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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, 1998
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.
Delaware 94-2347624
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
1 DNA Way, South San Francisco, California 94080
(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 $.02 par value New York Stock Exchange
Callable Putable Common Stock Pacific Exchange
$.02 par value
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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 $2,772,135,122 as of December 31, 1998. (A)
Number of shares of Common Stock outstanding as of December 31, 1998:
76,621,009
Number of shares of Callable Putable Common Stock outstanding as of
December 31, 1998: 50,493,631
Documents incorporated by reference:
PARTS INCORPORATED
DOCUMENT BY REFERENCE
(1) Annual Report to stockholders for the year ended II
December 31, 1998 (specified portions)
(2) Definitive Proxy Statement with respect to the 1999 III
Annual Meeting of Stockholders to be filed by Genentech,
Inc. with the Securities and Exchange Commission
(hereinafter referred to as "Proxy Statement")
- -----------------------------------------------------------------------------
(A) Excludes 92,327,062 shares of Common Stock and Callable Putable Common
Stock held by Directors, Officers and stockholders whose ownership
exceeds five percent of either the Common Stock or Callable Putable
Common Stock outstanding at December 31, 1998 (the holdings of FMR Corp.,
Goldman Sachs & Co., The Goldman Sachs Group, L.P. and Roche Holdings,
Inc. were calculated based on their filings as of December 31, 1998, with
the Securities and Exchange Commission pursuant to Section 13(g) of the
Securities Exchange Act of 1934. As of January 22, 1999, it is
unconfirmed whether any other person or entity holds greater than five
percent of the registrant's Common Stock and Callable Putable Common
Stock. Exclusion of shares held by any person should not be construed to
indicate that such person possesses the power, direct or indirect, to
direct or cause the direction of the management or policies of the
registrant, or that such person is controlled by or under common control
with the registrant.
PART I
ITEM 1. BUSINESS
Genentech, Inc. (the Company) is a biotechnology company that uses human
genetic information to discover, develop, manufacture and market human
pharmaceuticals for significant unmet medical needs. Twelve of the approved
products of biotechnology stem from Genentech science. The Company
manufactures and markets eight products (see also the Actimmune section
below) directly in the United States (U.S.).
Relationship with Roche Holdings, Inc.
On October 25, 1995, the Company and Roche Holdings, Inc. (Roche) entered
into an agreement (the Agreement) to extend until June 30, 1999, Roche's
option to cause the Company to redeem (call) the outstanding Callable Putable
Common Stock (Special Common Stock) of the Company at predetermined prices.
Should the call be exercised, Roche will concurrently purchase from the
Company a like number of shares of Common Stock for a price equal to the
Company's cost to redeem the Special Common Stock. If Roche does not cause
the redemption as of June 30, 1999, the Company's stockholders will have the
option to cause the Company to redeem none, some, or all of their shares of
Special Common Stock (and Roche will concurrently provide the necessary
redemption funds to the Company by purchasing a like number of shares of
Common Stock) within thirty business days commencing July 1, 1999. See the
Relationship with Roche Holdings, Inc. note in the Notes to Consolidated
Financial Statements in the Company's 1998 Annual Report to Stockholders
(Part II, Item 8 of this Form 10-K) for further information.
In conjunction with the Agreement, F. Hoffman-La Roche Ltd (HLR), a
subsidiary of Roche, was granted an option for ten years for licenses to use
and sell certain of the Company's products in non-U.S. markets. See below
and in the Relationship with Roche Holdings, Inc. note in the Notes to
Consolidated Financial Statements in the Company's 1998 Annual Report to
Stockholders (Part II, Item 8 of this Form 10-K) for further information.
Products
The Company has developed seven products, co-developed one product and
manufactures and markets eight of its products (see also the Actimmune
section below) in the U.S.: Herceptin, registered trademark, (trastuzumab)
anti-HER2 antibody; Rituxan, registered trademark, (rituximab, C2B8)
monoclonal antibody, which was co-developed with IDEC Pharmaceuticals
Corporation (IDEC); Activase, registered trademark, (alteplase, recombinant)
recombinant tissue plasminogen activator (t-PA); Protropin, registered
trademark, (somatrem for injection) recombinant growth hormone; Nutropin,
registered trademark, [somatropin (rDNA origin) for injection] growth
hormone; Nutropin AQ, registered trademark, [somatropin (rDNA origin)
injection] liquid formulation of growth hormone; Pulmozyme, registered
trademark, (dornase alfa, recombinant) inhalation solution; and Actimmune,
registered trademark, (interferon gamma-1b) recombinant interferon gamma.
As part of the Agreement, the Company receives royalties on sales of its
products in Canada, on sales of Pulmozyme outside of the U.S. and on sales of
rituximab outside of the U.S. (excluding Japan) from HLR. The Company
receives royalties on sales of two of its products, growth hormone and t-PA,
outside of the U.S. and Canada through other licensees. The Company also
receives worldwide royalties on five additional licensed products, and
received royalties on one other licensed product for which those royalties
expired in August 1998, that originated from the Company's technology and are
marketed by other companies.
Herceptin: In September 1998, the Company received U.S. Food and Drug
Administration (FDA) approval to market Herceptin for use as first line
therapy in combination with paclitaxel and as a single agent in second and
third line therapy in patients with metastatic breast cancer who have tumors
that overexpress the human epidermal growth factor receptor2 (HER2) protein.
Herceptin is the first humanized monoclonal antibody for the treatment of
HER2 overexpressing metastatic breast cancer and the second U.S. approval in
this new class of monoclonal antibody biotherapeutic cancer drugs. The first
was Rituxan, which was approved in November of 1997. Pursuant to an
agreement entered into with the Company, HLR received exclusive marketing
rights to Herceptin outside of the U.S.
Rituxan: Rituxan is marketed in the U.S. for the treatment of relapsed or
refractory low-grade or follicular, CD20-positive B-cell non-Hodgkin's
lymphoma (B-cell NHL), a cancer of the immune system. In November 1997,
Rituxan was cleared for marketing in the U.S. by the FDA. B-cell NHL
affects approximately 250,000 people in the U.S. of which one-half are
follicular or low-grade lymphoma patients. A portion of these patients will
have multiple relapses and may be eligible for Rituxan therapy. Rituxan was
co-developed by the Company and IDEC, from whom the Company licenses
Rituxan, and was the first monoclonal antibody approved to treat cancer.
IDEC and the Company are jointly promoting Rituxan in the U.S. and share
responsibility for the manufacturing of the product. HLR is responsible for
marketing MabThera, trademark, (rituximab) in the rest of the world,
excluding Japan.
In December 1998, a letter was sent to physicians advising them of some
deaths associated with administration of Rituxan. As a result, the Company
and IDEC have updated the Warning section of the package insert to include
information on infusion-related reactions and cardiovascular events.
Activase: T-PA is an enzyme that is produced naturally by the body to
dissolve blood clots. However, when a blood clot obstructs blood flow in the
coronary artery and causes a heart attack, the body is unable to produce
enough t-PA to dissolve the clot rapidly enough to prevent damage to the
heart. Through recombinant DNA technology, Genentech produces Activase, a
recombinant form of t-PA, in sufficient quantity for therapeutic use. The
FDA approved Activase for marketing in the U.S. in 1987 for the treatment of
acute myocardial infarction (AMI or 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 (AIS) or brain attack (blood
clots in the brain) within three hours of symptom onset.
In exchange for royalty payments, the Company has licensed marketing
rights to a recombinant t-PA in Japan to Kyowa Hakko Kogyo, Ltd. (Kyowa) and
Mitsubishi Kasei Corporation (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 U.S., Canada and Japan, the Company has
licensed t-PA marketing and manufacturing rights to Boehringer Ingelheim
International GmbH (Boehringer). The Company has also licensed certain
rights to Boehringer regarding future sales of a second generation t-PA, TNK,
which is currently under late stage development. Boehringer markets a
recombinant t-PA under the trademark Actilyse, registered trademark.
