FINANCIAL REVIEW
(dollars in millions, except per share amounts)
MAJOR EVENTS AFFECTING FINANCIAL RESULTS AND POSITION
The major events described below affected Genentech's financial results and
position in 1995 and have prospective implications as indicated:
On October 25, 1995, a new agreement (the Agreement) with Roche Holdings, Inc.
(Roche) was approved by Genentech's non-Roche stockholders to extend for four
years Roche's option to cause Genentech (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 common shares, for a price equal to
Genentech's cost to redeem the special common stock. The special common stock
is subject to redemption at the option of Roche at prices beginning at $62.50
during the quarter ended December 31, 1995, and increasing $1.25 per quarter
for six quarters, then increasing $1.50 per quarter for the following eight
quarters to $82.00 in the quarter ending June 30, 1999 (with each such
redemption price being increased by $0.50, to a final price of $82.50, upon
final court settlement of certain stockholder litigation). If Roche does not
cause the redemption as of June 30, 1999, Genentech's stockholders will have
the option (the put) to cause the Company to redeem none, some, or all of their
shares of special common stock at $60.00 per share (and Roche will concurrently
provide the necessary redemption funds to the Company by purchasing a like
number of shares of common stock at $60.00 per share) within thirty business
days commencing July 1, 1999 (such dates subject to acceleration in certain
insolvency events). The Company's obligation to redeem these shares is
contingent upon the contribution by Roche of the necessary redemption funds for
the put. Roche Holding Ltd., a Swiss corporation, has guaranteed Roche's
obligation under the put. In 1995, the Company recorded special charges
totaling $25 million, of which $21 million related to expenses associated with
the Agreement.
In conjunction with that Agreement, F. Hoffmann-La Roche Ltd. (HLR) was granted
an option at terms discussed below for ten years for licenses to use and sell
certain of Genentech's products in non-U.S. markets. As a general matter, such
option for a Genentech product must be exercised at, or prior to if Genentech
mutually agrees, the conclusion of phase II clinical trials for each product.
In general, for each product for which HLR exercises its option (option
product), the Company and HLR will share equally all development expenses,
including preclinical, clinical, process development and related expenses,
incurred by the Company through that date and prospectively, with respect to
the development of the product in the United States. HLR will pay all non-U.S.
development expenses. In general, Genentech will supply HLR clinical
requirements of option products at cost and its commercial requirements at cost
plus 20%. In general, HLR will pay a royalty of 12.5% until a product reaches
$100 million in aggregate sales outside of the United States, at which time the
royalty rate increases to 15%. In addition, HLR has exclusive rights to, and
pays the Company 20% royalties on, Canadian sales of the Company's existing
approved products in Canada, and European sales of Pulmozyme, registered
trademark. Consequently, in the fourth quarter of 1995, the Company
transferred to HLR the rights to its Canadian product sales, and its European
sales of Pulmozyme, and commenced recording royalty revenue from HLR on such
sales. The Company supplies its products to HLR, and has agreed to supply
products for which HLR has exercised its option, for sales outside of the
United States at cost plus 20%. Depending on whether HLR does or does not
exercise its option to develop and sell each of the Company's future products,
future levels of the Company's product sales, royalties and contract revenue,
as well as R&D and other expenses, could vary significantly from 1995 levels
both on an annual and quarter-to-quarter basis.
Upon completion of the Agreement with Roche, Genentech has implemented a new
strategy focused on building the value of the Company and positioning Genentech
for ongoing growth into the 21st century. As part of the implementation of
that strategy, the Company expects to increase research and development
expenses in 1996 by approximately 20%.
The Company previously announced possible impending competition regarding sales
of its two human growth hormone products - Protropin, registered trademark and
Nutropin, registered trademark. Three companies received FDA approval in 1995
to market their growth hormone products for the treatment of growth hormone
inadequacy in children. However, as a result of the assertion of certain
Genentech patents, a court temporarily prohibited two of these products from
entering the market pending a full trial. The two companies appealed the
decision, which was subsequently overruled by the appellate court for one of
the companies. Future court decisions will determine whether these two products
will be permanently enjoined from the market. The third company initiated
product launch activities in late 1995. On December 29, 1995, Genentech
received clearance from the Food and Drug Administration (FDA) to market
Nutropin AQ, registered trademark [somatropin (rDNA origin) injection], the
first and only liquid (aqueous) recombinant human growth hormone product
available. Nutropin AQ is approved for the same indications as Nutropin.
In December 1994, the Company and Eli Lilly and Company (Lilly) reached an
agreement regarding all patent infringement and contract actions between the
two parties, which included the Company granting to Lilly licenses, options to
license, or immunities from suit for certain of the Company's patents.
Payments are required from Lilly on sales of these products. The Company
expects to record, and receive in cash, $7.5 million of royalty revenues per
quarter through 1998, subject to possible offsets and contingent upon Humulin
continuing to be marketed in the United States. Accordingly, $30.0 million of
such payments were received and recorded as royalty revenue in 1995.
RESULTS OF OPERATIONS
(dollars in millions)
Annual % Change
Revenues 1995 1994 1993 95/94 94/93
______________________________________________________________________________
Revenues $ 917.8 $ 795.4 $ 649.7 15% 22%
The increase in revenues in 1995 resulted primarily from higher royalty income
and product sales. The 1994 increase resulted from higher product sales,
royalty income and contract revenues.
Annual % Change
Product Sales 1995 1994 1993 95/94 94/93
______________________________________________________________________________
Activase $ 301.0 $ 280.9 $ 236.3 7% 19%
Protropin and
Nutropin 219.4 225.4 216.8 (3) 4
Pulmozyme 111.3 88.3 - 26 -
Actimmune 3.6 6.4 4.3 (44) 49
__________________________________________________________
Total product
sales $ 635.3 $ 601.0 $ 457.4 6% 31%
% of revenues 69% 76% 70%
Activase: The continued increase in Activase, registered trademark, sales in
1995 and 1994 is attributable to growth in market share and an increase in the
number of patients receiving thrombolytic therapy in the United States. During
1995, Activase market share increased to 75% from approximately 70% and 66% in
1994 and 1993, respectively, in the United States. In April 1995, the FDA
approved for marketing an accelerated infusion of Activase, allowing revised
labeling for the product incorporating data from the Global Utilization of
Activase and Streptokinase in Occluded Coronary Arteries (GUSTO) study. Also
during 1995, an analysis of the GUSTO trial, published in the New England
Journal of Medicine, determined that Activase is cost-effective relative to
other medical treatments. Pursuant to the Agreement with Roche, Genentech
transferred the rights to sell Activase in Canada to HLR during the fourth
quarter of 1995, and began receiving royalties on such sales.
Protropin and Nutropin: Net sales of Protropin and Nutropin decreased in 1995
compared to 1994 due to a slight volume increase in sales being offset by the
impact of pricing programs for distribution channels and for the managed care
sector. 1994 sales increased compared to 1993 due primarily to the
introduction of Nutropin for the treatment of chronic renal insufficiency and
to more growth hormone inadequate patients starting treatment. The Company
faces new competition in the growth hormone market from one new competitor
which entered the market in late 1995, and potential competition from three
other companies, and expects that such competition will have an adverse effect
on its sales of Protropin and Nutropin which, depending on the extent and type
of competition, could be material to the Company's total growth hormone sales.
Pursuant to the Agreement with Roche, Genentech transferred the rights to sell
its growth hormone in Canada to HLR during the fourth quarter of 1995, and
began receiving royalties on such sales. Other factors that may influence
future Protropin and Nutropin sales include: the availability of third party
reimbursement for the costs of such therapies and the outcome of litigation
involving the Company's patents for growth hormone and related processes.
Pulmozyme: The increase in the sales of Pulmozyme (launched in 1994) in 1995
is attributable to market launches in additional European countries and
continued adoption of the product by physicians to treat cystic fibrosis
patients. Pursuant to the Agreement with Roche, Genentech transferred rights
to sell Pulmozyme in Europe and Canada to HLR during the fourth quarter of 1995
and, instead of recording sales of Pulmozyme, began receiving royalties on such
sales. Additional factors that may influence future sales of Pulmozyme for the
management of cystic fibrosis include: the number and kinds of patients
benefiting from such therapy; the availability of third party reimbursement for
the costs of such therapies; physicians' personal experiences in the use and
results of the therapy; the development of alternate therapies for the
treatment and cure of cystic fibrosis; the development of additional
indications for using Pulmozyme; and the cost of Pulmozyme therapy.
Royalties, Contract and Other, and Interest Income Annual % Change
1995 1994 1993 95/94 94/93
_______________________________________________________________________________
Royalties $ 190.8 $ 126.0 $ 112.9 51% 12%
Contract and other 31.2 25.6 37.9 22 (32)
Interest income 60.5 42.7 41.5 42 3
The Company receives royalty payments from the sales of various health care
products. These payments have increased in each of the past three years
primarily due to increases in product sales by the Company's licensees and new
royalty arrangements. In 1995, the largest dollar increase was attributable to
the receipt and recognition of $30.0 million of royalty revenue relating to the
December 1994 settlement with Lilly regarding certain of the Company's patents.
In 1994, the largest dollar increase was attributable to royalties earned from
the sales of recombinant human insulin. As discussed above, HLR has been
granted options for licenses to use and sell certain of Genentech's products in
non-U.S. markets. As a result of this arrangement, the Company expects such
royalty revenue to increase in future years, although it is not certain for
which products HLR will exercise its option. Cash flows from royalty income
include non-dollar denominated revenues. The Company currently purchases simple
foreign currency put options (options) and enters into foreign currency forward
exchange contracts (forward contracts) to hedge these cash flows. All options
expire within the next two years. All forward contracts are less than 90 days
in duration, and there are no outstanding balances at the end of any quarter.
In 1996, the Company has entered into forward contracts with various durations
that will expire by the end of the year. In addition, the Company plans to
enter into new simple purchased put options that will expire within the next
five years to hedge non-U.S. dollar denominated royalties during this period.
Contract and other revenues increased in 1995 primarily due to $6.4 million of
gains recorded from sales of biotechnology equity securities. 1994 revenue
decreased compared to 1993 because 1993 included $18.2 million related to fixed
license fees receivable through 1996 from Schering Corporation and its
affiliates for a world-wide license to certain patented technology and
processes used to produce recombinant interferon alpha. Contract and other
revenues will continue to fluctuate due to variations in the timing of contract
benchmark achievements; the initiation of new contractual arrangements,
including the potential exercise of product options by HLR; and the conclusion
of existing arrangements.
