UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number: 1-9813
GENENTECH, INC.
A Delaware Corporation 94-2347624
(I.R.S. employer identification number)
1 DNA Way
South San Francisco, California 94080-4990
(650) 225-1000
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class Name of Each Exchange on Which Registered
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Common Stock $.02 par value New York Stock Exchange
Callable Putable Common Stock Pacific Exchange
$.02 par value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The approximate aggregate market value of voting stock held by nonaffiliates
of the registrant is $2,143,366,690 as of February 13, 1998. (A)
Number of shares of Common Stock outstanding as of February 13, 1998:
76,621,009
Number of shares of Callable Putable Common Stock outstanding as of
February 13, 1998: 48,148,527
Documents incorporated by reference:
PARTS INCORPORATED
DOCUMENT BY REFERENCE
(1) Annual Report to stockholders for the year ended II
December 31, 1997 (specified portions)
(2) Definitive Proxy Statement with respect to the 1998 III
Annual Meeting of Stockholders filed by Genentech, Inc.
(SEC file No. 1-9813) with the Securities and Exchange
Commission (hereinafter referred to as "Proxy Statement")
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(A) Excludes 92,386,281 shares of Common Stock and Callable Putable Common
Stock held by Directors, Officers and stockholders whose ownership exceeds
five percent of either the Common Stock or Callable Putable Common Stock
outstanding at February 13, 1998 (the holdings of FMR Corp., Goldman Sachs &
Co. and The Goldman Sachs Group, L.P. were calculated based on their holdings
as of December 31, 1997). Exclusion of shares held by any person should not
be construed to indicate that such person possesses the power, direct or
indirect, to direct or cause the direction of the management or policies of
the registrant, or that such person is controlled by or under common control
with the registrant
PART I
ITEM 1. BUSINESS
Genentech, Inc. (the Company) is a biotechnology company that discovers,
develops, manufactures and markets human pharmaceuticals produced by
recombinant DNA technology for significant unmet medical needs. The Company
manufactures and markets seven products directly in the United States (U.S.)
and sells these products to F. Hoffmann-La Roche Ltd (HLR) for HLR to sell
outside of the U.S. Of these seven products, HLR has the right to sell six in
Canada and two in a number of countries. In addition, the Company receives
royalties from HLR's sales of these products, and receives royalties from HLR
and other licensees from sales of five other products which originated from
the Company's technology.
Relationship with Roche Holdings, Inc.
On October 25, 1995, the Company and Roche Holdings, Inc. (Roche) entered into
a new agreement (the Agreement) to extend until June 30, 1999, Roche's option
to cause the Company to redeem (call) the outstanding callable putable common
stock (special common stock) of the Company at predetermined prices. Should
the call be exercised, Roche will concurrently purchase from the Company a
like number of shares of common stock for a price equal to the Company's cost
to redeem the special common stock. If Roche does not cause the redemption as
of June 30, 1999, the Company's stockholders will have the option to cause the
Company to redeem none, some, or all of their shares of special common stock
(and Roche will concurrently provide the necessary redemption funds to the
Company by purchasing a like number of shares of common stock) within thirty
business days commencing July 1, 1999. See the Relationship with Roche
Holdings, Inc. note in the Notes to Consolidated Financial Statements in the
Company's 1997 Annual Report to Stockholders (Part II, Item 8 of this Form 10-
K) for further information.
In conjunction with the Agreement, HLR was granted an option for ten years for
licenses to use and sell certain of the Company's products in non-U.S.
markets. See below and in the Relationship with Roche Holdings, Inc. note in
the Notes to Consolidated Financial Statements in the Company's 1997 Annual
Report to Stockholders (Part II, Item 8 of this Form 10-K) for further
information.
Products
The Company has developed six products, co-developed one product and currently
manufactures and markets all seven products in the U.S.: Activase, registered
trademark, (Alteplase, recombinant) recombinant tissue plasminogen activator;
Protropin, registered trademark, (somatrem for injection) recombinant growth
hormone; Nutropin, registered trademark, [somatropin (rDNA origin) for
injection] human growth hormone; Nutropin AQ, registered trademark,
[somatropin (rDNA origin) injection] liquid formulation human growth hormone;
Pulmozyme, registered trademark, (dornase alfa) inhalation solution;
Actimmune, registered trademark, (Interferon gamma-1b) recombinant interferon
gamma and Rituxan, trademark, (Rituximab, C2B8) a monoclonal antibody which
was co-developed with IDEC Pharmaceuticals Corporation (IDEC).