In July 1998, the Company discontinued development of Activase for
treating AIS in patients presenting later than three hours from symptom onset
after the termination of two clinical trials, one in AIS patients presenting
three to five hours from symptom onset, and another in AIS patients
presenting zero to six hours from symptom onset. Neither study showed
clinical benefit. Activase is approved for the treatment of AIS within three
hours of symptom onset.
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. A recombinant growth hormone product developed by
the Company, Protropin, was approved by the FDA in 1985 for marketing in the
U.S. for the treatment of growth hormone inadequacy in children.
In exchange for royalty payments, the Company licensed rights to
recombinant growth hormone outside the U.S. and Canada to Pharmacia &
Upjohn(P&U), which manufactures and markets recombinant growth hormone under
the trademarks Somatonorm and Genotropin. Under the terms of the agreement
with P&U, commencing in late 1995, the Company has the right to sell growth
hormone in most European countries and Japan and P&U has the right to sell
their own growth hormone in the U.S. and Canada.
Nutropin: Nutropin is a human growth hormone similar to Protropin; however,
it does not have the additional N-terminal amino acid, methionine, found in
the Protropin chemical structure. Nutropin was approved in November 1993 and
launched in January 1994 for marketing in the U.S. for the treatment of
growth failure in children associated with chronic renal insufficiency (CRI)
up to the time of renal transplantation. CRI causes irreversible damage to
the kidneys and a variety of other medical problems. The condition affects
an estimated 3,000 children in the U.S. Nutropin has been designated as a
U.S. Orphan Drug for treatment of growth failure in children with CRI.
Nutropin was approved by the FDA in March 1994 for marketing for the
treatment of growth hormone inadequacy in children. In December 1996, the FDA
approved Nutropin for the treatment of short stature associated with Turner
syndrome. In December 1997, the Company received FDA approval to market
Nutropin for the treatment of growth hormone deficiency in adults.
Nutropin AQ: In December 1995, the Company 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.
Nutropin AQ was approved for the treatment of growth hormone inadequacy in
children, growth hormone failure in children associated with CRI up to the
time of renal transplantation and short stature associated with Turner
syndrome. In December 1997, the Company received FDA approval to market
Nutropin AQ for the treatment of growth hormone deficiency in adults. As part
of the strategic alliance formed with Sumitomo Pharmaceuticals Co., Ltd.
(Sumitomo) in December 1997, the Company has agreed to provide Sumitomo
exclusive rights to develop, import and distribute in Japan, Nutropin AQ and
a sustained release formulation of human growth hormone (see below in
Products in Development).
Pulmozyme: Pulmozyme is marketed in the U.S. for the management of cystic
fibrosis (CF), for which it has U.S. Orphan Drug designation. In November
1996, Pulmozyme was cleared for marketing by the FDA for the management of CF
patients with advanced disease. In February 1998, the Company received
approval from the FDA for a label extension which includes the safety and
alternative administration of Pulmozyme in children with CF under the age of
five, adding to the product's previous approvals for patients five years of
age and older.
Actimmune: Actimmune is approved in the U.S. for the treatment of chronic
granulomatous disease (CGD), a rare, inherited disorder of the immune system
which affects an estimated 250 to 400 Americans. Actimmune received
designation by the FDA in 1990 as a U.S. Orphan Drug for the treatment of
CGD. During the quarter ended June 30, 1998, the Company licensed U.S.
marketing and development rights to interferon gamma, including Actimmune,
to Connetics Corporation (Connectics). Following a transition period ending
January 1999, the Company will no longer market Actimmune, and has agreed to
supply bulk materials to Connetics at cost plus a mark-up and a royalty.
The Company receives royalty payments from Boehringer from the sale of
interferon gamma in certain countries outside of the U.S., Canada and Japan.
Licensed Products:
In addition to the royalties mentioned above, the Company also receives
royalties on the following products:
Product Trademark Company
- ---------------------------- ---------- -----------------------------
Human growth hormone Humatrope Eli Lilly and Company (Lilly)
Recombinant interferon alpha Roferon-A HLR
Hepatitis B vaccine Recombivax Merck and Company, Inc.
Hepatitis B vaccine Engerix-B Smith-Kline Beecham
Pharmaceuticals
Factor VIII Kogenate Bayer Corporation
Bovine growth hormone Posilac Monsanto Corporation
Under a December 1994 settlement agreement with Lilly regarding certain of
the Company's patents, royalties of $30.0 million per year were payable to
the Company through 1998, subject to possible offsets and contingent upon
Humulin, registered trademark, continuing to be marketed in the U.S. These
royalty obligations have now expired. Under a prior license agreement with
Lilly, the Company received royalties from Lilly's sales of Humulin. These
royalty payments on Humulin sales expired in August 1998.
Products in Development:
As part of the Company's program of research and development (R&D), a number
of other products are in various stages of development. Product development
efforts cover a wide range of disorders or medical conditions, including
cancer, respiratory disorders, cardiovascular diseases, endocrine disorders,
inflammatory and immune problems, and neurological disorders.
Below is a summary of products in clinical development:
Product Description
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Phase III
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Anti-IgE Antibody A humanized IgE monoclonal antibody designed
to interfere early in the process that leads
to symptoms of allergic asthma (being
developed in collaboration with Tanox
Biosystems, Inc. and Novartis Pharmaceuticals
Corporation). Phase III development in both
allergic asthma and allergic rhinitis began
in 1998.
Neuleze, trademark, A protein that may aid the treatment of
(Nerve Growth Factor) diabetic peripheral neuropathy (HLR has
exercised its option for this product outside
of the U.S.). The Company is in the process
of concluding Phase III clinical trials.
Nutropin Depot, trademark, A sustained release version of human growth
(Sustained-Release Growth hormone based on Alkermes' ProLease,
Hormone) registered trademark, injectable sustained
release drug delivery system designed to
reduce the need for daily injections (being
developed in collaboration with Alkermes,
Inc.). The Company is currently preparing
FDA regulatory filings.
Pulmozyme Inhalation Solution An approved treatment for the management of
CF in patients with mild, moderate or severe
disease. The Company is conducting a trial
to determine the effect of Pulmozyme on
pulmonary functions in patients with early
stage CF.
TNK-tPA A second generation t-PA that is a
selectively mutated version of natural t-PA.
This t-PA version may be faster acting,
easier to administer and may restore blood
flow faster. The Company has completed
enrollment in Phase III clinical trials in
AMI patients (being developed in collaboration
with Boehringer Ingelheim, GmbH.)
gp120 A recombinant form of the gp120 envelope
protein of human immunodeficiency virus (HIV-1),
which may serve as the basis for the development
of a prophylactic HIV/Acquired Immune Deficiency
Syndrome (AIDS) vaccine. Under a license
agreement entered into with VaxGen Inc. (VaxGen),
the Company is responsible for supplying
specified amounts of clinical quantities of
gp120 (and has an option to supply additional
clinical supplies); VaxGen is responsible for
conducting all clinical trials necessary for
worldwide product approvals. Currently,
VaxGen is conducting phase III trials with
gp120. The Company has separate options for
worldwide marketing rights and commercial
supply of gp120 in the event that gp120 is
approved as an AIDS vaccine.
Xubix, trademark, (Sibrafiban) An inhibitor of platelet aggregation that may
oral IIb/IIIa antagonist be useful in the prevention of unwanted
clotting in certain cardiovascular conditions
(HLR is conducting global development of this
molecule, and the Company retains certain
opt-in rights with respect to the U.S.).
Phase II
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Anti-CD11a antibody An antibody designed to block certain
immune cells as a potential treatment for
psoriasis (being developed in collaboration
with Xoma Corporation).