Interest income was higher in 1995 due to a larger investment portfolio in 1995
and a higher average portfolio yield. In 1994, the increase was due to a
larger investment portfolio in 1994 compared to 1993, which more than offset
the decline in the average portfolio yield. The Company enters into interest
rate swaps as part of its overall strategy of managing the duration of its
investment portfolio. See the "Financial Instruments" footnote in the "Notes to
Consolidated Financial Statements" for further information.
Annual % Change
Costs and Expenses 1995 1994 1993 95/94 94/93
______________________________________________________________________________
Cost of sales $ 97.9 $ 95.8 $ 70.5 2% 36%
Research and
development 363.0 314.3 299.4 15 5
Marketing, general and
administrative 251.7 248.6 214.4 1 16
Special charge 25.0 - - - -
Interest expense 8.0 7.1 6.5 13 9
_________________________________________________________
Total costs
and expenses $ 745.6 $ 665.8 $ 590.8 12% 13%
% of revenues 81% 84% 91%
Cost of sales as % of
product sales 15% 16% 15%
R&D as % of revenues 40 40 46
MG&A as % of revenues 27 31 33
Cost of sales: Cost of sales in 1995 increased over 1994 due to higher product
sales. This increase was partly offset by a decrease in inventory reserves
provided, from $11.9 million in 1994 to $3.7 million in 1995. The 1995
reserves were primarily for expected product expiration of certain Nutropin and
Activase inventories. The reserves recorded in 1994 were primarily for the
likely expiration of Pulmozyme and Nutropin product prior to sale. These
products were launched in the beginning of 1994 and did not meet the Company's
initial expectations for sales that year. The increase in cost of sales in
1994 compared to 1993 was primarily due to increased product sales and the
$11.9 million addition to reserves discussed above.
Research and Development: The increase in R&D expenses in 1995 and 1994
reflects the Company's continued commitment to developing new products and new
indications for existing products. Overall increases resulted from the higher
level of activity and associated costs of products in the later stages of
clinical trials and the manufacture of products for clinical trials. Expenses
as a percentage of revenues were unchanged at 40% from 1994 to 1995. The
percentage declined in 1994 compared to 1993 due to increasing revenues
combined with the Company's disciplined approach to managing its research and
development investment.
To gain additional access to potential new products and technologies, the
Company has established research collaborations, including equity investments,
with companies developing technologies that fall outside the Company's research
focus and with companies having the potential to generate new products through
technology exchanges and investments. The Company has also entered into
product-specific collaborations to acquire development and marketing rights for
products. In March 1995, Genentech entered into a collaboration with IDEC
Pharmaceuticals Corp. (IDEC) to develop IDEC's CD20 monoclonal antibody for the
treatment of non-Hodgkin's B-cell lymphomas. A phase III clinical trial has
begun. In January 1996, HLR exercised its option, pursuant to the terms of the
Agreement, to IDEC-C2B8. In February 1996, Genentech expanded its
collaboration with IDEC to include IDEC-Y2B8, for the treatment of the more
severe forms of B-cell lymphomas. In February 1996, the Company agreed to
invest in Genenvax, Inc., a new company created to develop gp120, Genentech's
potential vaccine for the prevention of HIV. Genenvax will receive exclusive
rights to gp120. See the "Research and Development" footnote in the "Notes to
Consolidated Financial Statements" for a further description of these
collaborations.
Marketing, General and Administrative: Marketing, general and administrative
expenses in 1995 were comparable to the 1994 level of expenses. The increase
in 1994 compared to 1993 was primarily due to additional Activase marketing
expenses, Pulmozyme marketing costs in preparation for the anticipated U.S. and
European product launches in 1994, and increased growth hormone marketing
expenses in anticipation of future competition.
Special Charge: The Company recorded a special charge of $25.0 million in
1995, which includes $21.0 million related to the new merger Agreement with
Roche and $4.0 million associated with the resignation of the Company's former
President and Chief Executive Officer. The merger expenses include investment
banking fees, legal expenses, filing fees and other costs related to the
Agreement, as well as charges associated with the proposed settlement of
stockholder lawsuits filed after the transaction was announced.
Interest Expense: Interest expense in 1995, 1994, and 1993, net of amounts
capitalized, relates primarily to interest on the Company's 5% convertible
subordinated debentures. In 1995, it also includes interest on a $25.0 million
borrowing arrangement which commenced in February 1995 and was paid in December.
Income Before Taxes and Income Taxes 1995 1994 1993
_____________________________________________________________________________
Income before taxes $ 172.3 $ 129.6 $ 58.9
Income tax provision 25.8 5.2 -
Effective tax rate 15% 4% -
Deferred tax assets less
deferred tax liabilities $ 130.8 $ 118.6 $ 123.0
Valuation allowance (74.0) (84.4) (123.0)
________________________________
Total net deferred taxes $ 56.8 $ 34.2 $ -
================================
Approximately $30 million of the valuation allowance at December 31, 1995,
relates to the tax benefits of stock option deductions which will be credited
to additional paid-in capital when realized.
Realization of the net deferred taxes, future effective tax rates, and future
reversals of the valuation allowance (that is, recognition of deferred tax
assets) depend on future earnings from existing and new products and new
indications for existing products. The timing and amount of future earnings
will depend on continued success in marketing and sales of the Company's
current products, as well as scientific success, results of clinical trials and
regulatory approval of products under development.
The net increase in the effective tax rate from 1994 to 1995 was primarily
related to limitations on the utilization of existing carryforwards related to
the U.S. alternative minimum tax. Future effective tax rates are expected to
increase following the recognition of the balance of the Company's credit
carryforwards.
Annual % Change
Net Income 1995 1994 1993 95/94 94/93
_______________________________________________________________________________
Net income $ 146.4 $124.4 $ 58.9 18% 111%
Net income per share $ 1.21 $ 1.04 $ 0.50
LIQUIDITY AND CAPITAL RESOURCES 1995 1994 1993
_______________________________________________________________________________
Cash, cash equivalents, short-term investments
and long-term marketable debt and equity
securities $1,096.8 $ 920.9 $ 719.8
Working capital 812.0 776.6 694.6
Cash provided by (used in):
Operating activities 133.9 200.4 114.5
Investing activities (117.7) (322.3) (121.3)
Financing activities 54.1 71.2 49.9
Capital expenditures
(included in investing activities above) (70.2) (82.8) (87.5)
Current ratio 4.5:1 4.5:1 4.6:1
The Company believes that its cash, cash equivalents, and short-term and long-
term investments, together with funds provided by operations and leasing
arrangements, will be sufficient to meet its operating cash requirements,
including capital expenditures and the development of existing and new products
through internal research and development activities, selective product in-
licensing, research collaborations and equity investments.
Cash generated from operations, the maturity of investments and stock issuances
was used to purchase marketable securities and make capital additions in 1995.
Capital expenditures in 1995 primarily include costs incurred for additional
office buildings and enhancements to existing manufacturing facilities.
Capital expenditures decreased in 1995 compared to 1994 primarily due to the
completion in 1994 of a central process utility plant and additional
manufacturing facilities.
In 1995, the Company entered into an arrangement with a lessor for a new
manufacturing facility which will be subject to an operating lease and is
expected to become operational in three years.
ADDITIONAL PROSPECTIVE INFORMATION
Market Potential/Risk: Over the longer term, the Company's (and its partners')
ability to successfully market current products, expand their usage, and bring
new products to the marketplace will depend on many factors, including the
effectiveness and safety of the products, FDA and foreign regulatory agencies'
approvals for new products and new indications, and the degree of patent
protection afforded to particular products. 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.
Roche Holdings, Inc.: At December 31, 1995, Roche held approximately 64% of
the Company's outstanding equity securities. The Company expects to continue
to have material transactions with Roche, including royalty income, contract
development revenues, product sales and joint product development.
Foreign Exchange: The Company receives revenues from countries throughout the
world. As a result, risk exists that revenues may be impacted by changes in the
exchange rates between the U.S. dollar and foreign currencies. To mitigate this
risk, the Company hedges certain of these anticipated revenues as discussed in
the "Financial Instruments" footnote in the "Notes to Consolidated Financial
Statements."
Legal Proceedings: The Company is a party to various legal proceedings
including a stockholder suit involving the new Agreement with Roche and the
1990 merger with Roche; patent infringement cases; and various cases involving
product liability and other matters. See the "Legal Proceedings" footnote in
the "Notes to Consolidated Financial Statements" for further information.
Future Accounting Changes: In March 1995, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (FAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of," which requires the Company to review for impairment long-
lived assets, certain identifiable intangibles, and goodwill related to those
assets whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. In certain situations, an
impairment loss would be recognized. FAS 121 is effective for the Company's
1996 fiscal year. The Company is evaluating the impact of the new standard on
its financial position, results of operations, and cash flows and expects the
effect to be immaterial.
In October 1995, the FASB issued FAS 123 "Accounting for Stock-Based
Compensation" which also will be effective for the Company's 1996 fiscal year.
FAS 123 allows companies which have stock-based compensation arrangements with
employees to adopt a new fair-value basis of accounting for stock options and
other equity instruments, or to continue to apply the existing accounting rules
under APB Opinion 25 "Accounting for Stock Issued to Employees" but with
additional financial statement disclosure. The Company expects to continue to
account for stock-based compensation arrangements under APB Opinion 25,
therefore does not expect FAS 123 to have a material impact on its financial
position, results of operations, and cash flows.
REPORT OF MANAGEMENT
Genentech, Inc. is responsible for the preparation, integrity and fair
presentation of its published financial statements. The Company has prepared
the financial statements, presented on pages 41 to 62, in accordance with
generally accepted accounting principles. As such, the statements include
amounts based on judgments and estimates made by management. The Company also
prepared the other information included in the annual report and is responsible
for its accuracy and consistency with the financial statements.
The financial statements have been audited by the independent auditing firm,
Ernst & Young LLP, which was given unrestricted access to all financial records
and related data, including minutes of all meetings of stockholders, the Board
of Directors and committees of the Board. The Company believes that all
representations made to the independent auditors during their audit were valid
and appropriate. Ernst & Young LLP's audit report appears on page 63.
Systems of internal accounting controls, applied by operating and financial
management, are designed to provide reasonable assurance as to the integrity
and reliability of the financial statements and reasonable, but not absolute,
assurance that assets are safeguarded from unauthorized use or disposition, and
that transactions are recorded according to management's policies and
procedures. The Company continually reviews and modifies these systems, where
appropriate, to maintain such assurance. Through the Company's general audit
activities, the adequacy and effectiveness of the systems and controls are
reviewed and the resultant findings are communicated to management and the
Audit Committee of the Board of Directors.