Pursuant to the Agreement with Roche, the Company granted exclusive rights to
HLR to sell Activase, Protropin, Nutropin and Pulmozyme in Canada and
Pulmozyme in Europe and the Company began receiving a royalty on such sales.
HLR has the right to sell Nutropin AQ in Canada from which the Company will
receive a royalty on such sales. In addition, HLR has exclusive rights to
sell Rituxan in all countries, excluding the U.S. and Japan, and the Company
will receive a royalty on such sales.
Activase: Tissue plasminogen activator (t-PA) is an enzyme that is produced
naturally by the body to dissolve blood clots. However, when a blood clot
obstructs blood flow in the coronary artery and causes a heart attack, the
body is unable to produce enough t-PA to dissolve the clot rapidly enough to
prevent damage to the heart. Through recombinant DNA technology, Genentech
produces Activase, a recombinant form of t-PA, in sufficient quantity for
therapeutic use. The U.S. Food and Drug Administration (FDA) approved
Activase for marketing in the U.S. in 1987 for the treatment of acute
myocardial infarction (AMI or heart attack); in 1990 for use in the treatment
of acute pulmonary embolism (blood clots in the lungs); and in June 1996 for
the treatment of acute ischemic stroke or brain attack (blood clots in the
brain) within three hours of symptom onset.
In exchange for royalty payments, the Company has licensed marketing rights to
a recombinant t-PA in Japan to Kyowa Hakko Kogyo, Ltd. (Kyowa) and Mitsubishi
Kasei Corporation (Mitsubishi). Kyowa and Mitsubishi are marketing forms of a
recombinant t-PA under the trademarks Activacin, registered trademark, and
GRTPA, registered trademark, respectively. In a number of countries outside
of the U.S., Canada and Japan, the Company has licensed t-PA marketing and
manufacturing rights to Boehringer Ingelheim International GmbH (Boehringer).
The Company has also licensed certain rights to Boehringer regarding future
sales of a second generation t-PA, which is currently under development.
Boehringer markets a recombinant t-PA under the trademark Actilyse, registered
trademark.
Protropin: Human growth hormone is a naturally occurring human protein
produced in the pituitary gland that regulates metabolism and is responsible
for growth in children. A recombinant growth hormone product developed by the
Company, Protropin, was approved by the FDA in 1985 for marketing in the U.S.
for the treatment of growth hormone inadequacy in children.
In exchange for royalty payments, the Company licensed rights to recombinant
growth hormone outside the U.S. and Canada to Pharmacia & Upjohn(P&U), which
manufactures and markets recombinant growth hormone under the trademarks
Somatonorm, registered trademark, and Genotropin, registered trademark. Under
the terms of the agreement with P&U, effective in late 1995, the Company has
the right to sell growth hormone in most European countries and Japan and P&U
has the right to sell their own growth hormone in the U.S. and Canada.
Nutropin: Nutropin is a human growth hormone similar to Protropin; however,
it does not have the additional amino acid, methionine, found in the Protropin
chemical structure. Nutropin was approved in November 1993 and launched in
January 1994 for marketing in the U.S. for the treatment of growth hormone
inadequacy in children due to chronic renal insufficiency (CRI). CRI causes
irreversible damage to the kidneys and a variety of other medical problems,
including growth hormone inadequacy. The condition affects an estimated 3,000
children in the U.S. Nutropin has been designated as a U.S. Orphan Drug for
treatment of growth hormone inadequacy in children with CRI. Nutropin was
approved by the FDA in March 1994 for marketing for the treatment of growth
hormone inadequacy in children. In December 1996, the FDA approved Nutropin
for the treatment of short stature associated with Turner syndrome. In
December 1997, the Company received FDA approval to market Nutropin for the
treatment of growth hormone deficiency in adults.
Nutropin AQ: In December 1995, the Company received regulatory approval to
market Nutropin AQ, a liquid formulation of Nutropin, aimed at providing
improved convenience in administration. Nutropin AQ is the first and only
liquid (aqueous) recombinant human growth hormone product available. Nutropin
AQ was approved for the treatment of growth hormone inadequacy in children,
growth hormone inadequacy in children due to CRI and short stature associated
with Turner syndrome. In December 1997, the Company received FDA approval to
market Nutropin AQ for the treatment of growth hormone deficiency in adults.
