development of a new manufacturing facility of
approximately 300,000 square feet in Vacaville, California under an operating
lease arrangement. The facility is operational and was granted FDA licensure
in April 2000. In April 2000, we purchased a cell culture manufacturing
facility in Porrino, Spain. The facility will supplement our existing bulk
cell culture production capacity. We also have leases for certain additional
office facilities in several locations in the United States.
We believe our facilities are in good operating condition and that the
real property owned or leased are adequate for all present and near term
uses. Additional manufacturing capacity may be added in the South San
Francisco or on the Vacaville site dependent on the success of products in
clinical trials. We believe any additional facilities could be obtained or
constructed with our capital resources.
ITEM 3. Legal Proceedings
We are a party to various legal proceedings, including patent infringement
litigation relating to our human growth hormone products and antibody
products, product liability litigation, licensing and contract disputes, and
other matters.
In 1990 and 1997, the Regents of the University of California, or UC, filed
patent infringement lawsuits against Genentech, alleging that the
manufacture, use and sale of our Protropin and Nutropin human growth hormone
products infringe a patent known as the "Goodman patent" that is owned by UC.
On November 19, 1999, we and UC announced a proposed settlement of those
lawsuits, and on or about December 17, 1999, the parties entered into a
definitive written agreement on the terms of the settlement. Under the terms
of the settlement, Genentech agreed to pay UC $150.0 million and agreed to
make a contribution in the amount of $50.0 million toward construction of the
first biological sciences research building at the University of California,
San Francisco Mission Bay campus, and Genentech and UC granted certain
releases to one another and dismissed with prejudice the 1990 and 1997 patent
infringement lawsuits and related appeals. Such amounts were included in
other accrued liabilities at December 31, 1999. The settlement resolves all
outstanding litigation between Genentech and UC relating to our growth
hormone products.
On May 28, 1999, GlaxoSmithKline plc, or Glaxo, filed a patent
infringement lawsuit against us in the U.S. District Court in Delaware. The
suit asserts that we infringe four U.S. patents owned by Glaxo. Two of the
patents relate to the use of specific kinds of antibodies for the treatment
of human disease, including cancer. The other two patents asserted against
us relate to preparations of specific kinds of antibodies which are made more
stable and the methods by which such preparations are made. Glaxo's
complaint fails to specify which of our products or methods of manufacture
are allegedly infringing the four patents at issue. However, we believe that
the suit relates to the manufacture, use and/or sale of our Herceptin and
Rituxan antibody products. On July 19, 1999, we filed our answer to the
complaint, and in our answer we also stated counterclaims against Glaxo. On
or about October 27, 2000, Glaxo filed a motion for summary judgment that our
Herceptin and Rituxan antibody products infringe two of the patents asserted
against us in this suit, U.S. Patent Nos. 5,545,403 and 5,545,405. On
November 21, 2000, we filed an opposition to that motion. The trial of this
suit was previously scheduled to begin January 29, 2001, but has been
rescheduled to begin April 16, 2001.
On September 14, 2000, Glaxo filed another patent infringement
lawsuit against us in the U.S. District Court in Delaware, alleging that we
are infringing U.S. Patent No. 5,633,162 owned by Glaxo. The patent relates
to specific methods for culturing Chinese Hamster Ovary cells. Glaxo's
complaint fails to specify which of our products or methods of manufacture
are allegedly infringing that patent. However, the complaint makes a general
reference to Genentech's making, using and selling "monoclonal antibodies,"
and so we believe that the suit relates to our Herceptin and Rituxan antibody
products. On October 4, 2000, we filed our answer to the complaint, and in
our answer we also stated counterclaims against Glaxo. The judge has
scheduled the trial for this suit to begin January 25, 2002. This lawsuit is
separate from and in addition to the Glaxo suit mentioned above.
We and the City of Hope National Medical Center are parties to a 1976
agreement relating to work conducted by two City of Hope employees, Arthur
Riggs and Keiichi Itakura, and patents that resulted from that work, which
are referred to as the "Riggs/Itakura Patents." Since that time, Genentech
has entered into license agreements with various companies to make, use and
sell the products covered by the Riggs/Itakura Patents. On August 13, 1999,
the City of Hope filed a complaint against us in the Superior Court in Los
Angeles County, California alleging that we owe royalties to the City of Hope
in connection with these license agreements, as well as product license
agreements that involve the grant of licenses under the Riggs/Itakura
Patents. The complaint states claims for declaratory relief, breach of
contract, breach of implied covenant of good faith and fair dealing, and
breach of fiduciary duty. On December 15, 1999, we filed our answer to the
City of Hope's complaint, denying all the claims made by the City of Hope.
On or about December 22, 2000, City of Hope filed a dismissal of its
declaratory relief claims. On January 4, 2001, we filed a motion to dismiss
the case. The judge denied the motion on February 1, 2001, but issued a
temporary stay of proceedings to permit us to file a petition with the
appellate court. We filed our petition on February 13, 2001, which was
denied by the appellate court on February 22, 2001. The trial of this suit
has been rescheduled to begin on August 22, 2001.