The selection of Ernst & Young LLP as the Company's independent auditors has
been approved by the Company's Board of Directors and ratified by the
stockholders. An Audit Committee of the Board of Directors, composed of four
non-management directors, meets regularly with, and reviews the activities of,
corporate financial management, the general audit function and the independent
auditors to ascertain that each is properly discharging its responsibilities.
The independent auditors separately meet with the Audit Committee, with and
without management present, to discuss the results of their work, the adequacy
of internal accounting controls and the quality of financial reporting.
Arthur D. Levinson, Ph.D. Louis J. Lavigne, Jr. Bradford S. Goodwin
President and Senior Vice President and Vice President and
Chief Executive Officer Chief Financial Officer Controller
CONSOLIDATED STATEMENTS OF INCOME
(thousands, except per share amounts)
YEAR ENDED DECEMBER 31 1995 1994 1993
__________________________________________________________________________________
Revenues
Product sales $ 635,263 $ 601,064 $ 457,360
Royalties (including amounts
from related parties: 1995-$12,492;
1994-$8,454; 1993-$5,488) 190,811 126,022 112,872
Contract and other (including amounts
from related parties: 1995-$13,448;
1994-$17,106; 1993-$8,869) 31,209 25,556 37,957
Interest 60,562 42,748 41,560
_____________________________________
Total revenues 917,845 795,390 649,749
Costs and expenses
Cost of sales 97,930 95,829 70,514
Research and development (including
contract related: 1995-$17,124;
1994-$7,584; 1993-$4,235) 363,049 314,322 299,396
Marketing, general and administrative 251,653 248,604 214,410
Special charge (primarily merger related) 25,000 -- --
Interest 7,940 7,058 6,527
____________________________________
Total costs and expenses 745,572 665,813 590,847
Income before taxes 172,273 129,577 58,902
Income tax provision 25,841 5,183 --
____________________________________
Net income $146,432 $124,394 $ 58,902
====================================
Net income per share $ 1.21 $ 1.04 $ .50
====================================
Weighted average number of shares used
in computing per share amounts 121,220 119,465 117,106
====================================
<FN>
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
Increase (Decrease) in Cash and
Cash Equivalents
YEAR ENDED DECEMBER 31 1995 1994 1993
____________________________________________________________________________________________
Cash flows from operating activities:
Net income $ 146,432 $ 124,394 $ 58,902
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 58,421 53,452 44,003
Writedown of securities available-for-sale 6,609 12,590 -
Gain on sales of securities available-for-sale (7,432) - -
Deferred income taxes (22,655) (34,193) -
Loss on fixed asset dispositions
(including merger related in 1995) 1,032 5,510 1,652
Writedown of non-marketable equity securities 469 748 600
Gain on sale of a non-marketable equity security (703) - -
Changes in assets and liabilities:
Net cash flow from trading securities (50,014) (4,634) -
Receivables and other current assets (28,446) (11,937) (20,212)
Inventories 9,552 (18,475) (19,410)
Accounts payable, other current
liabilities and other long-term
liabilities 20,682 72,901 48,995
___________________________________
Net cash provided by operating activities 133,947 200,356 114,530
Cash flows from investing activities:
Purchases of securities held-to-maturity (682,396) (1,088,737) (564,855)
Proceeds from maturities of securities
held-to-maturity 924,345 877,139 535,089
Purchases of securities available-for-sale (353,118) (22,644) (8,222)
Proceeds from sales of securities available-
for-sale 101,591 - -
Purchases of non-marketable equity securities - (4,000) -
Proceeds from sale of a non-marketable equity
security 703 - -
Capital expenditures (70,166) (82,837) (87,461)
Proceeds from sale of fixed assets - - 26,316
Change in other assets (38,651) (1,198) (22,181)
____________________________________
Net cash used in investing activities (117,692) (322,277) (121,314)
Cash flows from financing activities:
Stock issuances 54,946 71,955 50,582
Reduction in long-term debt,
including current portion (871) (794) (721)
____________________________________
Net cash provided by financing activities 54,075 71,161 49,861
____________________________________
Increase (decrease) in cash and cash equivalents 70,330 (50,760) 43,077
Cash and cash equivalents at beginning of year 66,713 117,473 74,396
____________________________________
Cash and cash equivalents at end of year $137,043 $ 66,713 $ 117,473
====================================
Supplemental cash flow data:
Cash paid during the year for:
Interest, net of portion capitalized $ 7,917 $ 7,058 $ 6,527
Income taxes 44,699 4,099 2,194
<FN>
Non-cash activity: Income tax benefits of $7,204 in 1995 and $26,038 in 1994 realized from
employee stock option exercises were recorded as an increase in stockholders' equity.
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
DECEMBER 31 1995 1994
________________________________________________________________________________
Assets:
Current assets:
Cash and cash equivalents $ 137,043 $ 66,713
Short-term investments 603,296 652,461
Accounts receivable (including amounts from
related parties: 1995-$19,281;1994-$13,184;
less allowances of: 1995-$6,672;1994-$4,422) 172,160 146,267
Inventories 93,648 103,200
Prepaid expenses and other current assets 39,267 28,475
______________________________
Total current assets 1,045,414 997,116
Long-term marketable securities 356,475 201,726
Property, plant and equipment, at cost:
Land 57,313 55,998
Buildings 258,717 245,871
Equipment 383,387 331,392
Leasehold improvements 12,508 11,988
Construction in progress 60,480 55,299
______________________________
772,405 700,548
Less: accumulated depreciation 268,751 215,255
______________________________
Net property, plant and equipment 503,654 485,293
Other assets 105,452 60,989
______________________________
Total assets $ 2,010,995 $ 1,745,124
==============================
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable $ 37,101 $ 30,963
Accrued compensation 36,945 36,939
Accrued royalties 23,159 25,864
Accrued marketing and promotion costs 18,863 27,463
Accrued clinical and other studies
(including amounts due to related
parties: 1995-$6,331;1994-$0) 33,621 36,277
Income taxes payable 14,329 17,839
Other accrued liabilities (including amounts
due to related parties: 1995-$2,414;
1994-$2,280) 69,068 44,283
Current portion of long-term debt 358 871
_____________________________
Total current liabilities 233,444 220,499
Long-term debt 150,000 150,358
Other long-term liabilities 25,504 25,483
_____________________________
Total liabilities 408,948 396,340
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.02 par value; authorized
100,000,000 shares, none issued - -
Special common stock, $.02 par value;
authorized 100,000,000 shares, outstanding:
1995 - 42,646,958; No shares authorized or
outstanding in 1994 853 -
Redeemable common stock, $.02 par value;
no shares authorized or outstanding in 1995;
1994-50,105,925 shares outstanding - 1,002
Common stock, $.02 par value; authorized
200,000,000 shares, outstanding:
1995-76,621,009; 1994-67,133,409 1,532 1,343
Additional paid-in capital 1,281,640 1,207,720
Retained earnings (since October 1, 1987
quasi-reorganization in which a deficit
of $329,457 was eliminated) 263,749 129,127
Net unrealized gain on securities
available-for-sale 54,273 9,592
_______________________________
Total stockholders' equity 1,602,047 1,348,784
_______________________________
Total liabilities and stockholders' equity $ 2,010,995 $ 1,745,124
===============================
See notes to consolidated financial statements.
Consolidated STATEMENT OF STOCKHOLDERS' EQUITY
(thousands)
1995 1994 1993
___________________ ___________________ ___________________
Shares Amount Shares Amount Shares Amount
________ ________ ________ ________ ________ ________
Special common stock
Beginning balance - - - - - -
Issuance of stock upon exercise
of options and warrants 298 $ 6 - - - -
Conversion of common stock
to special stock 42,349 847 - - - -
_______________________________________________________________
Ending balance 42,647 853 - - - -
_______________________________________________________________
Redeemable common stock
Beginning balance 50,106 1,002 47,690 $ 954 45,744 $ 915
Issuance of stock upon exercise
of options and warrants 679 14 1,905 38 1,385 28
Issuance of stock under
employee stock plan 322 6 511 10 561 11
Conversion of redeemable
common stock to common stock (51,107) (1,022) - - - -
_______________________________________________________________
Ending balance - - 50,106 1,002 47,690 954
_______________________________________________________________
Common stock
Beginning balance 67,133 1,343 67,133 1,343 67,133 1,343
Issuance of stock upon exercise
of options and warrants 512 10 - - - -
Issuance of stock under
employee stock plan 218 4 - - - -
Conversion of redeemable
common stock to common stock 51,107 1,022 - - - -
Conversion of common stock
to special common stock (42,349) (847) - - - -
_______________________________________________________________
Ending balance 76,621 1,532 67,133 1,343 67,133 1,343
_______________________________________________________________
Additional paid-in capital
Beginning balance 1,207,720 1,070,121 998,962
Issuance of stock upon exercise
of options and warrants 37,087 56,133 37,125
Issuance of stock under
employee stock plan 17,819 15,774 13,418
Income tax benefits
realized from employee
stock option exercises 7,204 26,038 -
Tax benefits arising prior
to quasi-reorganization 11,810 39,654 20,616
__________ __________ ___________
Ending balance 1,281,640 1,207,720 1,070,121
__________ __________ ___________
Retained earnings
Beginning balance 129,127 44,387 6,101
Net income 146,432 124,394 58,902
Tax benefits arising prior
to quasi-reorganization (11,810) (39,654) (20,616)
__________ __________ ___________
Ending balance 263,749 129,127 44,387
__________ __________ ___________
Net unrealized gain on securities
Beginning balance 9,592 - -
Net unrealized gain on
securities available-for-sale 44,681 9,592 -
__________ __________ __________
Ending balance 54,273 9,592 -
__________ __________ __________
Total stockholders' equity $1,602,047 $1,348,784 $1,116,805
========== ========== ==========
<FN>
See note to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business: Genentech, Inc. (the Company) is a biotechnology
company that discovers, develops, manufactures and markets human
pharmaceuticals produced by recombinant DNA technology for significant unmet
medical needs. The Company manufactures and markets five products directly in
the United States and to F. Hoffmann-La Roche Ltd. (HLR) for sales outside of
the United States, and receives royalties from sales of five other products
which originated from the Company's technology.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and all significant subsidiaries and collaborations.
Material intercompany balances and transactions are eliminated.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents: The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents.
Short-term Investments and Long-term Marketable Securities: The Company
invests its excess cash balances in short-term and long-term marketable
securities. These investments primarily include corporate notes, certificates
of deposit and treasury notes.
On January 1, 1994, the Company adopted Statement of Financial Accounting
Standards (FAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The effect of adopting this new standard was not material to net
income. FAS 115 requires that all investment securities be classified into one
of three categories: held-to-maturity, available-for-sale, or trading.