As part of the strategic alliance formed with Sumitomo Pharmaceuticals Co.,
Ltd. (Sumitomo) in December 1997, the Company has agreed to provide Sumitomo
exclusive rights to develop, import and distribute in Japan, Nutropin AQ and
ProLease, registered trademark, sustained release growth hormone (see below in
Products in Development).
Pulmozyme: Pulmozyme is marketed in the U.S. for the management of cystic
fibrosis (CF), for which it has U.S. Orphan Drug designation. There are an
estimated 22,000 patients with CF in the U.S., a significant portion of whom
are expected to be candidates for treatment. In November 1996, Pulmozyme was
cleared for marketing by the FDA for the management of CF patients with
advanced disease.
Rituxan: Rituxan is marketed in the U.S. for the treatment of relapsed or
refractory low-grade or follicular, CD20-positive B-cell non-Hodgkin's
lymphoma (B-cell NHL), a cancer of the immune system. In November 1997,
Rituxan was cleared for marketing in the U.S. by the FDA. B-cell NHL affects
approximately 250,000 people in the U.S. of which one-half are follicular or
low-grade lymphoma patients. A portion of these patients will have multiple
relapses and may be eligible for Rituxan therapy. Rituxan was co-developed by
the Company and IDEC, from whom the Company licenses Rituxan, and is the first
monoclonal antibody approved to treat cancer. IDEC and the Company are
jointly promoting Rituxan in the U.S. and share responsibility for the
manufacturing of the product.
Actimmune: Actimmune is approved in the U.S. for the treatment of chronic
granulomatous disease (CGD), a rare, inherited disorder of the immune system
which affects an estimated 250 to 400 Americans. Actimmune received
designation by the FDA in 1990 as a U.S. Orphan Drug for the treatment of CGD.
The Company receives royalty payments from Boehringer from the sale of
interferon gamma in certain countries outside of the U.S., Canada and Japan.
Licensed Products:
In addition to the royalties mentioned above, the Company also receives
royalties on the following products:
Product Trademark Company
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Recombinant human insulin Humulin Eli Lilly and Company (Lilly)
Human growth hormone Humatrope Lilly
Recombinant interferon alpha Roferon-A HLR
Hepatitis B vaccine Recombivax Merck and Company, Inc.
Hepatitis B vaccine Engerix-B Smith-Kline Beecham
Pharmaceuticals
Factor VIII Kogenate Bayer Corporation
Bovine growth hormone Posilac Monsanto Corporation
Under the December 1994 settlement agreement with Lilly regarding certain of
the Company's patents, royalties of $30.0 million per year are payable,
subject to possible offsets and contingent upon Humulin, registered trademark,
continuing to be marketed in the U.S., to the Company through 1998. Under a
prior license agreement with Lilly, the Company receives royalties from
Lilly's sales of Humulin. These royalty payments on Humulin sales will expire
in August 1998.
Through its January 1997 agreement with Roche Laboratories, Inc., a New Jersey
corporation, the Company has the exclusive right to market and promote Roche's
Roferon-A, registered trademark, in the U.S. for ten years for its approved
oncology indications. On April 1, 1998, the Company will return to Roche its
rights to market and promote Roferon-A. In consideration, the Company will
receive $5.0 million plus royalties for sales of alpha interferon under a
prior Roche agreement (the 1980 Roche Agreement).
Products in Development:
As part of the Company's program of research and development (R&D), a number
of other products are in various stages of development. Product development
efforts cover a wide range of disorders or medical conditions, including
cancer, respiratory disorders, cardiovascular diseases, endocrine disorders,
inflammatory and immune problems, and neurological disorders.
Below is a summary of products in clinical development:
Product Description
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Phase III
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Activase (Alteplase, recombinant) Activase currently has marketing clearance
for the treatment of acute ischemic stroke
(AIS) within three hours of symptom onset.
The Company is conducting a Phase III
clinical trial to determine if Activase
can benefit patients with AIS if
administered within three to five hours of
symptom onset.
Anti-IgE Antibody A humanized IgE monoclonal antibody
designed to interfere early in the process
that leads to symptoms of allergic asthma
(being developed in collaboration with
Tanox Biosystems, Inc. and Novartis
Pharmaceuticals Corporation).