On December 1, 1994, Genentech filed suit against Bio-Technology General
Corporation, or BTG, in the United States District Court in Delaware charging
BTG with infringement of two Genentech patents applicable to its human growth
hormone product. On February 28, 1995, Genentech filed an Amended Complaint
against BTG alleging infringement of an additional Genentech patent. On
January 6, 1995, BTG filed suit against Genentech in the United States
District Court for the Southern District of New York seeking declaratory
judgments that those patents and another Genentech patent are invalid and not
infringed by BTG. Genentech's suit in Delaware was then transferred to New
York and consolidated with BTG's suit there.
At the time of filing its suit and thereafter, BTG alleged various
antitrust, abuse of process, civil rights, malicious prosecution and unfair
competition claims against Genentech. All of those claims were dismissed by
the District Court.
On August 10, 1995, the District Court issued a preliminary injunction
which prohibited BTG, pending the Court's final determination of the action,
from importing, making, using, selling, offering for sale or distributing in
the United States BTG's human growth hormone products except for certain
ongoing FDA approved clinical trials. BTG filed an appeal from the District
Court's issuance of the preliminary injunction to the United States Court of
Appeals for the Federal Circuit. On April 8, 1996, the Federal Circuit
affirmed the preliminary injunction granted by the District Court. On May
20, 1996, the Federal Circuit denied BTG's petition for rehearing, and on
October 7, 1996, the United States Supreme Court declined to review the case.
In 1999, the case was transferred to a different judge of the District
Court for further proceedings. A jury trial of BTG's patent invalidity claim
began on January 10, 2000. On January 18, 2000, the jury returned a verdict
in Genentech's favor on a certain factual issue underlying BTG's invalidity
claim, but the judge nevertheless entered judgment in favor of BTG and lifted
the preliminary injunction that had been in effect against BTG since 1995.
On February 23, 2000, we filed a motion with the Federal Circuit requesting
that the injunction against BTG be reinstated pending appeal and for an
expedited appeal. On May 8, 2000, the Federal Circuit denied our motion.
Genentech and BTG each filed appeals with the Federal Circuit relating
to the proceedings in the District Court, and those appeals are now pending.
Genentech filed its appeal brief with the Federal Circuit on May 15, 2000.
BTG filed its appeal brief on July 11, 2000. In it, BTG included a request
that its antitrust claims against Genentech (which previously had been
dismissed by the District Court) be reinstated. The Federal Circuit held a
hearing on the appeals on December 4, 2000, but has not yet given a decision
on the appeals. At this time, and in the future if Genentech's appeal is not
successful, BTG could enter the United States market with its human growth
hormone product.
On June 7, 2000, Chiron Corporation filed a patent infringement suit against
us in the U.S. District Court in the Eastern District of California
(Sacramento), alleging that the manufacture, use, sale and offer for sale of
our Herceptin antibody product infringes Chiron's U.S. Patent No. 6,054,561.
This patent relates to certain antibodies that bind to breast cancer cells
and/or other cells. On August 4, 2000, we filed our answer to Chiron's
complaint, and in our answer we also stated counterclaims against Chiron.
The judge has scheduled the trial of this suit to begin June 25, 2002.
We and Pharmacia AB are parties to a 1978 agreement relating to Genentech's
development of recombinant human growth hormone products, under which
Pharmacia is obligated to pay Genentech royalties on sales of Pharmacia's
growth hormone products throughout the world. On January 5, 1999, Pharmacia
filed a request for arbitration with the International Chamber of Commerce to
resolve several disputed issues between Genentech and Pharmacia under the
agreement. One of the claims made by Pharmacia is for a refund of some of
the royalties previously paid to Genentech for sales of Pharmacia's growth
hormone products in certain countries. Although the International Chamber of
Commerce has not yet given a decision on that claim, we do not believe its
decision is likely to have a material adverse effect on our financial
position, result of operations or cash flows.
Based upon the nature of the claims made and the information available to
date to us and our counsel through investigations and otherwise, we believe
the outcome of these actions is not likely to have a material adverse effect
on our financial position, result of operations or cash flows. However, were
an unfavorable ruling to occur in any quarterly period, there exists the
possibility of a material impact on the operating results of that period.
In addition to the above, in April 1999, we paid $50.0 million to settle a
federal investigation relating to our past clinical, sales and marketing
activities associated with human growth hormone.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable.
GENENTECH, INC.