Securities are considered held-to-maturity when the Company has the positive
intent and ability to hold the securities to maturity. These securities are
recorded as either short-term investments or long-term marketable securities on
the balance sheet depending upon their contractual maturity date. Held-to-
maturity securities are stated at amortized cost, adjusted for amortization of
premiums and accretion of discounts. Securities are considered trading when
bought principally for the purpose of selling in the near term. These
securities are recorded as short-term investments and are carried at market
value. Unrealized holding gains and losses on trading securities are included
in interest income. Securities not classified as held-to-maturity or as trading
are considered available-for-sale. These securities are recorded as long-term
marketable securities and are carried at market value with unrealized gains and
losses included in stockholders' equity. If a decline in fair value below cost
is considered other than temporary, such securities are written down to
estimated fair value with a charge to marketing, general and administrative
expenses. Prior to adopting FAS 115, marketable debt securities were carried at
amortized cost that approximated fair value. Marketable equity securities were
carried at the lower of cost or market. The cost of all securities sold is
based on the specific identification method.
Property, Plant and Equipment: The costs of buildings and equipment are
depreciated using the straight-line method over the following estimated useful
lives of the assets: buildings - 25 years; certain manufacturing equipment -
15 years; other equipment - 4 or 8 years; leasehold improvements - length of
applicable lease. Expenditures for maintenance and repairs are expensed as
incurred. Interest on construction-in-progress of $1.5 million in 1995, $0.6
million in 1994, and $1.3 million in 1993 has been capitalized and is included
in property, plant and equipment.
Patents: As a result of its research and development (R&D) programs, the
Company owns or is in the process of applying for patents in the United States
and other countries which relate to products and processes of significant
importance to the Company. Costs of patents and patent applications are
capitalized and amortized for financial reporting purposes on a straight-line
basis over their estimated useful lives of approximately 12 years.
Other Intangible Assets: In 1995, the Company repurchased from a licensee for
approximately $25 million the right to sell Activase in Canada. The asset is
being amortized on a straight-line basis over ten years, and is expected to be
recovered through royalties received from HLR on their product sales in Canada.
Contract Revenue: Contract revenue for R&D is recorded as earned based on the
performance requirements of the contract. In return for contract payments,
contract partners may receive certain marketing and manufacturing rights,
products for clinical use and testing, or R&D services.
Royalty Expenses: Royalty expenses directly related to product sales are
classified in cost of sales. Other royalty expenses, relating to royalty
revenue, totaled $30.2 million, $26.5 million and $22.6 million in 1995, 1994
and 1993, respectively, and are classified in marketing, general and
administrative expenses.
Advertising Expenses: The Company expenses the costs of advertising as
incurred. Advertising expenses for the years ended December 31, 1995, 1994 and
1993 were $29.2 million, $44.2 million and $45.7 million, respectively.
Income Taxes: The Company accounts for income taxes in accordance with FAS
109, "Accounting for Income Taxes," which requires the asset and liability
approach for the financial accounting and reporting for income taxes.
Accounting for operating loss and tax credit carryforwards arising prior to the
date of the Company's quasi-reorganization in 1987 is more fully described in
the "Quasi-Reorganization" footnote.
Net Income Per Share: Net income per share is computed based on the weighted
average number of shares of the Company's special common stock, redeemable
common stock, common stock and common stock equivalents, if dilutive.
Financial Instruments: Certain of the Company's revenues are earned outside of
the United States. Because the Company's foreign currency denominated revenues
exceed its foreign currency denominated expenses, risk exists that net income
may be impacted by changes in the exchange rates between the U.S. dollar and
foreign currencies. To mitigate this risk, the Company purchases simple foreign
currency put options (options) with expiration dates and amounts of currency
that are the same as a portion of probable revenues so that the adverse impact
of movements in currency exchange rates on the non-dollar denominated revenues
will be largely offset by an associated increase in the value of the options.
At the time the options are purchased they have little or no intrinsic value.
Realized and unrealized gains related to the options are deferred until the
designated hedged revenues are recorded. The associated costs, which are
deferred and classified as other current assets, are amortized over the term of
the options and recorded as a reduction of the hedged revenues. The Company
also enters into foreign currency forward contracts as hedging instruments.
All forward contracts are less than 90 days in duration, and there are no
outstanding balances at the end of any quarter. These contracts are recorded
at fair value, and any gains and losses from these contracts are recorded in
the income statement with the related hedged revenues. Financial instruments,
such as forward contracts, not qualifying as hedges of firm commitments, if
any, are marked to market with gains or losses recorded in income as they
occur.
Interest income is subject to fluctuations as U.S. interest rates change. To
manage this risk, the Company periodically establishes duration targets for its
investment portfolio that reflect its anticipated use of cash and fluctuations
in market rates of interest. Interest rate swaps have been used and may be used
in the future to adjust the duration of the investment portfolio in order to
meet these duration targets. Interest rate swaps are contracts in which two
parties agree to swap future streams of payments over a specified period. By
designating a swap with a pool of short-term securities equal in size to the
notional amount of the swap, an instrument with an effective interest rate and
maturity equal to the term of the swap is created. The characteristics of the
instrument (including interest rate, maturity and fair value) are similar to
the characteristics of a high grade corporate security which could be purchased
at the same time the instrument is created. LIBOR payments received on swaps
are highly correlated to interest collection on short-term investments.
Increases (decreases) in swap variable payments caused by rising (falling)
interest rates will be essentially offset by increased (reduced) interest
income on the related short-term investments, while the fixed rate payments
received from the swap counterparty establishes the Company's interest income.
Net payments made or received on swaps are included in interest income as
adjustments to the interest received on invested cash. Amounts deferred on
terminated swaps are classified as other assets and are amortized to interest
income over the original contractual term of the swaps by a method that
approximates the level yield method.
401(k) Plan: The Company's 401(k) Plan covers substantially all its U.S.
employees. Under the 401(k) Plan, eligible employees may contribute up to 15%
of their eligible compensation, subject to certain Internal Revenue Service
restrictions. The Company matches a portion of employee contributions, up to a
maximum of 4% of each employee's eligible compensation. The match is effective
December 31 of each year and is fully vested when made. During 1995, 1994, and
1993, the Company provided $5.6 million, $5.2 million, and $4.4 million,
respectively, for the Company match under the 401(k) Plan.
Future Accounting Changes: In March 1995, the Financial Accounting Standards
Board (FASB) issued FAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," which requires the Company
to review for impairment long-lived assets, certain identifiable intangibles,
and goodwill related to those assets whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In certain situations, an impairment loss would be recognized.
FAS 121 is effective for the Company's 1996 fiscal year. The Company is
evaluating the impact of the new standard on its financial position, results of
operations, and cash flows, and expects the effect to be immaterial.
In October 1995, the FASB issued FAS 123 "Accounting for Stock-Based
Compensation" which also will be effective for the Company's 1996 fiscal year.
FAS 123 allows companies which have stock-based compensation arrangements with
employees to adopt a new fair-value basis of accounting for stock options and
other equity instruments, or to continue to apply the existing accounting rules
under APB Opinion 25 "Accounting for Stock Issued to Employees" but with
additional financial statement disclosure. The Company expects to continue to
account for stock-based compensation arrangements under APB Opinion 25,
therefore does not expect FAS 123 to have a material impact on its financial
position, results of operations and cash flows.
SIGNIFICANT CUSTOMER AND GEOGRAPHIC INFORMATION
One major customer in 1995, 1994 and 1993 contributed 10% or more of the
Company's total revenues. The portions of revenues attributable to this
customer were 18% in 1995, 21% in 1994 and 26% in 1993. This customer
distributes Protropin, Nutropin, Pulmozyme and Actimmune through its extensive
branch network, and is then reimbursed through a variety of sources. A second
customer, a wholesale distributor of all of the Company's products, contributed
11% of revenues in both 1995 and 1994.
Approximate foreign sources of revenues were as follows (millions):
1995 1994 1993
_____________________________________________________
Europe $112.0 $81.8 $41.0
Asia 23.6 19.5 22.2
Canada 25.0 9.7 12.2
The Company currently sells primarily to distributors and hospitals throughout
the United States, performs ongoing credit evaluations of its customers'
financial condition and generally requires no collateral. In 1995, 1994 and
1993 the Company did not record any material additions to, or losses against,
its provision for doubtful accounts.
RESEARCH AND DEVELOPMENT ARRANGEMENTS
To gain access to potential new products and technologies, the Company has
established research collaborations, including the acquisition of both
marketable and non-marketable equity investments, with companies developing
technologies that fall outside the Company's research focus and with companies
having the potential to generate new products through technology exchanges and
investments. Potential future payments may be due to selective collaborative
partners if the partners achieve certain benchmarks as defined in the
collaborative agreements. The Company has also entered into product-specific
collaborations to acquire development and marketing rights for products. In
addition to the collaboration with HLR discussed in the "Related Parties"
footnote, in March 1995 the Company entered into a collaboration with IDEC
Pharmaceuticals Corp. (IDEC) to develop IDEC's anti-CD20 monoclonal antibody,
IDEC-C2B8, for the treatment of non-Hodgkin's B-cell lymphomas. A phase III
clinical trial has begun. Under the terms of the agreement, Genentech and IDEC
have agreed to copromote IDEC-C2B8 in the United States and Canada, with IDEC
receiving a share of the profits. Genentech has commercialization rights
throughout the rest of the world except Japan. Genentech exercised its option
rights regarding Asia (except Japan) during the fourth quarter of 1995. In
conjunction with the Agreement with Roche, Genentech has granted an option to
HLR to use and sell IDEC-C2B8 in all countries, except the United States, in
which Genentech has rights under its agreement with IDEC. HLR exercised that
option in January 1996. IDEC will receive royalties on sales outside the
United States and Canada. In connection with the collaboration, Genentech
provided $9 million in preferred equity investments and licensing fees, and
will provide $17.5 million in additional equity funding prior to U.S. approval
($2.5 million of which was provided in 1995), and up to $30.5 million in
milestone and option payments. In February 1996, Genentech expanded its
collaboration with IDEC to include IDEC-Y2B8, a complementary radioisotopic
version of the drug, for the treatment of more severe forms of B-cell
lymphomas. In February 1996, the Company agreed to invest in Genenvax, Inc.,
a new company created to develop gp120, Genentech's potential vaccine for the
prevention of HIV. Genentech will provide an initial equity investment of $1
million and then an additional $1 million along with other private investors.
After the close of private financing, Genentech will have the right to maintain
a 25% equity investment in Genenvax. Genenvax will receive exclusive rights to
gp120.