Herceptin, trademark, A humanized monoclonal antibody targeted
(Anti-HER2 Humanized Monoclonal against a protein receptor, which may be
Antibody) useful in the treatment of certain types
of breast cancer. The Company is
currently preparing FDA regulatory
filings.
Nerve Growth Factor A protein that may aid the treatment of
diabetic peripheral neuropathy (HLR has
exercised its option for this product
outside of the U.S.). The Company is
currently conducting Phase III clinical
trials.
pimagedine A compound being developed to inhibit or
block abnormal glucose/protein complexes,
advanced glycosylation end-products (AGE),
that lead to diabetic complications such
as kidney disease (being developed under a
collaboration and license agreement
between the Company and Alteon Inc.).
Alteon is conducting Phase III clinical
trials in end-stage renal disease and in
overt nephropathy in Type I and Type II
diabetes patients.
ProLease hGH Encapsulated A sustained release version of human
Sustained-Release Growth Hormone growth hormone designed to reduce the need
for daily injections (being developed in
collaboration with Alkermes, Inc.).
Pulmozyme Inhalation Solution An approved treatment for the management
of CF in patients from age five with mild,
moderate or severe disease. The Company is
conducting a trial to determine the
effect of Pulmozyme on pulmonary functions
in patients with early stage CF.
TNK-tPA A second generation t-PA that is a
selectively mutated version of natural
t-PA. The Company is conducting Phase III
clinical trials in AMI patients (being
developed in collaboration with Boehringer.)
Xubix, trademark, (Sibrafiban) An inhibitor of platelet aggregation that
oral IIb/IIIa antibody may be useful in the prevention of
unwanted clotting in certain
cardiovascular conditions (HLR is
conducting global development of this
molecule, and the Company retains opt-in
rights).
Phase II
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Anti-CD11a antibody An antibody designed to block the immune
cells that are over-active in psoriasis
(being developed in collaboration with
Xoma Corporation).
Anti-CD18 antibody An antibody designed to address problems
related to loss of blood flow, as in
trauma. HLR began Phase II clinical trials
for the treatment of shock and burns, and
the Company began planning Phase II
clinical trials for the treatment of
AMI. In January 1998, HLR notified the
Company that it was going to discontinue
the shock and burns clinical trials.
Anti-IgE antibody A humanized IgE monoclonal antibody
designed to interfere early in the process
that leads to symptoms of allergic
rhinitis (being developed in collaboration
with Tanox Biosystems, Inc. and Novartis
Pharmaceuticals Corporation).
Thrombopoietin (TPO) A protein that is being studied for
treatment of thrombocytopenia, a reduction
in clot-inducing platelets, in cancer
patients treated with chemotherapy. This
molecule has been exclusively licensed to,
and is being co-developed for one
indication with, P&U.
Vascular Endothelial Growth A protein that ischemic tissues (tissues
Factor (VEGF) antibody lacking in oxygen) secrete. It binds to
receptors on nearby blood vessels and
causes angiogenesis, the formation of new
blood vessels. The Company is currently
investigating the use of VEGF for the
treatment of coronary ischemia. The
Company is currently preparing for Phase
II clinical trials.
Phase I
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Anti-VEGF An antibody developed to treat several
types of cancer. In preclinical studies,
the anti-VEGF antibody resulted in
decreased vascularization and a decline in
growth and metastasis of a variety of
tumors. The Company has filed with the
FDA an investigational new drug
application (IND) to investigate its
anti-VEGF antibody in Phase I clinical
trials as a potential therapy against
solid tumors.
LDP-02 A humanized monoclonal antibody for the
treatment of inflammatory bowel diseases
(licensed from and being developed in
collaboration with
LeukoSite, Inc.).
In conjunction with the Agreement, HLR was granted an option for ten years for
licenses to use and sell certain of the Company's products in non-U.S. markets
(the license agreement). In the second quarter of 1997, the Company and HLR
agreed in principle to changes to the license agreement. Key changes to the
license agreement are summarized as follows: (1) For future products, HLR may
choose to exercise its option either when the Company determines to move a
product into development, or at the end of Phase II clinical trials (as in the
1995 agreement). U.S. and European development costs will be shared
(discontinuing the distinction regarding location or purpose of studies). (2)
If HLR exercises its option at the development determination point, U.S. and
European development costs will be shared 50/50. (3) If HLR exercises its
option at the end of Phase II clinical trials, HLR will reimburse the Company
for 50 percent of any development costs incurred, and subsequent U.S. and
European development costs will be shared 75/25, HLR/Genentech. (4) For nerve
growth factor (NGF), which HLR has already exercised its option to develop,
prospective U.S. and European development costs will be shared 60/40,
HLR/Genentech. (5) HLR will assume development of Xubix globally on its own.