EXECUTIVE OFFICERS
The executive officers of the Company and their respective ages (ages as of
December 31, 2000) and positions with the Company are as follows:
Name Age Position
-------------------------------------- --- -----------------------------------------
Arthur D. Levinson, Ph.D. 50 Chairman and Chief Executive Officer
Susan D. Desmond-Hellmann, M.D., M.P.H. 43 Executive Vice President-Development and
Product Operations and Chief Medical
Officer
Louis J. Lavigne, Jr. 52 Executive Vice President and
Chief Financial Officer
Myrtle S. Potter 42 Executive Vice President-Commercial
Operations and Chief Operating Officer
Robert L. Garnick, Ph.D. 51 Senior Vice President-Regulatory, Quality
and Compliance
Dennis J. Henner, Ph.D 49 Senior Vice President-Research
Stephen G. Juelsgaard 52 Senior Vice President-General Counsel and
Secretary
Kimberly J. Popovits 42 Senior Vice President-Marketing and Sales
W. Robert Arathoon, Ph.D. 48 Vice President-Global Manufacturing
Operations
J. Joseph Barta 53 Vice President-Quality
Stephen G. Dilly, M.D., Ph.D. 41 Vice President-Medical Affairs
David A. Ebersman 31 Vice President-Product Development
Claudia M. Estrin 48 Vice President-Decision Support and
Commercial Innovation
Roy C. Hardiman 41 Vice President-Corporate Law and
Assistant Secretary
Paula M. Jardieu, Ph.D. 50 Vice President-Pharmacological Sciences
Sean A. Johnston, Ph.D. 42 Vice President-Intellectual Property
and Assistant Secretary
R. Guy Kraines 50 Vice President-Finance
Joseph S. McCracken, D.V.M. 47 Vice President-Business and Commercial
Development
Walter K. Moore 49 Vice President-Government Affairs
David Nagler 48 Vice President-Human Resources
Diane L. Parks 48 Vice President-Managed Healthcare and
Commercial Support
Andrew R. Scherer 52 Vice President-Engineering, Facilities,
Strategic Planning and Support
Daniel S. Sulzbach, Ph.D. 51 Vice President-Corporate Information
Technology
John M. Whiting 45 Vice President, Controller and
Chief Accounting Officer
All officers are elected annually by the Board of Directors. There is no
family relationship between or among any of the officers or directors.
Business Experience
Arthur D. Levinson, Ph.D. was appointed Chairman of the Board of Directors on
September 1999 and was elected President and Chief Executive Officer and a
director of the Company in July 1995. Since joining the Company in 1980, Dr.
Levinson has been a Senior Scientist, Staff Scientist and the Director of the
Company's Cell Genetics Department. Dr. Levinson was appointed Vice President
of Research Technology in April 1989, Vice President of Research in May 1990
and Senior Vice President in January 1993. Dr. Levinson was formerly on the
editorial boards of "Molecular Biology and Medicine" and "Molecular and
Cellular Biology," and is active in the American Society of Microbiology, the
New York Academy of Sciences, the American Association for the Advancement of
Science, and the American Society for Biochemistry and Molecular Biology.
From 1977 to 1980, Dr. Levinson was a Postdoctoral Fellow in the Department
of Microbiology at the University of California, San Francisco. In 1977, Dr.
Levinson received his Ph.D. in Biochemistry from Princeton University.
Susan D. Desmond-Hellmann, M.D., M.P.H. was appointed Executive Vice
President, Development and Product Operations in September 1999. She has
served as Chief Medical Officer since December 1996. She previously served
as Senior Vice President, Development from December 1997 until September
1999, among other positions, since joining Genentech in March 1995 as a
Clinical Scientist. Prior to joining Genentech, she held the position of
Associate Director at Bristol-Myers Squibb from February 1993 to February
1995.
Louis J. Lavigne, Jr. was appointed Executive Vice President of Genentech in
March 1997 and Chief Financial Officer in August 1988. He previously served
as Senior Vice President from July 1994 to March 1997 and as Vice President
from July 1986 to July 1994. Mr. Lavigne joined Genentech in July 1982 from
Pennwalt Corporation and became Controller in May 1983 and an officer of
Genentech in February 1984.
Myrtle S. Potter was appointed Executive Vice President, Commercial Operations
and Chief Operating Officer in May 2000. Prior to joining Genentech, she held
the positions of President of U.S. Cardiovascular/Metabolics from November
1998 to May 2000, Senior Vice President of Sales, U.S.
Cardiovascular/Metabolics from March 1998 to October 1998, Group Vice
President of Worldwide Medicines Group from February 1997 to February 1998 and
Vice President of Strategy and Economics, U.S. Pharmaceutical Group from April
1996 to January 1997 at Bristol-Myers Squibb. Previously, she held the
position of Vice President of the Northeast Region Business Group at Merck and
Company from October 1993 to March 1996.
Robert L. Garnick, Ph.D. was appointed Vice President, Regulatory, Quality
and Compliance on March 1, 2001. Previously, he served as Vice President,
Regulatory Affairs from February 1998 to March, 2001. He previously served
as Vice President, Quality from April 1994, Senior Director, Quality Control
from 1990 to 1994 and Director, Quality Control from 1988 to 1990. He joined
Genentech in August 1984 from Armour Pharmaceutical, where he worked from
1980.
Dennis J. Henner, Ph.D. was appointed Senior Vice President, Research in May
1998. He previously served as Vice President, Research from April 1996 to
May 1998, Vice President, Research Technology from July 1994 to April 1996,
and as Senior Director, Research Technology from December 1990 to July 1994
and was Director and Senior Scientist, Cell Genetics from May 1990 to
December 1990. He joined Genentech in 1981, as a Scientist in Research from
Scripps Clinic and Research Foundation.
Stephen G. Juelsgaard was appointed Senior Vice President in April 1998, Vice
President and General Counsel in July 1994 and Secretary in April 1997. He
joined Genentech in July 1985 as Corporate Counsel and subsequently served as
Senior Corporate Counsel from 1988 to 1990, Chief Corporate Counsel from 1990
to 1993, Vice President, Corporate Law from 1993 to 1994, and Assistant
Secretary from 1994 to 1997.