SPECIAL CHARGE
The $25.0 million special charge in 1995 includes $21.0 million related to the
merger agreement with Roche Holdings, Inc. (Roche) discussed in the footnote
"Merger and New Agreement with Roche Holdings, Inc.," and $4.0 million of
charges associated with the resignation of the Company's former President and
Chief Executive Officer. The merger expenses include legal expenses,
investment banking fees, filing fees and other costs related to the Agreement,
as well as charges associated with the proposed settlement of stockholder
lawsuits filed after the transaction was announced.
INCOME TAXES
The income tax provision consists of the following amounts (thousands):
1995 1994 1993
_________________________________________________________________
Current:
Federal $ 43,997 $ 38,331 $ -
State 4,467 1,016 -
Foreign 32 29 -
_____________________________________
Total current 48,496 39,376 -
_____________________________________
Deferred:
Federal (12,319) (34,193) -
State (10,336) - -
_____________________________________
Total deferred (22,655) (34,193) -
_____________________________________
Total $ 25,841 $ 5,183 $ -
=====================================
Actual current tax liabilities are lower than reflected above by $7.2 million
in 1995 and $26.0 million in 1994 due to employee stock option related tax
benefits which were credited to stockholders' equity.
A reconciliation between the Company's effective tax rate and the U.S.
statutory rate follows:
1995 Amount Tax Rate
(thousands) 1995 1994 1993
______________________________________________________________________________
Tax at U.S. statutory rate $ 60,296 35.0% 35.0% 35.0%
Operating losses utilized - - (45.6) (35.0)
Research and development
credits realized (27,312) (15.9) - -
Alternative minimum tax liability - - 24.6 -
Adjustment of deferred tax assets
valuation allowance (22,655) (13.1) (26.4) -
Foreign losses not benefited 4,842 2.8 15.0 -
State taxes 4,467 2.6 0.8 -
Other 6,203 3.6 0.6 -
________________________________________________
Income tax provision $ 25,841 15.0% 4.0% -
================================================
The components of deferred taxes consist of the following at December 31
(thousands):
1995 1994
_______________________________________________________________________________
Deferred tax liabilities:
Depreciation $ 50,010 $ 42,109
Other 3,109 19,928
__________________________
Total deferred tax liabilities 53,119 62,037
Deferred tax assets:
Federal net operating loss (NOL) carryforward - 43,027
Federal credit carryforward 107,350 86,804
Reserves not currently deductible 39,433 31,688
State credit carryforward 32,147 11,324
Other 5,058 7,839
__________________________
Total deferred tax assets 183,988 180,682
Valuation allowance (74,021) (84,452)
__________________________
Total net deferred tax assets 109,967 96,230
__________________________
Total net deferred taxes $ 56,848 $ 34,193
==========================
Total tax credit carryforwards of $139 million expire in the years 1996 through
2010, except for $37 million of alternative minimum tax credits which have no
expiration date. Approximately $30 million of the valuation allowance at
December 31, 1995 reflected above relates to the tax benefits of stock option
deductions which will be credited to additional paid-in capital when realized.
The valuation allowance decreased by $10.4 million in 1995 and $38.5 million in
1994. Realization of net deferred taxes, as well as future reversals of the
valuation allowance (that is, recognition of deferred tax assets), depend on
future earnings from existing and new products and new indications for existing
products. The timing and amount of future earnings will depend on continued
success in marketing and sales of the Company's current products, as well as
the scientific success, results of clinical trials and regulatory approval of
products under development.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
a weighted-average approach which approximates the first-in, first-out method.
Inventories at December 31, 1995 and 1994 are summarized below (thousands):
1995 1994
__________________________________________________________________
Raw materials and supplies $ 12,808 $ 13,145
Work in process 67,239 76,974
Finished goods 13,601 13,081
______________________
Total $ 93,648 $103,200
======================
The decrease in inventories in 1995 compared to 1994 is primarily attributable
to a decrease in the inventories of Pulmozyme.
INVESTMENT SECURITIES
Securities classified as trading, available-for-sale and held-to-maturity at
December 31, 1995 are summarized below. Estimated fair value is based on quoted
market prices for these or similar investments.
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1995 Cost Gains Losses Value
______________________________________________________________________________
(thousands)
TOTAL TRADING SECURITIES
(carried at estimated
fair value) $135,325 $ 1,314 $ (1,328) $135,311
==============================================
SECURITIES AVAILABLE-FOR-SALE
(carried at estimated
fair value):
Equity securities $ 22,423 $ 45,894 $ (350) $ 67,967
U.S. Treasury securities
and obligations of other
U.S. government agencies
maturing within:
1 year 7,503 17 - 7,520
1-5 years 162,322 7,103 - 169,425
5-10 years 83,188 437 - 83,625
Other debt securities
maturing within
1-5 years 29,868 1,172 - 31,040
----------------------------------------------
TOTAL AVAILABLE-FOR-SALE $305,304 $ 54,623 $ (350) $359,577
==============================================
SECURITIES HELD-TO-MATURITY*
(carried at amortized cost)
maturing within 1 year:
U.S. Treasury securities
and obligations of other
U.S. government agencies $219,267 $ 318 $ (53) $219,532
Other debt securities 236,870 95 (297) 236,668
______________________________________________
TOTAL HELD-TO-MATURITY $456,137 $ 413 $ (350) $456,200
==============================================
* Interest rate swap arrangements are used to modify the duration of certain
held-to-maturity securities. See "Financial Instruments" footnote for
further information.
The carrying value of all investment securities held at December 31, 1995 and
1994 is summarized below (thousands):
Security 1995 1994
_______________________________________________________________________________
Trading securities $135,311 $ 85,297
Securities available-for-sale maturing within one year 7,520 -
Securities held-to-maturity maturing within one year 456,137 559,916
Accrued interest 4,328 7,248
-------- --------
Total short-term investments $603,296 $652,461
======== ========
Securities available-for-sale maturing within 1-10 years $352,057 $ 35,660
Securities held-to-maturity maturing within 1-3 years - 164,429
Accrued interest 4,418 1,637
-------- --------
Total long-term marketable securities $356,475 $201,726
======== ========
In 1995, proceeds from sales of available-for-sale securities totaled $101.6
million; gross realized gains totaled $7.6 million and gross realized losses
totaled $0.2 million. During 1994, no available-for-sale securities were sold.
The Company recorded charges in 1995 and 1994 of $6.6 million and $12.6
million, respectively, to write-down certain available-for-sale biotechnology
equity securities for which the decline in fair value below cost was other than
temporary.
During the year ended December 31, 1995, the unrealized holding losses on
trading securities included in net income were not material.
Marketable debt securities held by the Company are issued by a diversified
selection of institutions with strong credit ratings. The Company's investment
policy limits the amount of credit exposure with any one institution. These
debt securities are generally not collateralized. The Company has not
experienced any material losses due to credit impairment on its investments in
marketable debt securities in the years 1995, 1994 and 1993.
FINANCIAL INSTRUMENTS
Foreign Currency Instruments: As discussed above, to hedge anticipated non-
dollar denominated net revenues, the Company currently purchases simple foreign
currency put options (options) and enters into foreign currency forward
exchange contracts (forward contracts). All forward contracts are less than 90
days in duration, and there are no outstanding balances at the end of any
quarter. At December 31, 1995 and 1994, the Company had hedged approximately
80% and 85%, respectively, of net foreign revenues anticipated within 12 months
and 50% and 35%, respectively, of net foreign revenues anticipated in the
following 12 months. At December 31, 1995 and 1994, the notional amount of the
options totaled $72.8 million and $78.3 million, respectively, and consisted of
the following currencies: Australian dollars, Canadian dollars, German marks,
Spanish pesetas, French francs, British pounds, Italian lira, Japanese yen, and
Swedish krona. All option contracts mature within the next two years. The fair
value of the options, which is based on exchange rates and market conditions at
December 31, 1995 and 1994, totaled $6.3 million and $1.6 million,
respectively. Forward contracts open at December 31, 1994 were closed out by
entering into offsetting contracts with the counterparty, so that the net
notional amount denominated in foreign currencies was zero. At December 31,
1994, the U.S. dollar equivalent of the notional amount of the forward sell
contracts totaled $28.3 million; the forward buy contracts totaled $29.8
million. The difference, an unrealized loss of $1.5 million, was recorded as a
reduction of net income in 1994 as a charge to marketing, general and
administrative expenses. At December 31, 1995, the U.S. dollar equivalent of
the notional amount of the remaining forward sell contracts was $6.0 million,
and the remaining forward buy contracts totaled $6.2 million.
Credit exposure is limited to the unrealized gains on these contracts. All
agreements are with a diversified selection of institutions with strong credit
ratings which minimizes risk of loss due to nonpayment from the counterparty.
The Company has not experienced any material losses due to credit impairment of
its foreign currency instruments.
Interest Rate Swaps: The Company enters into interest rate swaps (swaps) as
part of its overall strategy of managing the duration of its cash portfolio.
For each swap, the Company receives interest based on fixed rates and pays
interest to counterparties based on floating rates (three or six month LIBOR)
on a notional principal amount. By designating a swap with a pool of short-
term securities equal in size to the notional amount of the swap, an instrument
with an effective interest rate and maturity equal to the term of the swap is
created. LIBOR payments received on swaps are highly correlated to interest
collections on short-term investments. The use of swaps in this manner
generates net interest income on the swap and associated pool of short-term
securities equivalent to interest income that would be earned from a high grade
corporate security of the same maturity as the swap, while reducing credit risk
(there is no principal invested in a swap). The Company's credit exposure on
swaps is limited to the value of the interest rate swaps that have become
favorable to the Company and any net interest earned but not yet received. The
Company's swap counterparties have strong credit ratings which minimize the
risk of non-performance on the swaps. The Company has not experienced any
material losses due to credit impairment. The Company's credit exposure on
swaps as of December 31, 1995 and 1994 was $24.1 million and $19.9 million,
respectively. The carrying amount of the swaps, which reflects the net
interest accrued for such swaps, totaled $7.2 million and $6.2 million at
December 31, 1995 and 1994, respectively, and is included in accounts
receivable.
The Company targets the average maturity of its investment portfolio (including
swaps) based on its anticipated use of cash and fluctuations in the market
rates of interest. The maturity of the investment portfolio (including swaps)
ranges from overnight funds used for near-term working capital purposes to
investments maturing within the next one to ten years for future working
capital, capital expenditures, strategic investments and debt repayment. The
Company gradually increased the average effective maturity of its investment
portfolio (including swaps) from 1.9 years at December 31, 1994, to 2.7 years
at December 31, 1995, to better match the duration of the portfolio to expected
cash needs.
The notional amount of each swap is equal to the amount of designated high
quality short-term investments which either mature or reprice within the next
six months. The investments include U.S. Treasury securities, U.S. government
agency securities, commercial paper and corporate debt obligations. Swaps are
used to extend the maturity of the investment portfolio; no speculative
activity occurs.