Anti-CD18 antibody An antibody designed to address problems
related to loss of blood flow. The Company
is conducting Phase II clinical trials aimed
at increasing blood flow in AMI patients.
Anti-VEGF antibody An antibody developed to inhibit angiogenesis
(the formation of new blood vessels) as a
potential treatment for several types of
cancer. In pre-clinical studies the anti-
VEGF antibody resulted in decreased
vascularization and a decline in growth and
metastasis of a variety of solid tumors.
Phase II studies are ongoing in prostate
cancer, breast cancer, renal cell carcinoma,
lung cancer and colorectal cancer.
Herceptin An approved treatment for metastatic breast
cancer, Herceptin will also be evaluated for
broader application in breast cancer as well
as in other tumor types. The Company is
planning to conduct Phase II studies alone or
in collaboration with HLR, the National Cancer
Institute or other clinical research groups.
Rituxan A monoclonal antibody marketed to treat
relapsed or refractory low-grade or
follicular, CD20-positive B-cell non-
Hodgkin's lymphoma, a cancer of the immune
system. The Company is in Phase II clinical
trials for the treatment of intermediate and
high-grade non-Hodgkin's lymphoma (being
developed in collaboration with IDEC).
Thrombopoietin (TPO) A protein that is being studied for treatment
of thrombocytopenia, a reduction in clot-
inducing platelets, in cancer patients
treated with chemotherapy. This molecule has
been exclusively licensed to, and is being
co-developed for one indication with, P&U.
Vascular Endothelial Growth A protein that ischemic tissues (tissues
Factor (VEGF) lacking in oxygen) secrete. It binds to
receptors on nearby blood vessels and causes
angiogenesis, the formation of new blood
vessels. The Company is currently
investigating the use of VEGF for the
treatment of coronary ischemia and is
currently in Phase II clinical trials.
Phase I
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LDP-02 A humanized monoclonal antibody for the
treatment of inflammatory bowel diseases
(licensed from and being developed in
collaboration with LeukoSite, Inc.). The
Company is currently conducting Phase I
clinical trials in Canada and the United
Kingdom.
In conjunction with the Agreement and revisions agreed upon in principle in
the second quarter of 1997, HLR was granted an option for ten years for
licenses to use and sell certain of the Company's products in non-U.S.
markets (the License Agreement). See the Relationship with Roche Holdings,
Inc. note in the Notes to Consolidated Financial Statements in the Company's
1998 Annual Report to Stockholders (Part II, Item 8 of this Form 10-K) for
further information.
In general, with respect to the Company's products, HLR pays a royalty
of 12.5% until a product reaches $100.0 million in aggregate sales outside of
the U.S., at which time the royalty rate on all sales increases to 15%. In
addition, HLR has rights to, and pays the Company 20% royalties on, Canadian
sales of Activase, Protropin, Nutropin, Pulmozyme and Actimmune, sales of
Pulmozyme outside of the U.S. and sales of Rituxan outside of the U.S.,
excluding Japan. The Company supplies its products to HLR, and has agreed to
supply its products for which HLR has exercised its option, for sales outside
of the U.S. at cost plus 20%.
In addition, in July 1998, the Company entered into an agreement with HLR to
provide HLR exclusive marketing rights outside of the U.S. for Herceptin.
Under the agreement, HLR paid $40.0 million and has agreed to pay cash
milestones tied to future product development activities, to contribute
equally with the Company up to a maximum of $40.0 million on global
development costs and to make royalty payments on product sales. As of
December 31, 1998, no additional amounts have been paid.
In December 1997, the Company and Alteon Inc. (Alteon) entered into a
collaborative agreement to develop and market pimagedine, an advanced
glycosylation end-product formation inhibitor to treat kidney disease in
diabetic patients. Under the terms of the agreement, the Company licensed
pimagedine and second generation compounds from Alteon and has made
investments in Alteon stock of $37.5 million. In 1998, as a result of
unsuccessful clinical trials with pimagedine and the decline in the value of
the Company's investment in Alteon, the Company wrote down $24.2 million of
its marketable and nonmarketable equity investments in Alteon. The Company
is in discussions with Alteon as to the future direction of the
collaboration.
The Company and CuraGen Corporation (CuraGen) entered into a research
collaborative agreement in November 1997, whereby the Company invested $5.0
million in equity of CuraGen and has agreed to provide a convertible equity
loan to CuraGen of up to $26.0 million. As of December 31, 1998, no loan
amounts have been funded to CuraGen.
Also, in December 1997, the Company and LeukoSite Inc. (LeukoSite) entered
into a collaboration agreement to develop and commercialize LeukoSite's LDP-
02, a humanized monoclonal antibody for the potential treatment of
inflammatory bowel diseases. Under the terms of the agreement, the Company
made a $4.0 million equity investment in LeukoSite and has agreed to provide
a convertible equity loan for approximately $15.0 million to fund Phase II
development costs. Upon successful completion of Phase II, if LeukoSite
agrees to fund 25% of Phase III development costs, the Company has agreed to
provide a second loan to LeukoSite for such funding. As of December 31,
1998, no loan amounts have been funded to LeukoSite.
Distribution
The Company has a U.S.-based pharmaceutical marketing, sales and distribution
organization. The Company's sales efforts are focused on specialist
physicians based at major medical centers in the U.S. In general, products
are sold to distributors or directly to hospital pharmacies or medical
centers. The Company utilizes common pharmaceutical company marketing
techniques, including advertisements, professional symposia, direct mail,
public relations and other methods.
The Company's products are available at no charge to qualified patients under
the Company's uninsured patient programs in the U.S. The Company has
established the Genentech Endowment for Cystic Fibrosis so qualified CF
patients in the U.S. who need Pulmozyme can gain assistance in obtaining it.
During 1998, the Company 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 the Company for replacement related
to both patient related product wastage and product expiration. The Company
maintains the right to renew, modify or discontinue the above programs.
As discussed in the Notes to Consolidated Financial Statements in the
Company's 1998 Annual Report to Stockholders (Part II, Item 8 of this Form
10-K), the Company had four major customers, including HLR, who provided over
10% of total revenues. Also discussed in the note are revenues from foreign
customers in 1998, 1997 and 1996.
Raw Materials
Raw materials and supplies required for the production of the Company's
principal products are generally available in quantities adequate to meet the
Company's needs.
Proprietary Technology - Patents and Trade Secrets
The Company has a policy of seeking patents on inventions arising from its
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. The Company has either
been granted patents or has patent applications pending which relate to a
number of current and potential products including products licensed to
others. The Company considers that in the aggregate its patent applications,
patents and licenses under patents owned by third-parties are of material
importance to its operations. Important legal issues remain to be resolved
as to the extent and scope of available patent protection for biotechnology
products and processes in the U.S. and other important markets outside of the
U.S. The Company expects that litigation will likely be necessary to
determine the validity and scope of certain of its proprietary rights. The
Company is currently involved in a number of patent lawsuits, as either a
plaintiff or defendant, and administrative proceedings relating to the scope
of protection of its patents and those of others. These lawsuits and
proceedings may result in a significant commitment of Company resources in
the future. There can be no assurance that the patents the Company obtains
or the unpatented proprietary technology it holds will afford the Company
significant commercial protection.
In general, the Company has obtained licenses from various parties that it
deems to be necessary or desirable for the manufacture, use or sale of its
products. These licenses (both exclusive and non-exclusive) generally
require the Company to pay royalties to the parties on product sales.
The Company's trademarks, ACTIVASE, PROTROPIN, NUTROPIN, NUTROPIN AQ,
PULMOZYME, HERCEPTIN and ACTIMMUNE in the aggregate are considered to be of
material importance and are registered in the U.S. Patent and Trademark
Office and in other countries throughout the world.