Kimberly J. Popovits was appointed Senior Vice President, Marketing and Sales
in February 2001. Previously, she served as Vice President, Sales from
October 1994 to February 2001, Director, Field Sales from January 1993 to
October 1994 and Regional Manager, Northeast Region from October 1989 to
January 1993. Prior to joining Genentech in November 1987, she served as
Division Manager, Southeast Region for American Critical Care, a Division of
American Hospital Supply.
W. Robert Arathoon, Ph.D. was appointed Vice President, Global Manufacturing
Operations in September 2000. He previously served as Vice President,
Process Sciences and Manufacturing from October 1999 through August 2000,
Vice President, Process Sciences from April 1996 through August 2000 and
Senior Director, Process Sciences from November 1994 to April 1996, among
other positions, since joining Genentech in 1983 from The Wellcome
Foundation.
J. Joseph Barta was appointed Vice President, Quality in October 1998. He
previously served as Senior Director, Quality from March 1998 to October
1998, Senior Director, Quality Assurance from January 1994 to February 1998,
Senior Director, Pharmaceutical Manufacturing from September 1993 to December
1993, Director, Pharmaceutical Manufacturing from September 1989 to August
1993, and Associate Director, Validation and Technical Services from June
1989 to September 1989. He joined Genentech in March 1988 as Manager,
Validation.
Stephen G. Dilly, M.D., Ph.D. joined Genentech as Vice President, Medical
Affairs in December 1998. Prior to joining Genentech, he held various
positions with GlaxoSmithKline plc, formerly SmithKline Beecham
Pharmaceuticals, from August 1988, including Director and Vice President
Neurosciences Therapeutic Unit from December 1996 to December 1998, Director
and Vice President CardioPulmonary Therapeutic Team from December 1994 to
December 1996 and Group Director Neurosciences Therapeutic Unit from April
1993 to December 1994.
David A. Ebersman was appointed Vice President, Product Development in
February 1999. He joined Genentech in February 1994 as a Business
Development Analyst and subsequently served as Manager, Business Development
from February 1995 to February 1996, Director, Business Development from
February 1996 to March 1998 and Senior Director, Product Development from
March 1998 to February 1999. Prior to joining Genentech, he held the
position of Research Analyst at Oppenheimer & Company, Inc. beginning in
1991.
Claudia M. Estrin was appointed Vice President, Decision Support and
Commercial Innovation in November 2000. Prior to joining Genentech, she held
the position of Executive Vice President, Customer Operations and Corporate
Administration from December 1999 to October 2000 and Senior Vice President
of Customer Operations from April 1998 to December 1999 at Boron, LePore &
Associates, Inc. Previously, she held the position of Director of Strategic
Marketing and Media from October 1996 to March 1998 at Bristol-Myers Squibb
and Business Planning Manager from March 1996 to October 1996 and Manager of
Database Marketing from August 1993 to March 1996 at Merck USHH.
Roy C. Hardiman was appointed Vice President of Corporate Law in May 2000 and
Assistant Secretary in December 2000. He previously served as Director and
Far East Representative, Business Development from July 1998 to April 2000,
and Associate General Counsel from April 1998 to July 1998, Chief Corporate
Counsel from April 1996 to March 1998, Senior Corporate Counsel from August
1993 to March 1996 and Corporate Counsel from November 1990 to July 1993.
Paula M. Jardieu, Ph.D. was appointed Vice President, Pharmacological
Sciences in February 1997. She previously served as Senior Director,
Pharmacological Sciences from 1996 to February 1997, Staff Scientist from
1992 to 1996, Senior Scientist from 1989 to 1992 and Scientist from 1986 to
1989.
Sean A. Johnston, Ph.D. was appointed Vice President, Intellectual Property
in June 1998 and Assistant Secretary in December 2000. He joined Genentech
in October 1990 as Patent Counsel and subsequently served as Senior Patent
Counsel from October 1993 to October 1995, Senior Patent Counsel and Manager
of Patent Litigation from October 1995 to April 1998, and Associate General
Counsel, Patent Law from April 1998 to June 1998. Prior to joining
Genentech, he served as a Law Clerk at the United States District Court for
the Central District of California from September 1989 to September 1990 and
was a Research Scientist at International Genetic Engineering, Inc. from
December 1984 to August 1986.
R. Guy Kraines was appointed Vice President of Finance in April 2000. Prior
to joining Genentech, he held the position of Vice President and Treasurer of
CNF Transportation Inc. from August 1996 through March 2000 and Assistant
Treasurer from August 1994 to August 1996.
Joseph S. McCracken was appointed Vice President of Business and Commercial
Development in February 2001. Previously, he served as Vice President of
Business Development from July 2000 to February 2001. He held the positions
of Vice President of Technology Licensing and Alliances at Aventis
Pharmaceuticals from January 2000 to July 2000. Previously he held the
position of Vice President of Worldwide Business and Technology Development
from November 1998 to December 1999 and Vice President of Technology
Licensing from November 1997 to November 1998 at Rhone-Poulenc Rorer
Pharmaceuticals. He was the Founder of TPM Associates from April 1995 to
November 1997. From October 1993 to April 1995, he held the position of Vice
President of Business Development at Terrapin Technologies.