The Company will provide clinical and scientific input for the Xubix program
and may subsequently opt-in and join development at any time up to the New
Drug Application (NDA) filing with the FDA for the first indication. If the
Company chooses to opt-in, it will reimburse HLR for 50 percent of the U.S.
and European Xubix development costs incurred after the Company's opt-out
decision through the subsequent opt-in date. In the event that the Company
opts-in, HLR and Genentech will co-promote Xubix in the U.S. with a 60/40,
Genentech/HLR, profit-sharing if the NDA filing for the first indication is
for acute therapy or a 50/50 profit-sharing if the NDA filing for the first
indication is for chronic therapy. If the Company does not opt-in, it will
receive from HLR a 6.0% royalty on worldwide sales of Xubix.
In general, with respect to the Company's products, HLR pays a royalty of
12.5% until a product reaches $100.0 million in aggregate sales outside of the
U.S. on a country-by-country basis, at which time the royalty rate on all
sales increases to 15%. In addition, HLR has rights to, and pays the Company
20% royalties on, Canadian sales of the Company's existing products, except
Rituxan, and European sales of Pulmozyme and Rituxan. In the fourth quarter
of 1995, the Company transferred to HLR the rights to sell Pulmozyme
exclusively in Canada and Europe and commenced recording royalty revenue from
HLR on such sales. The Company supplies its products to HLR, and has agreed
to supply its products for which HLR has exercised its option, for sales
outside of the U.S. at cost plus 20%.
The Company and CuraGen Corporation entered into a research collaborative
agreement in November 1997, whereby the Company will invest $5 million in
equity of CuraGen and provide a convertible loan to CuraGen of up to $26
million. The Company has exclusive rights for specified periods to evaluate
discoveries arising from the collaboration and to license them for an
additional fee. After the end of the first year, the drawn-down portion of
the loan is convertible into stock.
In December 1997, the Company and Alteon Inc. entered into a collaborative
agreement to develop and market pimagedine, an AGE formation inhibitor which
Alteon currently has in Phase III clinical trials to treat certain types of
kidney disease in diabetic patients. Under the terms of the agreement, the
Company licensed pimagedine from Alteon and made an initial equity investment
in Alteon stock of $15 million and will make additional equity investments of
up to $48 million to fund development costs for pimagedine. A $16 million
equity investment is scheduled for the first quarter of 1998.
Also, in December 1997, the Company and LeukoSite Inc. entered into a
collaboration agreement to develop and commercialize LeukoSite's LDP-02, a
humanized monoclonal antibody for the potential treatment of inflammatory
bowel diseases. Under the terms of the agreement, the Company made a $4
million equity investment in LeukoSite and will provide a convertible loan for
approximately $15 million to fund Phase II development costs. Upon successful
completion of Phase II, if LeukoSite agrees to fund 25% of Phase III
development costs, the Company will provide a second loan to LeukoSite for
such funding.
Distribution
The Company has a U.S.-based pharmaceutical marketing, sales and distribution
organization for its human pharmaceuticals. The Company's sales efforts are
focused on specialist physicians based at major medical centers in the U.S.
In general, products are sold to distributors or directly to hospital
pharmacies or medical centers. The Company utilizes common pharmaceutical
company marketing techniques, including advertisements, professional symposia,
direct mail, public relations and other methods.
The Company's products are available at no charge to qualified patients under
the Company's uninsured patient programs in the U.S. The Company has
established the Genentech Endowment for Cystic Fibrosis so qualified CF
patients in the U.S. who need Pulmozyme can gain assistance in obtaining it.
During 1997, the Company provided certain marketing programs relating to
Activase, including a comprehensive wastage replacement program for Activase
which, subject to specific conditions, provides customers the right to return
Activase to the Company for replacement related to both patient related
product wastage and product expiration. The Company maintains the right to
renew, modify or discontinue the above program.