Royalty income recognized by the Company during 1998, 1997 and 1996 for
patent licenses, know-how and other related rights amounted to $229.6
million, $241.1 million and $214.7 million, respectively. Royalty expenses
for 1998, 1997 and 1996, were $66.3 million, $58.9 million and $58.9 million,
respectively.
Competition
The Company faces competition, and believes 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 the Company. 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, the Company believes its competitive position is enhanced by its
commitment to research leading to the discovery and development of new
products and manufacturing methods. Other factors which should help the
Company meet competition include ancillary services provided to support its
products, customer service, and dissemination of technical information to
prescribers of its products and to the health care community including
payers.
Over the longer term, the Company's 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 U.S.
approval in this new class of monoclonal antibody biotherapeutic cancer
drugs. The first was Rituxan.
Rituxan: Rituxan received designation as a U.S. Orphan Drug by the FDA in
1994 for the treatment of B-cell NHL. Genentech is aware of other
potentially competitive biologic therapies in development. Coulter
Pharmaceuticals, Inc. (Coulter) recently filed for approval with the FDA with
respect to one such product for a similar indication for which Rituxan is
approved.
Activase: The Company continues to face competition from Retavase,
registered trademark, a thrombolytic agent. Retavase received FDA approval
in October 1996 for the treatment of AMI. The Company believes Retavase
infringes on its patents and has filed a patent infringement action against
Boehringer Mannheim (BM). Centocor, Inc. (Centocor) purchased the U.S. and
Canadian rights to Retavase from BM. 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 AMI. In
April 1995, the FDA approved for marketing an accelerated dosage of Activase.
In June 1996, the Company received clearance from the FDA to market Activase
for the treatment of AIS or brain attack. Activase is the first therapy to
be indicated for the acute treatment of stroke. In addition, the Company is
conducting Phase III clinical trials on a second generation of t-PA.
In March 1998, the Company received two new patents related to variant
forms of t-PA. Based on these patents, the Company filed an infringement
action against Centocor in the Northern District of California which alleges
that Centocor's sale, offer for sale, use in, and importation into, the U.S.
of Retavase (Reteplase, recombinant), a t-PA, infringes these two new patents
of the Company. The Company is seeking a permanent injunction and damages.
Genentech is aware of other companies actively pursuing the development
for the U.S. market of nonrecombinant or recombinant t-PA or t-PA variants,
and additional companies or combinations of companies pursuing the
development of other types of potentially competitive thrombolytic agents.
Protropin, Nutropin and Nutropin AQ: Lilly received FDA approval in 1987 to
market its growth hormone product for treatment of growth hormone inadequacy
in children. Three other companies - BioTechnology General (BTG), Novo
Nordisk A/S (Novo) and P&U - received FDA approval in 1995 to market their
growth hormone products, although BTG has been preliminarily enjoined from
selling its product. A fifth competitor, Serono Laboratories, Inc. (Serono),
received FDA approval in October 1996 to market its growth hormone product.
In the first quarter of 1997, Serono, Novo and P&U began selling their growth
hormone products in the U.S. market. In addition, three of the Company's
competitors have received approval to market their existing human growth
hormone products for additional indications.
Pulmozyme: Sales of Pulmozyme for the management of CF in the U.S., Canada
and some countries in Europe began in early 1994. In November 1996,
Pulmozyme was cleared for marketing by the FDA for the management of CF
patients with advanced disease; a condition that affects approximately 500
patients in the U.S. In February 1998, the Company received approval from
the FDA for a label extension which includes the safety and alternative
administration of Pulmozyme in children under the age of five with CF. In
accordance with the Agreement with Roche, in the fourth quarter of 1995, HLR
obtained exclusive rights to sell Pulmozyme outside of the U.S., and the
Company receives a royalty on such sales.
Actimmune: Actimmune received designation as a U.S. Orphan Drug by the FDA
in 1990 for the treatment of CGD.
Forward-Looking Statements
The following section contains forward-looking statements that are based on
the Company's current expectations. Because the Company's actual results may
differ materially from these and any other forward-looking statements made by
or on behalf of the Company, this section also includes a discussion of
important factors that could affect the Company's actual future results,
including its product sales, royalties, contract revenues, expenses and net
income.
Product Sales: The Company's product sales may vary from period to period
for several reasons including, but not limited to: the overall competitive
environment for the Company's products; the amount of sales to customers in
the U.S.; the amount and timing of the Company's sales to HLR; 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 the
products; the rate of adoption and use of the Company's products for approved
indications and additional indications; and the potential introduction of new
products and additional indications for existing products in 1999 and beyond.
Competition: The Company faces growing competition in two of its
therapeutic markets and expects new competition in a third. First, Activase
lost market share and could lose additional market share in the thrombolytic
market to Centocor's Retavase and the resulting adverse effect on sales
could be material. Retavase received FDA approval in October 1996 for the
treatment of AMI. In addition, there is an increasing use of mechanical
reperfusion in lieu of thrombolytic therapy for the treatment of AMI, which
is expected to continue. Second, in the growth hormone market, the Company
continues to face increased competition from five other companies with
growth hormone products, although one company has been preliminarily
enjoined from selling its product. As a result of this competition, the
Company has experienced a loss in new patient market share. Four of these
competitors have also received approval to market their existing human
growth hormone products for additional indications. The Company expects
that such competition could have an adverse effect on its sales of
Protropin, Nutropin and Nutropin AQ and such effect could be material.
Third, in the NHL market, Coulter recently filed for approval with the FDA
with respect to a product for a similar indication for which Rituxan is
approved. Genentech is aware of other potentially competitive biologic
therapies in development.
Other competitive factors affecting the Company's product sales include,
but are not limited to: the timing of FDA approval, if any, of additional
competitive products, pricing decisions made by the Company, the degree of
patent protection afforded to particular products, the outcome of litigation
involving the Company's patents and patents of competing companies for
products and processes related to production and formulation of those
products, the increasing use and development of alternate therapies, and the
rate of market penetration by competing products.
Royalty and Contract Revenues: Royalty and contract revenues in future
periods could vary significantly from 1998 levels. Major factors affecting
these revenues include, but are not limited to: HLR's decisions to exercise
or not to exercise its option to develop and sell the Company's future
products in non-U.S. markets and the timing and amount of related development
cost reimbursements, if any; variations in HLR's sales and other licensees'
sales of licensed products; fluctuations in foreign currency exchange rates;
the initiation of other new contractual arrangements with other companies;
the timing of non-U.S. approvals, if any, for products licensed to HLR and
other licensees; whether and when contract benchmarks are achieved; and the
conclusion of existing arrangements with other companies and HLR.
R&D: The Company is committed to aggressive R&D investment to discover and
develop new products. The Company currently has several products in late-
stage clinical testing and anticipates that its R&D expenses will continue at
a high percentage of revenues over the short-term. Over the long-term, as
revenues increase, R&D as a percent of revenues should decrease to the 20% to
25% range.
Successful pharmaceutical product development is highly uncertain and is
dependent on numerous factors, many of which are beyond the Company's
control. Products that appear promising in the early phases of development
may fail to reach the market for numerous reasons: they may be found to be
ineffective or to have harmful side effects in preclinical or clinical
testing; they may fail to receive necessary regulatory approvals; they may
turn out to be uneconomical because of manufacturing costs or other factors;
or they may be precluded from commercialization by the proprietary rights of
others or by competing products or technologies for the same indication.
Success in preclinical and early clinical trials does not ensure that large
scale clinical trials will be successful. Clinical results are frequently
susceptible to varying interpretations that may delay, limit or prevent
regulatory approvals. The length of time necessary to complete clinical
trials and to submit an application for marketing approval for a final
decision by a regulatory authority varies significantly and may be difficult
to predict. Factors affecting the Company's R&D expenses include, but are
not limited to: the number of and the outcome of clinical trials currently
being conducted by the Company and/or its collaborators; the number of
products entering into development from late-stage research; in-licensing
activities, including the timing and amount of related development funding or
milestone payments; and future levels of revenues.