Walter K. Moore was appointed Vice President, Government Affairs in May 1998.
He joined Genentech in September 1993 as Senior Director of Government
Affairs. Prior to joining Genentech, Mr. Moore served as Manager of
Governmental Relations at Eli Lilly and Company.
David Nagler was appointed Vice President of Human Resources in September
2000. He previously served as Senior Director of State Government Affairs
from April 1995 to August 2000. Prior to joining Genentech, he held the
position of Managing Associate at Nossaman, Guthner, Knox and Elliott from
April 1988 to April 1995.
Diane L. Parks was appointed Vice President of Managed Healthcare and
Commercial Support in February 2001. Previously, she served as Vice
President, Marketing from June 1999 to February 2001. Prior to joining
Genentech, she held various positions with Marion Laboratories, formerly
Marion Merrell Dow and Hoeschst Marion Roussel, from 1982, including Vice
President, Marketing from March 1998 to June 1999, Group Product Director,
Respiratory and Metabolism from November 1994 to March 1998 and Director,
U.S. Commercial Development from July 1993 to November 1994.
Andrew R. Scherer was appointed Vice President, Strategic Planning and Support
in August 2000 and has served as Vice President, Engineering and Facilities
since May 2000. He previously served as Senior Director of Engineering and
Facilities Services from April 1998 to April 2000 and Senior Director of
Facilities Services from January 1996 to April 1998 among other positions,
since joining Genentech in 1988.
Daniel S. Sulzbach, Ph.D. was appointed Vice President, Corporate Information
Technology in September 1999. He joined Genentech in March 1994 as Director
of Scientific Computing and subsequently served as Head and Senior Director
of Information Resources from March 1998 to September 1999. Prior to joining
Genentech, he served as Executive Director of the San Diego Supercomputer
Center from August 1985 to March 1994.
John M. Whiting was appointed Vice President in January 2001 and Controller
and Chief Accounting Officer in October 1997. He previously served as
Director, Financial Planning and Analysis from January 1997 to October 1997,
Director, Operations, Financial Planning and Analysis from December 1999 to
January 1997, Associate Director, Operations, Financial Planning and Analysis
from March 1996 to December 1996, Plant Controller from April 1993 to March
1996, and Group Controller from July 1991 to April 1993.
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The section labeled "Redemption of Our Special Common Stock," "Stock
Splits," and footnotes labeled "Relationship With Roche," "Roche's Right to
Maintain its Percentage Ownership Interest in Our Stock" and "Capital Stock"
in the Notes to Consolidated Financial Statements of our 2000 Annual Report
to Stockholders are incorporated herein by reference.
ITEM 6. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL DATA (UNAUDITED)
(millions, except per share amounts)
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------------------
New Basis || Old Basis
(June 30 ||(January 1
to || to
December 31) || June 30)
Restated (6) || Restated (6)
---------------------------------------------------------------------||------------------------------------------
Total revenues $ 1,736.4 $ 703.8 ||$ 697.2 $1,150.9 $1,016.7 $ 968.7
Product sales 1,278.3 535.7 || 503.4 717.8 584.9 582.8
Royalties 207.2 96.7 || 92.6 229.6 241.1 214.7
Contract & other 160.4 26.4 || 56.8 114.8 121.6 107.0
Interest 90.4 45.0 || 44.4 88.7 69.1 64.2
---------------------------------------------------------------------||------------------------------------------
Total costs and expenses $ 1,732.4 $ 2,211.0 ||$ 550.6 $ 898.3 $ 846.9 $ 820.8
Cost of sales 364.9(1) 187.1(1)|| 98.5 138.6 102.5 104.5
Research & development 489.9 182.4 || 184.9 396.2 470.9 471.1
Marketing, general & administrative 497.0 253.4 || 214.5 358.9 269.9 240.1
Special charges - 1,387.7(2)|| 50.0(2) - - -
Recurring charges related to redemption 375.3(3) 197.7(3)|| - - - -
Interest 5.3 2.7 || 2.7 4.6 3.6 5.1
---------------------------------------------------------------------||------------------------------------------
Income (loss) data ||
Income (loss) before taxes and ||
cumulative effect of accounting change $ 4.0 $(1,507.2) ||$ 146.6 $ 252.6 $ 169.8 $ 147.9
Income tax (benefit) provision 20.4 (262.1) || 59.0 70.7 40.8 29.6
Income (loss) before cumulative effect of ||
accounting change (16.4) (1,245.1) || 87.6 181.9 129.0 118.3
Cumulative effect of accounting ||
change, net of tax (57.8)(5) - || - - - -
Net income (loss) (74.2) (1,245.1) || 87.6 181.9 129.0 118.3
---------------------------------------------------------------------||------------------------------------------
Earnings (loss) per share: ||
Basic $ (0.14) $ (2.43) ||$ 0.17 $ 0.36 $ 0.26 $ 0.25
Diluted (0.14) (2.43) || 0.16 0.35 0.26 0.24
---------------------------------------------------------------------||------------------------------------------
Selected balance sheet data ||
Cash, short-term investments ||
& long-term marketable securities $ 2,459.4 $ 1,957.4 || - $1,604.6 $1,286.5 $1,159.1
Accounts receivable 261.7 214.8 || - 149.7 189.2 197.6
Inventories 265.8 275.2 || - 148.6 116.0 91.9
Property, plant & equipment, net 752.9 730.1 || - 700.2 683.3 586.2
Goodwill 1,455.8 1,609.1 || - - - -
Other intangible assets 1,280.4 1,453.3 || - 65.0 54.7 40.1
Other long-term assets 168.5 201.1 || - 131.3 122.5 109.1
Total assets 6,711.8 6,534.8 || - 2,855.4 2,507.6 2,226.4
Total current liabilities 448.7 477.4 || - 291.3 289.6 250.0
Long-term debt 149.7 149.7 || - 150.0 150.0 150.0
Total liabilities 1,037.6 1,264.9 || - 511.6 476.4 425.3
Total stockholders' equity 5,674.2 5,269.9(4)|| - 2,343.8 2,031.2 1,801.1
We have paid no dividends.