For the years ended December 31, 1995 and 1994, the weighted average rate
received on swaps was 7.29% and 6.30%, respectively, and the weighted average
rate paid on swaps was 6.56% and 4.81%, respectively. Net interest income
(loss) from swaps, including amortization of net losses on terminated swaps,
totaled ($0.7) million in 1995 and $4.3 million in 1994.
During 1995 and 1994, to reduce the average effective maturity of its
portfolio, the Company terminated certain swap agreements prior to maturity and
is amortizing the realized gains and losses over the original contractual term
of the swaps as a reduction of interest income. At December 31, 1995, net
losses of $2.4 million remained unamortized; $1.7 million will be recognized in
1996 and $0.7 million will be recognized during the following two years.
The tables below outline specific information for the swaps outstanding at
December 31, 1995 and 1994. The fair value is based on market prices of similar
agreements. Dollars are in millions.
Interest Rate Swaps Short-term Investments
___________________________ _______________________________
Fixed Average
Rates Variable Effective
Notional To Be Rates To Carrying Average Interest
December 31, 1995: Amounts Received Be Paid* Value Maturity** Rate
_____________________________________________________________________________________
Swaps matched
to investments
to meet maturity
target comparable
to outstanding debt 3 or 6
[Maturing on: 7.68%- month
1/2/02] $150 7.71% LIBOR $150 118 days 5.52%
Swaps matched to
other investments
to meet specific
maturity targets 3 or 6
[Ending dates: 6.09%- month
8/12/97 - 9/20/99] 80 7.20% LIBOR 80 93 days 5.85%
Other short-term
investments - 373
________ ________
Total $230 $603
======== ========
December 31, 1994:
____________________
Swaps matched
to investments
to meet maturity
target comparable
to outstanding debt 3 or 6
[Maturing on: 7.68%- month
1/2/02] $150 7.92% LIBOR $150 84 days 5.45%
Swaps matched to
other investments
to meet specific
maturity targets 3 or 6
[Ending dates: 4.08%- month
12/29/95 - 9/20/99] 180 7.20% LIBOR 180 35 days 5.34%
Other short-term
investments - 322
________ ________
Total $330 $652
======== ========
<FN>
* 3 and 6-month LIBOR rates are reset every 3 or 6 months. At December 31,
1995, the 3-month LIBOR rate was 5.6% and the 6-month LIBOR rate was 5.5%. At
December 31, 1994, the 3-month LIBOR rate was 6.5% and the 6-month LIBOR rate
was 7.0%.
** Average maturity reflects either the maturity date or, for a floating
investment, the next reset date.
Financial Instruments Held for Trading Purposes: As part of its overall
investment strategy, in 1994 the Company contracted with two external money
managers to manage part of its investment portfolio. One portfolio, which had a
carrying value of $34.9 million at December 31, 1995 and $31.0 million at
December 31, 1994, consisted of both U.S. dollar and non-dollar denominated
investments. To hedge the non-dollar denominated investments, the money manager
enters into forward contracts. The fair value at December 31, 1995 and 1994, of
the forward contracts totaled $0.1 million and ($0.5) million, respectively.
The average fair value during 1995 and 1994 totaled $0.1 million and ($0.5)
million, respectively. Net realized and unrealized trading gains on the
portfolio totaled approximately $3.8 million in 1995 and $0.4 million in 1994,
and are included in interest income. Counterparties have strong credit ratings
which minimizes the risk of non-performance from the counterparties.
Summary of Fair Values: The table below summarizes the carrying value and fair
value at December 31, 1995 and 1994, of the Company's financial instruments.
The fair value of the long-term debt was estimated based on the quoted market
price at year end.
1995 1994
___________________ __________________
Carrying Fair Carrying Fair
Financial Instrument Value Value Value Value
_____________________________________________________________________________
(thousands)
Assets:
Investment securities
(including accrued interest
and traded forward contracts) $959,771 $959,834 $854,187 $855,060
Options 2,345 6,300 1,646 1,600
Outstanding swaps 7,194 23,940 6,165 (2,044)
Liabilities:
Short-term and long-term
debt 150,358 147,750 151,229 125,250
Forward contracts 237 237 1,500 1,500
LONG-TERM DEBT
Long-term debt consists of the following (thousands):
1995 1994
_______________________________________________________________________________
Convertible subordinated debentures, interest at 5%,
due in 2002 $ 150,000 $ 150,000
Mortgage note payable on buildings and land,
interest at 9.5%, due 1996 358 1,229
______________________
150,358 151,229
Less current maturities 358 871
______________________
Total long-term debt $ 150,000 $ 150,358
======================
Convertible subordinated debentures are convertible at the option of the holder
into shares of the Company's special common stock at a conversion price of
$74 in principal amount of the debenture. Upon conversion, the holder receives,
for each $74 in principal amount of the debenture converted, one-half share of
special common stock and $18 in cash. The $18 in cash is reimbursed by Roche to
the Company. Generally, the Company may redeem the debentures until maturity.
LEASES, COMMITMENTS AND CONTINGENCIES
Future minimum lease payments under operating leases at December 31, 1995 are
as follows (thousands):
______________________________________________________________________
1996 $ 6,028
1997 2,374
1998 1,829
1999 2,000
2000 2,000
Thereafter 5,833
_________
Total minimum lease payments $20,064
=========
The Company leases various real property under operating leases that generally
require the Company to pay taxes, insurance and maintenance. Rent expense was
approximately $9.5 million, $6.5 million and $5.1 million for the years 1995,
1994 and 1993 respectively. Sublease income was not material in each year
presented.
Under three of the lease agreements, the Company has an option to purchase the
properties at an amount that does not constitute a bargain. Alternatively, the
Company can cause the property to be sold to a third party. The Company is
contingently liable, under residual value guarantees, for approximately $119
million. The Company also is required to maintain certain financial ratios and
is limited to the amount of additional debt it can assume. Securities with a
carrying amount of $74 million have been pledged as collateral with regards to
one of the three leases.
Pursuant to its research and development collaboration agreement with Scios
Nova, Inc. (Scios Nova), the Company established a line of credit for $30
million that Scios Nova may draw down at Scios Nova's discretion through 2002.
This commitment is supported through December 31, 1997, by a bank letter of
credit under which Scios Nova may draw up to $30 million directly from the
bank, with immediate repayment of the funds due to the bank by the Company.
Amounts drawn by Scios Nova under the bank letter of credit or directly from
the Company are repayable in the form of cash or Scios Nova common stock (at
the average market price over the thirty day period before the date of
repayment) at Scios Nova's option any time through December 30, 2002. Interest
on amounts borrowed by Scios Nova accrue to the Company at the prime rate of
interest. At December 31, 1995, no amounts were drawn.
MERGER AND NEW AGREEMENT WITH ROCHE HOLDINGS, INC.
The Company's merger (Merger) with a wholly owned subsidiary of Roche Holdings,
Inc. (Roche) was consummated on September 7, 1990. The Company's stockholders
of record on that date received, for each share of common stock that they
owned, $18 in cash from Roche and one-half share of newly issued redeemable
common stock from the Company. In the Merger, Roche acquired one half of the
Company's outstanding common stock for $1,537.2 million. The redeemable common
stock was substantially identical to the common stock previously held by
stockholders, except that it was redeemable by the Company at the election of
Roche. Roche had the right to require the Company to exercise its redemption
right, providing it did so for all shares of outstanding redeemable common
stock. The redemption right was not exercised and expired on June 30, 1995.
After the close of business on that date, each share of redeemable common stock
automatically converted to one share of Genentech common stock.
On October 25, 1995, the Company's non-Roche stockholders approved a new
agreement (the Agreement) with Roche. Each share of the Company's common
stock not held by Roche or its affiliates on that date automatically converted
to one share of callable putable common stock (special common stock). The
Agreement extends for four years Roche's option to cause Genentech to redeem
(call) the outstanding 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 common shares, for a price equal to Genentech's
cost to redeem the special common stock. During the quarter beginning January
1, 1996, the option price is $63.75 per share, and it increases by $1.25 per
share each quarter through June 30, 1997, thereafter escalating at $1.50 per
share each quarter, to $82.00 per share at the end of the option period on
June 30, 1999. As part of an agreement in principle to settle stockholder
lawsuits, as more fully discussed in the "Legal Proceedings" footnote, the
call price at which Roche may cause Genentech to redeem the special common
stock will be increased, upon approval of the settlement agreement by the
Delaware Chancery Court, by $0.50 per share each quarter with a final
redemption price of $82.50. The put price will remain unchanged at $60.00 per
share. If Roche does not cause the redemption as of June 30, 1999,
Genentech's stockholders will have the option (the put) to cause the Company
to redeem none, some, or all of their shares of special common stock at $60.00
per share (and Roche will concurrently provide the necessary redemption funds
to the Company by purchasing a like number of shares of common stock at $60.00
per share) within thirty business days commencing July 1, 1999 (such dates
subject to acceleration in certain insolvency events). The Company's
obligation to redeem these shares is contingent upon the contribution by Roche
of the necessary redemption funds for the put. Roche Holding Ltd., a Swiss
corporation, has guaranteed Roche's obligation under the put.
In conjunction with the Agreement, HLR was granted an option at terms
discussed below for ten years for licenses to use and sell certain of
Genentech's products in non-U.S. markets. As a general matter, such option
for a Genentech product must be exercised at, or prior to if Genentech
mutually agrees, the conclusion of phase II clinical trials for each
product. In general, for each product for which HLR exercises its option,
the Company and HLR will share equally all development expenses, including
preclinical, clinical, process development and related expenses, incurred by
the Company through that date and prospectively, with respect to the
development of the product in the United States. HLR will pay all non-U.S.
development expenses. In general, HLR will pay a royalty of 12.5% until a
product reaches $100 million in aggregate sales outside of the United
States, at which time the royalty rate increases to 15%. In addition, HLR
has exclusive rights to, and pays the Company 20% royalties on, Canadian
sales of the Company's existing products and European sales of Pulmozyme.
Consequently, in the fourth quarter of 1995, the Company transferred to HLR
the rights to its Canadian product sales and European sales of Pulmozyme,
and commenced recording royalty revenue from HLR on such sales. The Company
supplies its products to HLR, and has agreed to supply products for which
HLR has exercised its option, for sales outside of the United States at cost
plus 20%.
Under the Agreement, independent of its right to cause the Company to redeem
the special common stock, Roche may increase its ownership of the Company up to
79.9% by making purchases on the open market. Roche holds approximately 64% of
the outstanding common equity of the Company as of December 31, 1995.