Income Tax Provision: The Company expects its effective tax rate to be at or
near 35% for the next several years dependent upon several factors. These
factors include, but are not limited to, changes in tax laws and rates,
interpretation of existing tax laws, future levels of R&D spending, the
outcome of clinical trials of certain development products, the Company's
success in commercializing such products, and potential competition regarding
the products.
Uncertainties Surrounding Proprietary Rights: The patent positions of
pharmaceutical and biotechnology companies can be highly uncertain and
involve complex legal and factual questions. Accordingly, the breadth of
claims allowed in such companies' patents cannot be predicted. Patent
disputes are frequent and can preclude commercialization of products. The
Company has in the past been, is currently, and may in the future be involved
in material patent litigation. Such litigation is costly in its own right
and could subject the Company to significant liabilities to third-parties
and, if decided adversely, the Company may need to obtain third-party
licenses at a material cost or cease using the technology or product in
dispute. The presence of patents or other proprietary rights belonging to
other parties may lead to the termination of R&D of a particular product.
The Company believes it has strong patent protection or the potential for
strong patent protection for a number of its products that generate sales and
royalty revenue or that the Company is developing; however, the courts will
determine the ultimate strength of patent protection of the Company's
products and those on which the Company earns royalties.
Year 2000: The Company uses and relies on a wide variety of information
technologies, computer systems and scientific and manufacturing equipment
containing computer related components (such as programmable logic
controllers and other embedded systems). Some of the Company's older
computer software programs and equipment are unable to distinguish between
the year 1900 and the year 2000. As a result, time-sensitive functions of
those software programs and equipment may misinterpret dates after January 1,
2000, to refer to the twentieth century rather than the twenty-first century.
This could cause system or equipment shutdowns, failures or miscalculations
resulting in inaccuracies in computer output or disruptions of operations,
including, among other things, inaccurate processing of financial information
and/or temporary inabilities to process transactions, manufacture products,
or engage in similar normal business activities.
The Company has a Year 2000 Project (Y2K Project) in place to address
the potential exposures related to the impact on its computer systems and
scientific and manufacturing equipment containing computer related components
for the Year 2000 and beyond. Approximately half of the Company's Year 2000
(Y2K) scheduled work is complete. The remaining work is scheduled to be
completed by the end of the third quarter of 1999. The Y2K Project phases
include: (1) inventorying and prioritizing business critical systems; (2)
Y2K compliance analysis; (3) remediation activities including repairing or
replacing identified systems; (4) testing; and (5) developing contingency
plans.
An inventory of business critical financial, informational and
operational systems, including manufacturing control systems, has been
completed. Compliance analysis is approximately 80% complete for these
systems. Remediation activities vary by department, however, on the average,
remediation activities are approximately 50% complete. Testing of the
Company's information technology infrastructure is 60% complete. Testing of
business critical application programs began in the third quarter of 1998,
and is scheduled to be complete by the third quarter of 1999. Contingency
planning will begin in the first quarter of 1999. The Company believes that
with the completed modifications, the Y2K issue will not pose significant
operational problems for its computer systems and equipment. However, if
such modifications and conversions are not made, or are not completed in a
timely fashion, the Year 2000 issue could have a material impact on the
operations of the Company, the precise degree of which cannot be known at
this time.
In addition to risks associated with the Company's own computer systems
and equipment, the Company has relationships with, and is to varying degrees
dependent upon, a large number of third parties that provide information,
goods and services to the Company. These include financial institutions,
suppliers, vendors, research partners, governmental entities and customers.
If significant numbers of these third parties experience failures in their
computer systems or equipment due to Year 2000 non-compliance, it could
affect the Company's ability to process transactions, manufacture products,
or engage in similar normal business activities. While some of these risks
are outside the control of the Company, the Company has instituted programs,
including internal records review and use of external questionnaires, to
identify key third parties, assess their level of Year 2000 compliance,
update contracts and address any non-compliance issues.
The total cost of the Year 2000 systems assessments and conversions is
funded through operating cash flows and the Company is expensing these costs
as they are incurred. The Company has created a mechanism to trace costs
directly related to the Year 2000 issue and has budgeted funds to address the
issues of assessment and conversion. The financial impact of making the
required systems changes cannot be known precisely at this time, but it is
currently expected to be less than $10.0 million. The actual financial
impact could, however, exceed this estimate.
Liquidity: The Company believes that its cash, cash equivalents and short-
term investments, together with funds provided by operations and leasing
arrangements, will be sufficient to meet its foreseeable operating cash
requirements. In addition, the Company believes it could access additional
funds from the capital and debt markets. Factors affecting the Company's
cash position include, but are not limited to, future levels of the Company's
product sales, royalty and contract revenues, expenses, in-licensing
activities, including the timing and amount of related development funding or
milestone payments, and capital expenditures.
Roche Holdings, Inc.: At December 31, 1998, Roche held approximately 65.3%
of the Company's outstanding common equity. The Company expects to continue
to have material transactions with Roche, including royalty and contract
revenues, product sales and joint product development costs. See also
Relationship with Roche Holdings, Inc. note in Notes to Consolidated
Financial Statements in the Company's 1998 Annual Report to Stockholders
(Part II, Item 8 of this Form 10-K) for a discussion of the terms of the put
and call pursuant to the Agreement.
Market Risk: The Company is 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, the Company enters into
various derivative transactions pursuant to the Company's investment and risk
management policies and procedures in areas such as hedging and counterparty
exposure practices. The Company does not use derivatives for speculative
purposes.
A discussion of the Company's accounting policies for financial instruments
and further disclosures relating to financial instruments is included in the
Financial Review Section and Description of Business and Significant
Accounting Policies and Financial Instruments notes in the Notes to
Consolidated Financial Statements in the Company's 1998 Annual Report to
Stockholders (Part II, Item 8 of this Form 10-K).
New Accounting Standard: In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (FAS) 133,
"Accounting for Derivative Instruments and Hedging Activities," effective
beginning in the first quarter of 2000. FAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires companies to recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting under FAS 133. Based on the requirements of
FAS 133, there may be changes to the balance sheet and reported assets and
liabilities. The Company is currently evaluating the impact of FAS 133 on
its financial position and results of operations.
Credit Risk of Counterparties: The Company could be exposed to losses
related to the above financial instruments should one of its counterparties
default. This risk is mitigated through credit monitoring procedures.
Legal Proceedings: The Company is a party to various legal proceedings
including patent infringement cases and other matters. See the Leases,
Commitments and Contingencies note in the Notes to Consolidated Financial
Statements in the Company's 1998 Annual Report to Stockholders (Part II, Item
8 of this Form 10-K) for further information.
Government Regulation
The pharmaceutical industry is subject to stringent regulation with respect
to product safety and efficacy by various federal, state and local
authorities. Of particular significance are the FDA's requirements covering
research and development, testing, manufacturing, quality control, labeling
and promotion of drugs for human use. A pharmaceutical product cannot be
marketed in the U.S. 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 NDA (New Drug
Application) or a BLA (Biologics License Application) are substantial and can
require a number of years, although recently revised regulations are designed
to reduce somewhat the time for approval of new products.
Although it is difficult to predict the ultimate effect, if any, these
matters or any other pending or future legislation, regulations or government
actions may have on its business, the Company believes that the development
of new and improved products which address unmet medical needs should enable
it to compete effectively within this environment.
Research and Development
A major portion of the Company's operating expenses to date have been related
to the R&D of products either on its own behalf or under contracts. During
1998, 1997 and 1996 the Company's R&D expenses were $396.2 million, $470.9
million and $471.1 million, respectively. The Company has sponsored
approximately 93%, 86% and 89% of its research and development for the years
1998, 1997 and 1996, respectively.