The Selected Consolidated Financial Data above reflects adoption of SAB 101
in 2000, FAS 130 and 131 in 1998, FAS 128 and 129 in 1997 and FAS 121 in
1996.
All per share amounts reflect two-for-one stock splits that were effected in
2000 and 1999.
(1) Includes costs related to the sale of inventory that was written up at
the Redemption due to push-down accounting.
(2) Charges related to 1999 Redemption ($1,207.7 million) and legal
settlements ($230.0 million).
(3) Primarily reflects amortization of other intangible assets and goodwill
related to the Redemption.
(4) Reflects the impact of the Redemption and related push-down accounting of
$5,201.9 million of excess purchase price over net book value, net of
charges and accumulated amortization of goodwill and other intangible
assets.
(5) Reflects the impact of the adoption of SAB 101 on revenue recognition
effective January 1, 2000. Pro forma amounts of net income (loss) and
related diluted per share amounts, assuming retroactive application of
the change in accounting principle for the years ended 1997 through 2000
(previous amounts were not material) are as follows (in millions, except
per share amounts):
2000 1999 1998 1997
------ --------- ------ ------
Pro forma:
Net income (loss) $(16.4) $(1,168.7) $154.5 $109.8
Earnings (loss) per
share - diluted $(0.03) $ (2.28) $ 0.30 $ 0.22
(6) We revised the presentation of our 1999 results to reflect the New and
Old basis of accounting resulting from the Redemption and also corrected
the accounting related to the write up of the valuation allowance
pertaining to unrealized gains on certain marketable securities.
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation
The section labeled "Financial Review" of our 2000 Annual Report to
Stockholders is incorporated herein by reference.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The section labeled "Financial Review-Forward-Looking Information and
Cautionary Factors That May Affect Future Results-We Are Exposed to Market
Risk" in this Form 10-K.
ITEM 8. Consolidated Financial Statements and Supplementary Data
The Consolidated Financial Statements and Notes to Consolidated
Financial Statements, the Report of Ernst & Young LLP, Independent Auditors
and the section labeled "Quarterly Financial Data (unaudited)" of our 2000
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(a) Beneficial
Ownership Reporting Compliance" of our Proxy Statement in connection with the
2001 Annual Meeting of Stockholders are incorporated herein by reference.
(b) Information concerning our Executive Officers is set forth in Part I
of the Form 10-K.
ITEM 11. Executive Compensation
The sections labeled "Executive Compensation," "Compensation of
Directors," "Compensation of Executive Officers," "Summary of Compensation,"
"Summary Compensation Table," "Stock Option Grants and Exercises," "Option
Grants in Last Fiscal Year," "Aggregated Option Exercises in Last Fiscal Year
and FY-End Option Values," "Change-In-Control Agreements," "Loans and Other
Compensation," "Compensation Committee Report," "Compensation Committee
Interlocks and Insider Participation," "Performance Graph" and "Total
Stockholder Returns" of our Proxy Statement in connection with the 2001
Annual Meeting of Stockholders are incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The sections labeled "Relationship With Roche," "Security Ownership of
Certain Beneficial Owners," "Security Ownership of Management" and "Amount
and Nature of Beneficial Ownership" of our Proxy Statement in connection with
the 2001 Annual Meeting of Stockholders are incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions
The sections labeled "Relationship With Roche," "Loans and Other
Compensation" and "Certain Relationships and Related Transactions" of our
Proxy Statement in connection with the 2001 Annual Meeting of Stockholders 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 our 2000 Annual Report to Stockholders and are incorporated herein by
reference pursuant to Item 8 of this Form 10-K.
Consolidated Statements of Operations for the year ended December 31,
2000, the periods from June 30, 1999 to December 31, 1999 and January
1, 1999 to June 30, 1999, and for the year ended December 31, 1998
Consolidated Statements of Cash Flows for the year ended December 31,
2000, the periods from June 30, 1999 to December 31, 1999 and January
1, 1999 to June 30, 1999, and for the year ended December 31, 1998
Consolidated Balance Sheets at December 31, 2000 and 1999
Consolidated Statements of Stockholders' Equity for the year ended
December 31, 2000, the periods from June 30, 1999 to December 31, 1999
and January 1, 1999 to June 30, 1999, and for the year ended December
31, 1998
Notes to Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors
Quarterly Financial Data (unaudited)
2. Financial Statement Schedule
The following schedule is filed as part of this Form 10-K:
Schedule II- Valuation and Qualifying Accounts for the year ended
December 31, 2000, the periods from June 30, 1999 to December 31, 1999
and January 1, 1999 to June 30, 1999, and for the year ended December
31, 1999.