RELATED PARTY TRANSACTIONS
The Company has transactions with Roche and its affiliates in the ordinary
course of business. Pursuant to contracts, principally regarding R&D projects
and product licensing agreements as described below, the Company recorded
revenue of approximately $27.7 million in 1995, $25.6 million in 1994 and $14.4
million in 1993 from HLR (a wholly owned subsidiary of Roche; two officers of
HLR serve on the Company's Board of Directors). The Company has also developed
a mammalian cell line for HLR. During 1995, 1994 and 1993, the Company has
collaborated with HLR on four projects, including oral antagonists to platelet
gpIIb/IIIa, IL-8, LFA/ICAM and ras farnesyltransferase.
CAPITAL STOCK
Common Stock, Special Common Stock and Redeemable Common Stock
After the close of business on June 30, 1995, each share of the Company's
redeemable common stock automatically converted to one share of Genentech
common stock. The conversion was in accordance with the terms of the
redeemable common stock put in place at the time of its issuance in 1990 and as
described in Genentech's Certificate of Incorporation. On October 25, 1995,
the Company's non-Roche stockholders approved a new Agreement with Roche.
Pursuant to the Agreement, each share of the Company's common stock not held by
Roche or its affiliates automatically converted to one share of callable
putable common stock (special common stock). See the footnote "Merger and New
Agreement with Roche Holding, Inc." for a complete discussion of these
transactions.
Stock Option Plans
1984 PLANS: The 1984 Plans are the 1984 Incentive Stock Option Plan and the
1984 Non-Qualified Stock Option Plan (1984 Plans). Options granted under the
1984 Incentive Stock Option Plan and the 1984 Non-Qualified Stock Option Plan
have a maximum term of ten and 20 years, respectively, from the date of grant.
The options generally become exercisable in increments over a period of four
years from the date of grant, with the first increment vesting after one year.
As of December 31, 1995, there are no shares remaining for further grants under
the 1984 Plans.
1990 PLAN: The 1990 Stock Option/Stock Incentive Plan (1990 Plan) permits the
granting of options intended to qualify as incentive stock options and the
granting of options that do not so qualify. The Company may only grant
incentive options to employees (including officers and employee-directors). The
Company may only grant the non-qualified options and other non-option stock
incentives under the 1990 Plan to employees (including officers and employee-
directors) and consultants of the Company. All non-qualified options have a
maximum term of 20 years and all incentive options have a maximum term of ten
years. The options generally become exercisable in increments over a period of
four years from the date of grant, with the first increment vesting after one
year. The Company may grant options with different vesting terms from time to
time. The 1990 Plan includes an Automatic Grant Program whereby each individual
who was a non-employee member of the Board on July 18, 1990, and/or on April
30, 1992, was automatically granted, on each of those dates, a non-statutory
option to purchase 15,000 shares of redeemable common stock. These options have
a term of ten years from the date of grant and vest in equal increments over a
three-year period from the date of grant. Each non-employee member of the Board
who was elected to that position after April 30, 1992 but before April 30,
1995, was automatically granted such an option as was any employee member of
the Board who became a non-employee member of the Board, immediately upon the
change in status from employee to non-employee.
In addition, the 1990 Plan permits the Company to grant stock appreciation
rights in connection with non-qualified options or incentive options and issue
shares of special common stock, either fully vested at the time of issuance or
vesting according to a pre-determined schedule. The Company may grant three
types of stock appreciation rights under the 1990 Plan: tandem stock
appreciation rights, concurrent stock appreciation rights and limited stock
appreciation rights. At December 31, 1995, no stock appreciation rights for
special common stock have been granted under the 1990 Plan.
1994 PLAN: The 1994 Stock Option Plan (1994 Plan) permits the granting of
options intended to qualify as incentive stock options and the granting of
options that do not so qualify. Incentive options may only be granted to
employees (including officers and employee-directors). The non-qualified
options may only be granted under the 1994 Plan to employees (including
officers and employee-directors) and consultants of the Company. All non-
qualified options have a maximum term of 20 years and all incentive options
have a maximum term of ten years. Options have been granted with varying
vesting schedules, becoming exercisable in increments over periods of up to six
years from the date of grant, with the first increment vesting after periods of
up to two years. Options may be granted with different vesting terms from time
to time. The 1994 Plan includes an Automatic Grant Program whereby each
individual who was a non-employee member of the Board on April 30, 1995, was
granted a non-statutory option to purchase 15,000 shares of redeemable common
stock. These options have a term of ten years from the date of grant and vest
in equal increments over a three-year period from the date of grant. Each non-
employee member of the Board who is elected to that position after April 30,
1995 will be automatically granted such an option as will any employee member
of the Board who becomes a non-employee member of the Board, immediately upon
the change in status from employee to non-employee. Beginning on April 30,
1995, non-employee members of the Board no longer receive automatic option
grants under the 1990 Plan.
Transactions for the stock option plans for the year ended December 31, 1995,
were as follows:
Price
Shares Per Share
________________________________________________________________________________
Options outstanding - beginning of year 15,980,807 $14.08-50.75
Grants 1,303,800 48.13-51.63
Exercises (1,472,759) 14.08-50.75
Cancellations (602,774) 15.63-50.75
_______________________________
Options outstanding - end of year 15,209,074 14.08-51.63
Options available for future grant 1,508,820
at December 31 _____________
Total shares reserved under the Plans
at December 31 16,717,894
=============
Shares reserved under options exercisable
at December 31 7,265,254 $14.08-51.63
===============================
Employee Stock Plans
The Company adopted the 1991 Employee Stock Plan (1991 Plan) on December 4,
1990, and amended it during 1993 and 1995. All full-time employees of the
Company are eligible to participate in the 1991 Plan. Of the 3,800,000 shares
of special common stock reserved for issuance under the 1991 Plan, 2,444,491
shares have been issued as of December 31, 1995. During 1995, 2,534 of the
eligible employees participated in the 1991 Plan.
Warrants
In consideration of the grant to the Company by certain limited partners of
Genentech Clinical Partners IV (GCP IV) of an option to purchase all of such
limited partners' interests in GCP IV, the Company issued warrants with each
partnership interest to purchase an aggregate of 2,639,250 shares of common
stock (subsequently converted to 1,319,625 shares of redeemable common stock
under the terms of the 1990 Merger, and to special common stock pursuant to the
1995 Agreement). All previously unexercisable warrants held by non-defaulted
limited partners became exercisable upon termination of GCP IV's research
program in September 1992. The warrants are exercisable through July 31, 1996.
Special common stock activity during 1995 related to the warrants is reflected
in the following table:
Shares Price
Per Share
_______________________________________________________________________________
Shares subject to exercisable
warrants - beginning of year 138,915 $ 27.57-28.26
Shares issued upon exercise
of warrants (17,470) 27.57-28.26
__________________________________________
Shares subject to exercisable
warrants - end of year 121,445 $ 27.57-28.26
Shares reserved for issuance =========== ===============
under warrant agreements 121,445
===========
LEGAL PROCEEDINGS
The Company is a party to various legal proceedings including patent
infringement cases involving human growth hormone products and Activase; a
patent infringement and trade secret misappropriation case involving antibodies
to IgE; product liability cases involving Activase and Protropin; and
employment related cases.
The Company and its directors are defendants in two suits filed in California
challenging their actions in connection with the Company's 1990 merger with a
wholly owned subsidiary of Roche. There has been no activity in these actions
since 1990 and no further reference will be made to them in the future unless
they again become active. In addition, the Company, its directors, two former
directors and Roche are defendants in a number of suits filed in Delaware,
which have been consolidated in a single action, by certain individual
stockholders purporting to represent stockholders as a class alleging, in
general, breach of their fiduciary duties to the Company in connection with the
then proposed extension of Roche's option to cause the Company to redeem the
outstanding non-Roche owned redeemable common stock and transactions related
thereto. The Company, Roche and the attorneys representing the plaintiff
stockholders have entered into a memorandum of understanding settling all
claims against the defendants in these actions except the 1990 suits. In
connection with the settlement, if approved by the court, Roche would increase
the prices at which it could cause Genentech to redeem the non-Roche owned
special common stock by $0.50 per share per quarter, to a final price of $82.50
in the quarter ending June 30, 1999, and Genentech would pay the plaintiffs'
attorneys up to $3.5 million in attorneys' fees, and in connection with the
then proposed merger, Genentech would absorb the termination costs of up to six
Europe-based Genentech employees.
On June 28, 1995 and August 10, 1995, the U.S. District Court for the Southern
District of New York issued preliminary injunctions against Novo Nordisk A/S
and certain of its affiliates (Novo) and Bio-technology General Corporation and
its affiliate (BTG), respectively, which prohibited each of them, pending the
Court's final determination of the action, from importing, making, using and
selling their human growth hormone products in the United States. Each of Novo
and BTG appealed the Court's decision. On February 26, 1996, the U.S. Court of
Appeals for the Federal Circuit overruled the preliminary injunction against
Novo, but has not yet ruled on BTG's appeal. Future court decisions will
determine whether Novo's and BTG's products will be permanently enjoined from
the U.S. market.
The Company has received and responded to grand jury document subpoenas from
the United States District Court for the Northern District of California for
documents relating to Genentech's clinical, sales and marketing activities
associated with human growth hormone.
On August 19, 1994 and August 30, 1994, two class action suits were filed in
the U.S. District Court for the District of Minnesota against Genentech, one of
Genentech's executives, Caremark International, Inc. (Caremark), certain of
Caremark's executives and Dr. David R. Brown alleging, in general, causes of
action under the Racketeer Influenced and Corrupt Organizations Act and various
state statutory and common law theories. In addition, the suits allege that
the defendants made improper payments to Dr. Brown in connection with Dr.
Brown's prescription of Protropin for the plaintiffs rather than a competing
product, and that the plaintiffs were injured by purchasing Protropin at costs
approximately 30% higher than a competing product. A similar suit was filed in
the U.S. District Court for the District of South Dakota, Southern Division, on
July 13, 1995, against Genentech, Caremark and Dr. Brown, alleging the same
causes of action as above as well as intentional infliction of emotional
distress but not state and common law claims. The two Minnesota actions and
the South Dakota action are in the discovery phase.
Based upon the nature of the claims made and the investigations completed to
date by the Company and its counsel, the Company believes the outcome of the
above actions will not 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.
QUASI-REORGANIZATION
On February 18, 1988, the Company's Board of Directors approved the elimination
of the Company's accumulated deficit through an accounting reorganization of
its stockholders' equity accounts (a quasi-reorganization) effective October 1,
1987, that did not involve any revaluation of assets or liabilities. The
Company eliminated the accumulated deficit of $329.5 million by a transfer from
additional paid-in capital in an amount equal to the accumulated deficit.