The Company's R&D efforts have been the primary source of the Company's
products. The Company intends to maintain its strong commitment to R&D as an
essential component of its product development effort. Licensed technology
developed by outside parties is an additional source of potential products.
Human Resources
As of December 31, 1998, the Company had 3,389 employees.
Environment
The Company seeks to comply with all applicable statutory and administrative
requirements concerning environmental quality. The Company has made, and
will continue to make, the expenditures for environmental compliance and
protection. Expenditures for compliance with environmental laws have not had
and are not expected to have a material effect on the Company's capital
expenditures, results of operation, financial position or competitive
position.
ITEM 2. PROPERTIES
The Company's primary facilities are located in a research and industrial
park in South San Francisco, California in both leased and owned properties.
The Company currently occupies twenty-two buildings for its research and
development, manufacturing, marketing and administrative activities.
Fourteen of the buildings are owned property and eight are leased. The
Company has made and continues to make improvements to these properties to
accommodate its growth. In addition, the Company owns approximately 17 acres
adjacent to its current facilities that may be used for future expansion. In
1995, the Company began development of a new manufacturing facility of
approximately 309.2 thousand square feet in Vacaville, California under an
operating lease arrangement. The project is expected to be operational by
the third quarter of 1999, with licensure expected thereafter. The Company
also has leases for certain additional office facilities in several locations
in the U.S.
The Company believes its facilities are in good operating condition and that
the real property owned or leased, combined with the new Vacaville site,
currently conducting start-up and validation checks, are adequate for all
present and near term uses although additional manufacturing capacity may be
added on the Vacaville site dependent on the success of products in clinical
trials. The Company believes any additional facilities could be obtained or
constructed with the Company's capital resources.
ITEM 3. LEGAL PROCEEDINGS
Contingencies: The Company is a party to various legal proceedings,
including patent infringement cases involving human growth hormone products
and Activase, registered trademark, and other matters.
In July 1997, an action was filed in the U.S. District Court for the Northern
District of California alleging that the Company's manufacture, use and sale
of its Nutropin, registered trademark, human growth hormone products
infringed a patent (the Goodman Patent) owned by the Regents of the
University of California (UC). This action is substantially the same as a
previous action filed in 1990 against the Company by UC alleging that the
Company's manufacture, use and sale of its Protropin, registered trademark,
human growth hormone products infringed the Goodman Patent. The 1997 case
has been stayed pending the conclusion of the 1990 case, which is expected to
commence trial in April 1999.
Based upon the nature of the claims made and the information available to
date to the Company and its counsel through investigations and otherwise, the
Company believes the outcome of these actions is not likely to have a
material adverse effect on the financial position, results of operations or
cash flows of the Company. However, were an unfavorable ruling to occur in
any quarterly period, there exists the possibility of a material impact on
the net income of that period.
In addition to the above, in 1995, the Company received and responded to
grand jury document subpoenas from the U.S. District Court for the Northern
District of California for documents relating to the Company's past clinical,
sales and marketing activities associated with human growth hormone. In
February 1997, February 1998 and October 1998, the Company received grand
jury document subpoenas from the same court related to the same subject
matter. The government is actively investigating this matter, and the
Company is a target of that investigation. At this time, the Company cannot
reasonably estimate a possible range of loss, if any, that may result from
this investigation due to uncertainty regarding the outcome.
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, 1998) and positions with the Company are as follows:
Name Age Position
- ------------------------------- --- ------------------------------------
Arthur D. Levinson, Ph.D. 48 President and Chief Executive Officer
William D. Young 54 Chief Operating Officer
Louis J. Lavigne, Jr. 50 Executive Vice President and
Chief Financial Officer
Susan D. Hellmann, M.D., M.P.H. 41 Senior Vice President - Development and
Chief Medical Officer
Dennis J. Henner, Ph.D. 47 Senior Vice President - Research
Judy Heyboer 49 Senior Vice President, Human Resources
Stephen G. Juelsgaard 50 Senior Vice President, General Counsel and
Secretary
W. Robert Arathoon, Ph.D. 46 Vice President - Process Sciences
Joffre B. Baker, Ph.D. 51 Vice President - Research Discovery
J. Joseph Barta 51 Vice President - Quality
John G. Curd, M.D. 53 Vice President - Clinical Development
Stephn Dilly, M.D., Ph.D. 39 Vice President - Medical Affairs
Robert L. Garnick, Ph.D. 49 Vice President - Regulatory Affairs
Bradford S. Goodwin 44 Vice President - Finance
Paula M. Jardieu, Ph.D. 48 Vice President - Pharmacological Sciences
Edmon R. Jennings 51 Vice President - Corporate Development
Sean A. Johnston, Ph.D. 40 Vice President - Intellectual Property
Cynthia J. Ladd 43 Vice President - Corporate Law and
Assistant Secretary
Walter Moore 47 Vice President - Government Affairs
James P. Panek 45 Vice President - Manufacturing, Engineering and
Facilities
Kimberly J. Popovits 40 Vice President - Sales
Nicholas J. Simon 44 Vice President - Business and
Corporate Development
David C. Stump, M.D. 49 Vice President - Clinical Research and
Genentech Fellow
John M. Whiting 43 Controller and Chief Accounting Officer
All officers are elected annually by the Board of Directors. There is no
family relationship among any of the officers or directors.
Business Experience
Dr. Levinson was appointed President and Chief Executive Officer of the
Company in July 1995. He had previously served as Senior Vice President of
the Company since January 1993. Dr. Levinson has held a number of other
positions, including Vice President, Research, Vice President, Research
Technology, Director, Cell Genetics Department and Staff Scientist subsequent
to joining the Company in May 1980 as a Senior Scientist.
Mr. Young was appointed Chief Operating Officer of the Company in April 1997.
He previously served as Executive Vice President of the Company from January
1996 to April 1997, as Senior Vice President from September 1988 to January
1996 and as Vice President, Manufacturing and Process Sciences from April
1983 to September 1988. Mr. Young joined the Company in September 1980 as
Director, Manufacturing from Eli Lilly and Company.
Mr. Lavigne was appointed Executive Vice President of the Company 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 the Company in July 1982 from
Pennwalt Corporation and became Controller in May 1983 and an officer of the
Company in February 1984.
Dr. Hellmann was appointed Senior Vice President, Development in December
1997 and Chief Medical Officer in December 1996. She joined the Company in
March 1995 as Clinical Scientist and subsequently held the positions of
Associate Director from August 1995 to January 1996, Senior Director from
January 1996 to March 1996 and Vice President, Medical Affairs from March
1996 to November 1997. Prior to joining the Company, she held the positions
of Associate Director at Bristol-Myers Squibb from February 1993 to February
1995 and Medical Oncologist at Lexington Oncology Associates from June 1992
to February 1993.
Dr. Henner was appointed Senior Vice President, Research in May 1998. He had
served as Vice President, Research from April 1996 to May 1998, Vice
President, Research Technology from July 1994 to April 1996, and as Senior
Director, Research Technology from December 1990 to July 1994. From May 1990
to December 1990, Dr. Henner was Director and Senior Scientist, Cell Genetics
Department. Dr. Henner joined the Company in 1981 as a Scientist in
Research. Prior to joining the Company, he was at the Scripps Clinic and
Research Foundation.
Ms. Heyboer joined the Company as Senior Vice President, Human Resources in
August 1996. Prior to joining the Company, she held the positions of Vice
President, Employee Relations and later Senior Vice President at Acuson
Corporation from October 1983 to July 1996.
Mr. Juelsgaard was appointed Senior Vice President in April 1998, Vice
President and General Counsel in July 1994 and Secretary in April 1997. He
joined the Company 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.
Dr. Arathoon was appointed Vice President, Process Sciences in April 1996.
Since joining the Company in 1983 from The Wellcome Foundation, Dr. Arathoon
has held a series of positions of increasing responsibility, most recently as
Senior Director, Process Sciences from November 1994 to April 1996.