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 Amended and Restated Certificate of Incorporation.(1)
3.2 Certificate of Amendment of Amended and Restated Certificate of
Incorporation.(14)
3.3 Restated By-Laws.(2)
4.1 Indenture, dated March 27, 1987 ("Indenture") for U.S.
$150,000,000 5% Convertible Subordinated Debentures due
2002.(3)
4.2 First Supplemental to Indenture, dated August 17, 1990.(4)
4.3 Second Supplemental to Indenture, dated October 18, 1995.(5)
4.4 Form of Common Stock Certificate.(2)
10.1 Patent License Agreement with Columbia University dated October
12, 1987.(6)
10.2 Form of Affiliation Agreement, dated as of July 22, 1999,
between Genentech and Roche Holdings, Inc.(2)
10.3 Amendment No. 1, dated October 22, 1999, to Affiliation
Agreement between Genentech and Roche Holdings, Inc.(13)
10.4 Form of Amended and Restated Agreement, dated as of October 25,
1995, between Genentech, Inc. and F. Hoffmann-La Roche Ltd
regarding Commercialization of Genentech's Products outside the
United States.(2)
10.5 Tax Sharing Agreement, dated as of July 22, 1999, between
Genentech, Inc. and Roche Holdings, Inc.(2)
10.6 Amended and Restated Lease Agreement, dated December 8, 1995,
between Genentech and BNP Leasing Corporation.(5)
10.7 Amended and Restated Purchase Agreement, dated December 8,
1995, between Genentech and BNP Leasing Corporation.(5)
10.8 Restated Relocation Loan Program.(7)
10.9 Genentech, Inc. Tax Reduction Investment Plan.(9)
10.10 Amendment No. 1 to the Genentech, Inc. Tax Reduction Investment
Plan.(10)
10.11 Amendment No. 2 to the Genentech, Inc. Tax Reduction Investment
Plan.(10)
10.12 Amendment No. 3 to the Genentech, Inc. Tax Reduction Investment
Plan.(10)
10.13 Trust Agreement.(10)
10.14 Amendment No. 1 to Trust Agreement.(10)
10.15 Amendment No. 2 to Trust Agreement.(10)
10.16 Amendment No. 3 to Trust Agreement.(10)
10.17 Amendment No. 4 to Trust Agreement.(10)
10.18 Amendment No. 5 to Trust Agreement.(10)
10.19 Amendment No. 6 to Trust Agreement.(10)
10.20 Amendment No. 7 to Trust Agreement.(10)
10.21 Supplemental Plan to the 401(k) Plan.(7)
10.22 1990 Stock Option/Stock Incentive Plan, as amended and restated
as of October 16, 1996.(11)
10.23 1994 Stock Option Plan, as amended and restated as of October
16, 1996.(11)
10.24 1996 Stock Option/Stock Incentive Plan, as amended and restated
as of October 16, 1996.(11)
10.25 1999 Stock Plan, as amended and restated as of December 8,
2000.(14)
10.26 1991 Employee Stock Plan, as amended April 13, 1999.(12)
10.27 Long-Term Key Employee Incentive Program, effective as of
July 1, 1999.(13)
13.1 Portions of the 2000 Annual Report to Stockholders.(14)
23.1 Consent of Ernst & Young LLP, Independent Auditors.(14)
28.1 Description of the Company's capital stock.(8)
* As required by Item 14(a)(3) of Form 10-K, Genentech identifies this
Exhibit as a management contract or compensatory plan or arrangement of
Genentech.
----------------
(1) Filed as an exhibit to our current report on Form 8-K filed with the
Commission on July 28, 1999 and incorporated herein by reference.
(2) Filed as an exhibit to Amendment No. 3 to our Registration Statement
(No. 333-80601) on Form S-3 filed with the Commission on July 16, 1999
and incorporated herein by reference.
(3) Filed as an exhibit to our Annual Report on Form 10-K for the year
ended December 31, 1987 filed with the Commission and incorporated
herein by reference.
(4) Filed as an exhibit to our Annual Report on Form 10-K for the year
ended December 31, 1990 filed with the Commission and incorporated
herein by reference.
(5) Filed as an exhibit to our Annual Report on Form 10-K for the year
ended December 31, 1995 filed with the Commission and incorporated
herein by reference.
(6) Filed as an exhibit to our Annual Report on Form 10-K for the year
ended December 31, 1988 filed with the Commission and incorporated
herein by reference.
(7) Filed as an exhibit to our Annual Report on Form 10-K for the year
ended December 31, 1991 filed with the Commission and incorporated
herein by reference.