As discussed in the Notes to Consolidated Financial Statements in the
Company's 1997 Annual Report to Stockholders (Part II, Item 8 of this Form
10-K), the Company had three customers, including HLR, who provided over 10%
of total revenues. Also discussed in the note are revenues from foreign
customers in 1997, 1996 and 1995.
Raw Materials
Raw materials and supplies required for the production of the Company's
principal products are generally available in quantities adequate to meet the
Company's needs.
Proprietary Technology - Patents and Trade Secrets
The Company has a policy of seeking patents on inventions arising from its
ongoing R&D activities. Patents issued or applied for cover inventions
ranging from basic recombinant DNA techniques to processes relating to
specific products and to the products themselves. The Company has either been
granted patents or has patent applications pending which relate to a number of
current and potential products including products licensed to others. The
Company considers that in the aggregate its patent applications, patents and
licenses under patents owned by third-parties are of material importance to
its operations. Important legal issues remain to be resolved as to the extent
and scope of available patent protection for biotechnology products and
processes in the U.S. and other important markets outside of the U.S. The
Company expects that litigation will likely be necessary to determine the
validity and scope of certain of its proprietary rights. The Company is
currently involved in a number of patent lawsuits, as either a plaintiff or
defendant, and administrative proceedings relating to the scope of protection
of its patents and those of others. These lawsuits and proceedings may result
in a significant commitment of Company resources in the future. There can be
no assurance that the patents the Company obtains or the unpatented
proprietary technology it holds will afford the Company significant commercial
protection.
In general, the Company has obtained licenses from various parties which it
deems to be necessary or desirable for the manufacture, use or sale of its
products. These licenses (both exclusive and non-exclusive) generally require
the Company to pay royalties to the parties on product sales.
The Company's trademarks, ACTIVASE, PROTROPIN, NUTROPIN, NUTROPIN AQ,
PULMOZYME and ACTIMMUNE in the aggregate are considered to be of material
importance and are registered in the U.S. Patent and Trademark Office and in
other countries throughout the world.
Royalty income recognized by the Company during 1997, 1996 and 1995 for patent
licenses, know-how and other related rights amounted to $241.1 million, $214.7
million and $190.8 million, respectively. In 1997, 1996 and 1995 the Company
incurred royalty expenses amounting to $58.9 million, $58.9 million and $54.8
million, respectively, under licenses from others.
Competition
The Company faces competition, and believes significant long-term competition
can be expected, from large pharmaceutical companies and pharmaceutical
divisions of chemical companies as well as biotechnology companies. This
competition can be expected to become more intense as commercial applications
for biotechnology products increase. Some competitors, primarily large
pharmaceutical companies, have greater clinical, regulatory and marketing
resources and experience than the Company. Many of these companies have
commercial arrangements with other companies in the biotechnology industry to
supplement their own research capabilities.
The introduction of new products or the development of new processes by
competitors or new information about existing products may result in price
reductions or product replacements, even for products protected by patents.
However, the Company believes its competitive position is enhanced by its
commitment to research leading to the discovery and development of new
products and manufacturing methods. Other factors which should help the
Company meet competition include ancillary services provided to support its
products, customer service, and dissemination of technical information to
prescribers of its products and to the health care community including payers.
Over the longer term, the Company's (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 but not
limited to the effectiveness and safety of the products, FDA and foreign
regulatory agencies' approvals for new indications, the degree of patent
protection afforded to particular products, and the effect of managed care as
an important purchaser of pharmaceutical products.
Activase: Activase's market share at the end of 1997 decreased to
approximately 71% in the U.S. for the treatment of AMI as compared to
approximately 80% at the end of 1996. The decrease was primarily due to a new
competitive thrombolytic agent, Retavase, registered trademark. Retavase
received FDA approval in October 1996 for the treatment of acute myocardial
infarction (AMI). The Company believes Retavase infringes on its patents and
has filed a patent infringement action against Boehringer Mannheim (BM) which
manufactures and markets Retavase. Recently, Centocor, Inc. (Centocor)
announced that it had agreed to purchase the U.S. and Canadian rights to
Retavase from BM. In addition, there is an increasing use of angioplasty in
lieu of thrombolytic therapy for the treatment of AMI. In April 1995, the FDA
approved for marketing an accelerated dosage of Activase. In June 1996, the
Company received clearance from the FDA to market Activase for the treatment
of acute ischemic stroke or brain attack. Activase is the first therapy to be
indicated for the acute treatment of stroke. In addition, the Company is
conducting Phase III clinical trials on a second generation of t-PA.