Dr. Baker was appointed Vice President, Research Discovery in February 1997.
He previously held the positions of Senior Director, Research Discovery from
March 1993 to February 1997 and Director, Cardiovascular Research Development
from September 1990 to September 1993. He has also been a member of the
Research Review Committee (RRC) since March 1993.
Mr. Barta was appointed Vice President, Quality in October 1998. He
previously held the positions of Senior Director, Quality from March to
October 1998, Senior Director, Quality Assurance from January 1994 to
February 1998, Senior Director, Pharmaceutical Manufacturing from September
to December 1993, Director, Pharmaceutical Manufacturing from September 1989
to August 1993, and Associate Director, Validation and Technical Services
from June to September 1989. He joined the Company in March 1988 as Manager,
Validation. Prior to joining the Company, he held positions of Director,
Quality Assurance and Quality Control at Codon from May 1986 to March 1988
and Group Validation Manager at Miles Laboratories, Inc. from September 1979
to March 1986.
Dr. Curd was appointed Vice President, Clinical Development in October 1997.
He previously held the positions of Senior Director, Medical Affairs from
January 1996 to October 1997 and Director, Oncology, Immunology and
Infectious Diseases from December 1991 to January 1996.
Dr. Dilly joined the company as Vice President, Medical Affairs in
December 1998. Prior to joining the company he held various positions
with SmithKline Beecham Pharmaceuticals from August 1988, including
Director and Vice President Neurosciences Therapeutic Unit from December
1996 to December 1998, Director and Vice President CardioPulmonary
Therapeutic Team from December 1994 to December 1996 and Group Director
Neurosciences Therapeutic Unit from April 1993 to December 1994.
Dr. Garnick was appointed Vice President, Regulatory Affairs in February
1998. He had previously served as Vice President, Quality since April 1994
and was Senior Director, Quality Control from 1990 to 1994 and Director,
Quality Control from 1988 to 1990. Dr. Garnick joined the Company in August
1984 from Armour Pharmaceutical, where he worked from 1980. Prior to that,
he was Manager of Analytical Development at Merrell National Labs from 1977
to 1980.
Mr. Goodwin was appointed Vice President, Finance in October 1997. He had
served as Vice President, Finance and Controller since December 1996. He has
been a Vice President of the Company since July 1993 and served as Controller
from June 1989 to October 1997. He has also held the positions of Director,
Financial Planning and Analysis, the Assistant Controller and the General
Auditor. Before joining the Company in April 1987, Mr. Goodwin worked for
Price Waterhouse, a public accounting firm.
Dr. Jardieu was appointed Vice President, Pharmacological Sciences in
February 1997. She previously held the positions of Senior Director,
Pharmacological Sciences from 1996 to February 1997, Staff Scientist from
1992 to 1996, Senior Scientist from 1989 to 1992 and Scientist from 1986 to
1989.
Mr. Jennings was appointed Vice President, Corporate Development in December
1995. He was Vice President, Sales and Marketing from January 1994 to
December 1995, and had served as Vice President, Sales since January 1991.
He joined the Company in September 1985 as Western Area Sales Manager. Prior
to joining the Company, Mr. Jennings was Western Region Sales Manager of
Bristol-Myers' Oncology Division.
Dr. Johnston was appointed Vice President, Intellectual Property in June
1998. He joined the Company in October 1990 as Patent Counsel and
subsequently held the positions of Senior Patent Counsel from October 1993 to
October 1995, Senior Patent Counsel and Manager of Patent Litigation from
October 1995 to April 1998, and Associate General Counsel, Patent Law from
April 1998 to June 1998. Prior to joining the Company, he served as a Law
Clerk at the U.S. 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.
Ms. Ladd was appointed Vice President, Corporate Law in February 1996 and
Assistant Secretary in April 1997. She joined the Company in 1989 as
Corporate Counsel and subsequently held the positions of Senior Corporate
Counsel from November 1990 to June 1993 and Chief Corporate Counsel from June
1993 to February 1996.
Mr. Moore was appointed Vice President, Government Affairs in May 1998. He
joined the Company in September 1993 as Senior Director of Government
Affairs. Prior to joining the Company, Mr. Moore served as Manager of
Governmental Relations at Eli Lilly and Company.
Mr. Panek was appointed Vice President, Manufacturing, Engineering and
Facilities in July 1997. He joined the Company in September 1982 and
subsequently held the positions of Director, Engineering and Facilities since
May 1988, Senior Director, Engineering and Facilities since July 1991, and
Vice President, Engineering and Facilities since July 1993.
Ms. Popovits was elected Vice President, Sales in October 1994. She was
Director, Field Sales from January 1993 to October 1994 and Regional Manager,
Northeast Region from October 1989 to January 1993. Ms. Popovits was at
American Critical Care, a Division of American Hospital Supply Corporation,
for six years prior to joining the Company in November 1987 as Division
Manager, Southeast Region.
Mr. Simon was appointed Vice President of Business and Corporate Development
in December 1995. He had been Vice President of Business Development from
December 1994 to December 1995, and was Senior Director of Business
Development from December 1993 to December 1994. He joined the Company in
1989 as Director of Business Development from Xoma Corporation.
Dr. Stump was appointed Genentech Fellow in January 1996, in addition to his
responsibilities as Vice President, Clinical Research, a position he has held
since July 1995. He joined the Company in July 1989 as Director, Clinical
Research and was appointed Senior Director, Clinical Research in August 1991.
Prior to joining the Company, Dr. Stump was Associate Professor of Medicine
and Biochemistry at the University of Vermont.
Mr. Whiting was appointed Controller and Chief Accounting Officer in October
1997. He previously held the positions of Director, Financial Planning and
Analysis from January 1997 to October 1997; Director, Operations, Financial
Planning and Analysis from December 1996 to January 1997; Associate Director,
Operations, Financial Planning and Analysis from March 1996 to December 1996;
Plant Controller from April 1993 to March 1996; and Group Controller from
July 1991 to April 1993.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The section labeled "Common Stock, Special Common Stock and Redeemable
Common Stock Information," and footnotes labeled "Relationship with Roche
Holdings, Inc." and "Capital Stock" in the Notes to Consolidated Financial
Statements of the Company's 1998 Annual Report to Stockholders are
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The section labeled "11-Year Financial Summary" of the Company's 1998
Annual Report to Stockholders is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The section labeled "Financial Review" of the Company's 1998 Annual
Report to Stockholders is incorporated herein by reference.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Notes to Consolidated
Financial Statements, the Report of Ernst & Young LLP, Independent Auditors
and the section labeled "Quarterly Financial Data (unaudited)" of the
Company's 1998 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 the Company's Proxy Statement in
connection with the 1999 Annual Meeting of Stockholders are incorporated
herein by reference.
(b) Information concerning the Company's 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," "Long-Term Incentive Plans," "Long-Term Incentive
Plans - Awards in Last Fiscal Year," "Loans and Other Compensation" and
"Compensation Committee Interlocks and Insider Participation" of the
Company's Proxy Statement in connection with the 1999 Annual Meeting of
Stockholders are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The sections labeled "Merger with Roche Holdings, Inc.," "Security
Ownership of Certain Beneficial Owners," "Security Ownership of Management"
and "Amount and Nature of Beneficial Ownership" of the Company's Proxy
Statement in connection with the 1999 Annual Meeting of Stockholders are
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section labeled "Certain Relationships and Related Transactions" of
the Company's Proxy Statement in connection with the 1999 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 the Company's 1998 Annual Report to Stockholders and are incorporated
herein by reference pursuant to Item 8 of this Form 10-K.
Consolidated Statements of Income for each of the three years in the
period ended December 31, 1998
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1998
Consolidated Balance Sheets at December 31, 1998 and 1997
Consolidated Statements of Stockholders' Equity for each of the three
years in the period 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 each of the three years in
the period ended December 31, 1998.