(8) Incorporated by reference to the description under the heading
"Description of Capital Stock" relating to our Common Stock in the
prospectus included in our Amendment No. 2 to the Registration
Statement on Form S-3 (No. 333-88651) filed with the Commission on
October 20, 1999, and the description under the heading "Description of
Capital Stock" relating to the Common Stock in our final prospectus
filed with the Commission on October 21, 1999 pursuant to Rule 424(b)
under the Securities Act of 1933, as amended, including any amendment
or report filed for the purpose of updating that description.
(9) Filed as an exhibit to our Registration Statement (No. 333-08055) on
Form S-8 filed with the Commission on July 12, 1996 and incorporated
herein by reference.
(10) Filed as an exhibit to our Registration Statement (No. 333-94749) on
Form S-8 filed with the Commission on January 14, 2000 and incorporated
herein by reference.
(11) Filed as an exhibit to our Registration Statement (No. 333-83157) on
Form S-8 filed with the Commission on July 19, 1999 and incorporated
herein by reference.
(12) Filed as an exhibit to our Post-Effective Amendment No. 1 to our
Registration Statement on Form S-8 (No. 333-83989) filed with the
Commission on November 2, 1999.
(13) Filed as an exhibit to Annual Report on Form 10-K for the year ended
December 1999 and incorporate herein by reference.
(14) Filed with this document.
(b) Reports on Form 8-K
On October 25, 2000, Genentech filed a current report on Form 8-K dated
October 24, 2000. There were no other reports filed for the quarter
ended December 31, 2000.
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 9, 2001
By: /s/JOHN M. WHITING
---------------------------------
John M. Whiting
Vice President, Controller,
and Chief Accounting Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Louis J. Lavigne, Jr., Executive Vice
President and Chief Financial Officer, and John M. Whiting, Vice President,
Controller and Chief Accounting Officer, and each of them, his true and
lawful attorneys-in-fact and agents, with the full power of substitution and
resubstitution, for him and in his name, place and stead, 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, granting unto each said attorney-in-fact
and agent full power and authority to do and perform each and every act in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or either of them, or their or his substitute or substitutes, may
lawfully 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
---------------------------- --------------------------- -------------
Principal Executive Officer:
/s/ARTHUR D. LEVINSON Chairman, Chief Executive March 9, 2001
--------------------------- Officer and Director
Arthur D. Levinson
Principal Financial Officer:
/s/LOUIS J. LAVIGNE, JR. Executive Vice President March 9, 2001
--------------------------- and Chief Financial Officer
Louis J. Lavigne, Jr.
Director:
/s/HERBERT W. BOYER Director March 9, 2001
---------------------------
Herbert W. Boyer
/s/JONATHAN K.C. KNOWLES Director March 9, 2001
---------------------------
Jonathan K.C. Knowles
/s/FRANZ B. HUMER Director March 9, 2001
---------------------------
Franz B. Humer
/s/MARK RICHMOND Director March 9, 2001
---------------------------
Mark Richmond
/s/CHARLES A. SANDERS Director March 9, 2001
---------------------------
Charles A. Sanders
SCHEDULE II
GENENTECH, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2000, 1999 and 1998
(in thousands)
Additions
Balance at Charged to Balance at
Beginning Costs and End of
of Period Expenses Deductions(1) Period
--------- --------- ----------- ---------
Allowance for doubtful accounts and returns:
Year Ended December 31, 2000: $ 18,951 $ 16,167 $ (17,808) $ 17,310
========= ========= ========== =========
Period from June 30 to December 31, 1999: $ 17,744 $ 4,318 $ (3,111) $ 18,951
========= ========= ========== =========
Period from January 1 to June 30, 1999: $ 17,418 $ 3,985 $ (3,659) $ 17,744
========= ========= ========== =========
Year Ended December 31, 1998: $ 14,535 $ 11,389 $ (8,506) $ 17,418
========= ========= ========== =========
Inventory reserves:
Year Ended December 31, 2000: $ 16,384 $ 14,500 $ (19,067) $ 11,817
========= ========= ========== =========
Period from June 30 to December 31, 1999: $ 16,447 $ 2,382 $ (2,445) $ 16,384
========= ========= ========== =========
Period from January 1 to June 30, 1999: $ 14,904 $ 10,901 $ (9,358) $ 16,447
========= ========= ========== =========
Year Ended December 31, 1998: $ 12,055 $ 5,405 $ (2,556) $ 14,904
========= ========= ========== =========
Reserve for nonmarketable equity securities
and convertible equity loans:
Year Ended December 31, 2000: $ 29,045 $ 3,740 $ - $ 32,785
========= ========= ========== =========
Period from June 30 to December 31, 1999: $ 19,648 $ 9,397 $ - $ 29,045
========= ========= ========== =========
Period from January 1 to June 30, 1999: $ 12,143 $ 7,505 $ - $ 19,648
========= ========= ========== =========
Year Ended December 31, 1998: $ 5,490 $ 7,958 $ (1,305) $ 12,143
========= ========= ========== =========
(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, 2000
Exhibit No. Description
----------- -----------
3.2 Certificate of Amendment of Amended and Restated Certificate of
Incorporation
10.25 1999 Stock Plan, as amended and restated as of December 8, 2000
13.1 Portions of the 2000 Annual Report to Stockholders
23.1 Consent of Ernst & Young LLP, Independent Auditors