Genentech is aware of other companies actively pursuing the development for
the U.S. market of nonrecombinant or recombinant t-PA or t-PA variants, and
additional companies or combinations of companies pursuing the development of
other types of potentially competitive thrombolytic agents.
Protropin, Nutropin and Nutropin AQ: Lilly received FDA approval in 1987 to
market its growth hormone product for treatment of growth hormone inadequacy
in children. Three other companies - BioTechnology General (BTG), Novo
Nordisk A/S (Novo) and P&U - received FDA approval in 1995 to market their
growth hormone products for the treatment of growth hormone inadequacy in
children, although BTG has been preliminarily enjoined from selling its
product. A fifth competitor, Serono Laboratories, Inc. (Serono), received FDA
approval in October 1996 to market its growth hormone product. In the first
quarter of 1997, Serono, Novo and P&U began selling their growth hormone
products in the U.S. market. In addition, three of the Company's competitors
have received approval to market their existing human growth hormone products
for additional indications.
Pulmozyme: Sales of Pulmozyme for the management of CF in the U.S., Canada
and some countries in Europe began in early 1994. In November 1996, Pulmozyme
was cleared for marketing by the FDA for the management of CF patients with
advanced disease; a condition that affects approximately 500 patients in the
U.S. In accordance with the Agreement with Roche, in the fourth quarter of
1995, HLR obtained exclusive rights to sell Pulmozyme outside of the U.S., and
the Company receives a royalty on such sales.
Rituxan: Rituxan received designation as a U.S. Orphan Drug by the FDA in 1994
for the treatment of B-cell NHL.
Actimmune: Actimmune received designation as a U.S. Orphan Drug by the FDA in
1990 for the treatment of CGD.
Forward-Looking Statements
The following section contains forward-looking statements that are based on
the Company's current expectations. Because the Company's actual results may
differ materially from these and any other forward-looking statements made by
or on behalf of the Company, this section also includes a discussion of
important factors that could affect the Company's actual future results,
including its product sales, royalties, contract revenues, expenses and net
income.
Product Sales: The Company's product sales may vary from period to period for
several reasons including, but not limited to: the overall competitive
environment for the Company's products, the amount of sales to customers in
the U.S., the amount and timing of the Company's sales to HLR, the timing and
volume of bulk shipments to licensees, the availability of third-party
reimbursements for the cost of therapy, the effectiveness and safety of the
products, the rate of adoption and use of the Company's products for approved
indications and additional indications and the potential introduction of
additional new products and indications for existing products in 1998 and
beyond.
Competition: The Company faces growing competition in two of its therapeutic
markets. Activase lost market share and is expected to lose additional market
share in the thrombolytic market to Retavase and such adverse effect on sales
could be material. Recently, Centocor announced that it was purchasing the
U.S. and Canadian rights to Retavase from BM and will promote and sell the
product in the U.S. In addition, the increasing use of angioplasty in lieu of
thrombolytic therapy for the treatment of AMI is expected to continue. In the
growth hormone market, the Company continues to face increased competition
from five other companies with growth hormone products. Three of these
competitors have also received approval to market their existing human growth
hormone products for additional indications. The Company expects such
competition to have an adverse effect on its sales of Protropin, Nutropin and
Nutropin AQ and such effect could be material.
Other competitive factors affecting the Company's product sales include, but
are not limited to: the timing of FDA approval, if any, of additional
competitive products, pricing decisions made by the Company, the degree of
patent protection afforded to particular products, the outcome of litigation
involving the Company's patents and patents of competing companies for
products and processes related to production and formulation of those
products, the increasing use and development of alternate therapies, and the
rate of market penetration by competing products.
Royalty and Contract Revenues: Royalty and contract revenues in future
periods could vary significantly from 1997 levels. Major factors affecting
these revenues include, but are not limited to: HLR's decisions to exercise
or not to exercise its option to develop and sell the Company's future
products in non-U.S. markets and the timing and amount of related development
cost reimbursement, if any; variations in HLR's sales and other licensees'
sales of licensed products; the expiration of royalties from Lilly in 1998 for
its sales of insulin which contribute substantially to current royalty
revenues; fluctuations in foreign currency exchange rates; the initiation of
other new contractual arrangements with other companies; the timing of non-
U.S. approvals, if any, for products licensed to HLR; whether and when
contract benchmarks are achieved and the conclusion of existing arrangements
with other companies and HLR.