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the consolidated
financial statements or notes thereto.
3. Exhibits
Exhibit No. Description
- ----------- -----------
3.1 Certificate of Incorporation.(1)
3.2 Amended Certificate of Incorporation.(5)
3.3 Restated By-Laws.(3)
4.1 Indenture, dated March 27, 1987 ("Indenture") for U.S.
$150,000,000 5% Convertible Subordinated Debentures due
2002.(2)
4.2 First Supplemental to Indenture, dated August 17, 1990.(3)
4.3 Second Supplemental to Indenture, dated October 18, 1995. (6)
10.1 Patent License Agreement with Columbia University dated October
12, 1988.(2)
10.2 Amended and Restated Contract for the Sale and Distribution of
Protropin dated as of March 1, 1991.(4)
10.3 Agreement and Plan of Merger, dated as of May 23, 1995, as
amended and restated, among the Company, Roche Holdings, Inc.
and HLR (U.S.) II, Inc. with exhibits.(5)
10.4 Amended and Restated Governance Agreement, dated October 25,
1995, between the Company and Roche Holdings, Inc.(5)
10.5 Agreement between Genentech and F. Hoffman-La Roche Ltd
regarding commercialization of Genentech's products outside the
United States dated as of October 25, 1995.(5)
10.6 Guaranty Agreement between Genentech and Roche Holding, Ltd
dated as of October 25, 1995.(5)
10.7 Amended and Restated Lease Agreement, dated December 8, 1995,
between the Company and BNP Leasing Corporation.(6)
10.8 Amended and Restated Purchase Agreement, dated December 8,
1995, between the Company and BNP Leasing Corporation.(6)
10.9 Guiding Principles for the Genentech/Roche Relationship.(7)
13.1 1998 Annual Report to Stockholders.(9)
23.1 Consent of Ernst & Young LLP, Independent Auditors.(9)
27.1 Financial Data Schedule.(9)
28.1 Description of the Company's capital stock.(1)
99.1* 1984 Incentive Stock Option Plan, as amended and restated as of
October 16, 1996.(7)
99.2* 1984 Non-Qualified Stock Option Plan, as amended and restated
as of October 16, 1996.(7)
99.3* Restated Relocation Loan Program.(4)
99.4* Restated 401(k) Plan.(6)
99.5* 1990 Stock Option/Stock Incentive Plan, as amended and restated
as of October 16, 1996.(7)
99.6* Supplemental Plan.(4)
99.7* 1994 Stock Option Plan, as amended and restated as of October
16, 1996.(7)
99.8* 1996 Stock Option/Stock Incentive Plan, as amended and restated
as of October 16, 1996.(7)
99.9* Deferred Compensation Plan.(7)
99.10* 1991 Employee Stock Plan, as amended April 10, 1997.(8)
99.11* Incentive Units Plan, as amended on October 8, 1998.(9)
* As required by Item 14(a)(3) of Form 10-K, the Company identifies this
Exhibit as a management contract or compensatory plan or arrangement of the
Company.
- ----------------
(1) Filed as an exhibit to Annual Report on Form 10-K for the year ended
December 31, 1986 and incorporated herein by reference.
(2) Filed as an exhibit to Annual Report on Form 10-K for the year ended
December 31, 1987 and incorporated herein by reference.
(3) Filed as an exhibit to Annual Report on Form 10-K for the year ended
December 31, 1990 and incorporated herein by reference.
(4) Filed as an exhibit to Annual Report on Form 10-K for the year ended
December 31, 1991 and incorporated herein by reference.
(5) Filed as an exhibit to Form S-4 dated October 25, 1995 (registration
statement no. 33-59949) and incorporated herein by reference.
(6) Filed as an exhibit to Annual Report on Form 10-K for the year
ended December 31, 1995 and incorporated herein by reference.
(7) Filed as an exhibit to Annual Report on Form 10-K for the year
ended December 31, 1996 and incorporated herein by reference.
(8) Filed as an exhibit to the Quarterly Report on Form 10-Q filed for the
quarterly period ended March 31, 1997.
(9) Filed with this document.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the quarter ended December
31, 1998.
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: January 22, 1999
By: /S/JOHN M. WHITING
---------------------------------
John M. Whiting
Controller and Chief Accounting
Officer
(Principal 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, Controller and
Chief Accounting Officer, his attorney-in-fact, with the full power of
substitution, for him in any and all capacities, to sign any amendments to
this report, and to file the same, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorney-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
- ---------------------------- --------------------------- ----------------
Principal Executive Officer:
/S/ARTHUR D. LEVINSON President, Chief Executive January 22, 1999
- --------------------------- Officer and Director
Arthur D. Levinson
Principal Financial Officer:
/S/LOUIS J. LAVIGNE, JR. Executive Vice President January 22, 1999
- --------------------------- and Chief Financial Officer
Louis J. Lavigne, Jr.
Director:
/S/HERBERT W. BOYER Director January 22, 1999
- ---------------------------
Herbert W. Boyer
/S/JONATHAN K.C. KNOWLES Director January 22, 1999
- ---------------------------
Jonathan K.C. Knowles
/S/FRANZ B. HUMER Director January 22, 1999
- ---------------------------
Franz B. Humer
/S/LINDA F. LEVINSON Director January 22, 1999
- ---------------------------
Linda F. Levinson
/S/J. RICHARD MUNRO Director January 22, 1999
- ---------------------------
J. Richard Munro
/S/DONALD L. MURFIN Director January 22, 1999
- ---------------------------
Donald L. Murfin
/S/JOHN T. POTTS, JR. Director January 22, 1999
- ---------------------------
John T. Potts, Jr.
/S/C. THOMAS SMITH, JR. Director January 22, 1999
- ---------------------------
C. Thomas Smith, Jr.
/S/DAVID S. TAPPAN, JR. Director January 22, 1999
- ---------------------------
David S. Tappan, Jr.
SCHEDULE II
GENENTECH, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1998, 1997 and 1996
(in thousands)
Additions
Balance at Charged to Balance at
Beginning of Costs and End of
Period Expenses Deductions(1) Period
---------- ---------- ---------- ----------
Allowance for doubtful accounts
and returns:
Year Ended December 31, 1998: $ 14,535 $ 11,389 $ (8,506) $ 17,418
========== ========== ========== ==========
Year Ended December 31, 1997: $ 7,869 $ 13,976 $ (7,310) $ 14,535
========== ========== ========== ==========
Year Ended December 31, 1996: $ 6,672 $ 12,320 $ (11,123) $ 7,869
========== ========== ========== ==========
Inventory reserves:
Year Ended December 31, 1998: $ 12,055 $ 5,405 $ (2,556) $ 14,904
========== ========== ========== ==========
Year Ended December 31, 1997: $ 9,279 $ 5,901 $ (3,125) $ 12,055
========== ========== ========== ==========
Year Ended December 31, 1996: $ 6,909 $ 4,950 $ (2,580) $ 9,279
========== ========== ========== ==========
Reserve for nonmarketable
equity securities and
convertible debt:
Year Ended December 31, 1998: $ 5,490 $ 7,958 $ (1,305) $ 12,143
========== ========== ========== ==========
Year Ended December 31, 1997: $ 4,990 $ 500 $ - $ 5,490
========== ========== ========== ==========
Year Ended December 31, 1996: $ 5,092 $ - $ (102) $ 4,990
========== ========== ========== ==========
(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, 1998
Exhibit No. Description
- ----------- -----------
13.1 1998 Annual Report to Stockholders
23.1 Consent of Ernst & Young LLP, Independent Auditors
27.1 Financial Data Schedule
99.11 Incentive Units Plan, as amended on October 8, 1998
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1998 FORM 10K - Draft One 01/22/99 @ 1:38 PM