The Company has been reporting in income the recognition of operating loss and
tax credit carryforward items arising prior to the quasi-reorganization due to
the Company's adoption of its quasi-reorganization in the context of the
accounting and quasi-reorganization literature existing at the date the quasi-
reorganization was effected. If the provisions of the subsequently issued Staff
Accounting Bulletin 86 (SAB 86) had been applied, net income for the year ended
December 31, 1995, would have been reduced by $11.8 million or $.10 per share
(1994 net income would have been reduced by $39.7 million or $.33 per share;
1993 net income would have been reduced by $20.6 million or $.18 per share),
because SAB 86 would require that the tax benefits of prior operating loss and
tax credit carryforwards be reported as a direct addition to additional paid-in
capital rather than being recorded in the income statement. The Securities and
Exchange Commission staff has indicated that it would not object to the
Company's accounting for such tax benefits.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Genentech, Inc.
We have audited the accompanying consolidated balance sheets of Genentech, Inc.
as of December 31, 1995 and 1994, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Genentech, Inc.
at December 31, 1995 and 1994, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
Ernst & Young LLP
San Jose, California
January 17, 199
QUARTERLY FINANCIAL DATA (UNAUDITED)
(thousands, except per share amounts)
1995 Quarter Ended
_______________________________________________
December 31 September 30 June 30 March 31
________________________________________________________________________________
Total revenues $ 221,914 $223,911 $233,053 $238,967
Product sales 153,482 158,478 161,236 162,067
Gross margin from product sales 130,983 134,109 136,924 135,317
Net income 25,636 40,229 37,163 43,404
Net income per share .21 .33 .31 .36
1994 Quarter Ended
_______________________________________________
December 31 September 30 June 30 March 31
________________________________________________________________________________
Total revenues $ 207,760 $ 193,838 $ 194,922 $ 198,870
Product sales 158,137 142,555 152,574 147,798
Gross margin from product sales 133,464 118,095 128,009 125,667
Net income 18,566 33,586 33,387 38,855
Net income per share .15 .28 .28 .33
11-YEAR FINANCIAL SUMMARY (UNAUDITED)
(millions, except per share and employee data)
1995 1994 1993 1992
_______________________________________________________________________________________
Total revenues $ 917.8 $ 795.4 $ 649.7 $ 544.3
Product sales 635.3 601.0 457.4 391.0
Royalties 190.8 126.0 112.9 91.7
Contract & other 31.2 25.6 37.9 16.7
Interest 60.5 42.7 41.5 44.9
______________________________________________
Total costs and expenses $ 745.6 $ 665.8 $ 590.8 $ 522.3
Cost of sales 97.9 95.8 70.5 66.8
Research & development 363.0 314.3 299.4 278.6
Marketing, general & administrative 251.7 248.6 214.4 172.5
Special charge 25.0(1) - - -
Interest 8.0 7.1 6.5 4.4
_____________________________________________
Income data
Income (loss) before taxes $ 172.3 $ 129.6 $ 58.9 $ 21.9
Income tax provision 25.8 5.2 - 1.1
Net income (loss) 146.4 124.4 58.9 20.8
Net income (loss) per share 1.21 1.04 0.50 0.18
_____________________________________________
Selected balance sheet data
Cash & marketable securities $1,096.8 $ 920.9 $ 719.8 $ 646.9
Accounts receivable 172.2 146.3 130.5 93.9
Inventories 93.6 103.2 84.7 65.3
Property, plant & equipment, net 503.7 485.3 456.7 432.5
Other long-term assets 105.5 61.0 64.1 37.1
Total assets 2,011.0 1,745.1 1,468.8 1,305.1
Total current liabilities 233.4 220.5 190.7 133.5
Long-term debt 150.0 150.4 151.2 152.0
Total liabilities 408.9 396.3 352.0 297.8
Total stockholders' equity 1,602.0 1,348.8 1,116.8 1,007.3
_____________________________________________
Other data
Depreciation and amortization expense $ 58.4 $ 53.5 $ 44.0 $ 52.2
Capital expenditures 70.2 82.8 87.5 126.0
_____________________________________________
Share information
Shares used to compute EPS 121.2 119.5 117.1 114.0
Actual year-end 119.3 117.2 114.8 112.9
_____________________________________________
Per share data
Market price: High $ 53.00 $ 53.50 $ 50.50 $ 39.50
Low $ 44.50 $ 41.75 $ 31.25 $ 25.88
Book value $ 13.43 $ 11.50 $ 9.73 $ 8.92
_____________________________________________
Number of employees 2,842 2,738 2,510 2,331
_____________________________________________
<FN>
The Company has paid no dividends.
The Financial Summary above reflects adoption of FAS 115 in 1994, FAS 109 in 1992 and
FAS 96 in 1988.
All share and per share amounts reflect two-for-one split in 1986, two-for-one split in
1987.
*Redeemable common stock began trading September 10, 1990; prior to that date
all shares were common stock. Pursuant to the Merger agreement with Roche, all
shareholders as of effective date September 7, 1990, received for each common
share owned, $18 in cash from Roche and one-half share of newly issued
redeemable common stock from the Company.
(1) Charges related to 1995 merger and new Agreement with Roche ($21 million) and
resignation of the Company's former CEO ($4 million).
(2) Charges primarily related to 1990 Roche merger.
(3) Primarily inventory-related charge.
(4) Charge for purchase of in-process R&D.
1991 1990 1989 1988 1987 1986 1985
______________________________________________________________________________
$ 515.9 $ 476.1 $ 400.5 $ 334.8 $ 230.5 $ 134.0 $ 89.6
383.3 367.2 319.1 262.5 141.4 43.6 5.2
63.4 47.6 36.7 26.7 20.1 12.9 5.3
20.4 31.9 27.5 33.5 57.1 70.9 71.1
48.8 29.4 17.2 12.1 11.9 6.6 8.0
______________________________________________________________________________
$ 469.8 $ 572.7 $ 352.9 $ 311.7 $ 186.6 $ 484.6 $ 83.0
68.4 68.3 60.6 46.9 23.8 10.8 1.7
221.3 173.1 156.9 132.7 96.5 79.8 64.9
175.3 158.1 127.9 101.9 59.5 27.3 16.4
- 167.7(2) - 23.3(3) - 366.7(4) -
4.8 5.5 7.5 6.9 6.8 - -
______________________________________________________________________________
$ 46.2 $ (96.6) $ 47.5 $ 23.1 $ 43.9 $ (350.6) $ 6.6
1.8 1.5 3.6 2.5 1.7 2.4 0.5
44.3 (98.0) 44.0 20.6 42.2 (353.0) 6.1
0.39 (1.05) 0.51 0.24 0.50 (5.10) 0.10
______________________________________________________________________________
$ 711.4 $ 691.3 $ 205.0 $ 152.5 $ 158.3 $ 84.3 $ 99.8
69.0 58.8 66.8 63.9 92.2 24.5 26.2
56.2 39.6 49.3 63.4 58.0 14.7 4.6
342.5 300.2 299.1 289.4 195.7 133.1 87.9
42.7 61.7 85.0 89.7 108.7 114.9 16.6
1,231.4 1,157.7 711.2 662.9 619.0 376.0 238.6
118.6 101.4 75.9 95.4 82.8 37.8 27.2
152.9 153.5 154.4 155.3 168.1 31.6 6.0
281.7 264.5 242.2 263.6 263.6 83.3 35.7
949.7 893.2 469.0 399.3 355.4 292.6 202.9
______________________________________________________________________________
$ 46.9 $ 47.6 $ 44.6 $ 38.3 $ 23.5 $ 8.1 $ 5.7
71.3 36.0 37.2 110.9 65.3 46.3 20.2
______________________________________________________________________________
112.5 93.0 86.0 84.5 84.4 69.3 64.0
111.3 110.6 84.3 82.9 78.7 67.0 65.6
______________________________________________________________________________
$ 36.25 $ 30.88 $ 23.38 $ 47.50 $ 64.75 $ 49.38 $ 18.81
$ 27.50*
$ 20.75 $ 20.13 $ 16.00 $ 14.38 $ 28.00 $ 16.44 $ 8.56
$ 21.75*
$ 8.53 $ 8.08 $ 5.56 $ 4.82 $ 4.52 $ 4.37 $ 3.09
______________________________________________________________________________
2,202 1,923 1,790 1,744 1,465 1,168 893
______________________________________________________________________________
COMMON STOCK, SPECIAL COMMON STOCK AND REDEEMABLE COMMON STOCK INFORMATION
Stock Trading Symbol GNE
Stock Exchange Listings
The Company's callable putable common stock (special common stock) has traded
on the New York Stock Exchange and the Pacific Stock Exchange under the symbol
GNE since October 26, 1995. On October 25, 1995, the Company's non-Roche
stockholders approved a new agreement with Roche Holdings, Inc. (Roche).
Pursuant to the agreement, each share of the Company's common stock not held by
Roche or its affiliates automatically converted to one share of special common
stock. From July 3, 1995 through October 25, the Company's common stock was
traded under the symbol GNE. After the close of business on June 30, 1995,
each share of the Company's redeemable common stock automatically converted to
one share of Genentech common stock. The conversion was in accordance with the
terms of the redeemable common stock put in place at the time of its issuance
on September 7, 1990, when the Company's merger with a wholly owned subsidiary
of Roche was consummated. The Company's stockholders of record on September 7,
1990, received, for each share of common stock owned, $18 in cash from Roche
and one-half share of newly issued redeemable common stock from the Company.
The redeemable common stock of the Company traded under the symbol GNE from
September 10, 1990 to June 30, 1995. The Company's common stock was traded on
the New York Stock Exchange under the symbol GNE from March 2, 1988, until
September 7, 1990, and on the Pacific Stock Exchange under the symbol GNE from
April 12, 1988, until September 7, 1990. The Company's common stock was
previously traded in the NASDAQ National Market System under the symbol GENE.
No dividends have been paid on the common stock, special common stock or
redeemable common stock. See the footnotes to the consolidated financial
statements for a further description of the 1995 agreement with Roche and the
1990 merger transaction.
Special Common Stockholders
As of December 31, 1995, there were approximately 19,021 stockholders of
record of the Company's special common stock.
Stock Prices Special Common/Redeemable Common/Common Stock
1995 1994
__________________________________________________________________________
High Low High Low
_________________________________________________
4th Quarter $ 53 $ 47 7/8 $ 53 1/2 $ 42 1/8
3rd Quarter 49 1/4 46 5/8 52 1/2 48 1/8
2nd Quarter 52 46 3/8 51 5/8 43 1/4
1st Quarter 51 44 1/2 51 3/8 41 3/4
35