R&D: The Company intends to continue to develop new products and is committed
to aggressive R&D investment. Successful pharmaceutical product development
is highly uncertain and is dependent on numerous factors, many of which are
beyond the Company's control. Products that appear promising in the early
phases of development may fail to reach the market for numerous reasons: they
may be found to be ineffective or to have harmful side effects in preclinical
or clinical testing; they may fail to receive necessary regulatory approvals;
they may turn out to be uneconomical because of manufacturing costs or other
factors; or they may be precluded from commercialization by the proprietary
rights of others or by competing products or technologies for the same
indication. Success in preclinical and early clinical trials does not ensure
that large scale clinical trials will be successful. Clinical results are
frequently susceptible to varying interpretations which may delay, limit or
prevent regulatory approvals. The length of time necessary to complete
clinical trials and to submit an application for marketing approval for a
final decision by a regulatory authority varies significantly and may be
difficult to predict.
The Company currently has several products in late-stage clinical testing and
anticipates that its R&D expenses will continue at a high percentage of
revenues over the short-term. Over the long-term, however, as revenues
increase, R&D as a percent of revenues should decrease to the 20 to 25% range.
Factors affecting the Company's R&D expenses include, but are not limited to:
the outcome of clinical trials currently being conducted, the number of
products entering into development from late-stage research, in-licensing
activities, including the timing and amount of related development funding or
milestone payments, and future levels of revenues.
As part of the Company and HLR's agreed upon changes to the license agreement,
HLR has assumed development of Xubix on its own. As a result, the Company
will not be incurring future Xubix related R&D costs unless it decides to opt-
in on the development of this product. Such costs, net of amounts reimbursed
by HLR, were approximately $4.6 million for 1997.
In September 1997, the Company decided to discontinue development of IGF-I in
Type I and Type II diabetes mellitus. As a result, the Company will not be
incurring future IGF-I related R&D costs, net of amounts reimbursed by HLR,
which were approximately $16.1 million for 1997.
In addition, the Company announced in early October 1997 that it opted-out of
development and returned to IDEC the Company's marketing rights for IDEC-Y2B8,
a radioimmunotherapy under investigation for the treatment of relapsed or
refractory B-cell NHL. As a result, the Company discontinued its R&D funding
to IDEC for the development of IDEC-Y2B8. Such funding for 1997 was
immaterial.
Income Tax Provision: The Company expects its effective tax rate to increase
from the current rate of 24% to approximately 28% in 1998 and continue at or
near 35% for the next several years dependent upon several factors. These
factors include, but are not limited to, changes in tax laws and rates, future
levels of R&D spending, the outcome of clinical trials of certain development
products, the Company's success in commercializing such products, and
potential competition regarding the products.
Uncertainties Surrounding Proprietary Rights: The patent positions of
pharmaceutical and biotechnology companies can be highly uncertain and involve
complex legal and factual questions. Accordingly, the breadth of claims
allowed in such companies' patents cannot be predicted. Patent disputes are
frequent and can preclude commercialization of products. The Company has in
the past, is currently and may in the future be involved in material patent
litigation. Such litigation is costly in its own right and could subject the
Company to significant liabilities to third-parties and, if decided adversely,
the Company may need to obtain third-party licenses at a material cost or
cease using the technology or product in dispute. The presence of patents or
other proprietary rights belonging to other parties may lead to the
termination of R&D of a particular product. The Company believes it has
strong patent protection or the potential for strong patent protection for a
number of its products that generate sales and royalty revenue or that the
Company is developing; however, the courts will determine the ultimate
strength of patent protection of the Company's products and those on which the
Company earns royalties.
Year 2000: Some of the Company's older computer software programs were
written using two digit fields rather than four digit fields to define the
applicable year (i.e., "98" in the computer code refers to the year "1998").
As a result, time-sensitive functions of those software programs may
misinterpret dates after January 1, 2000, to refer to the twentieth century
rather than the twenty-first century (i.e., "02" could be interpreted as
"1902" rather than "2002"). This could cause system failures or
miscalculations resulting in inaccuracies in computer output or disruptions of
operations, including, among other things, inaccurate processing of financial
information and/or temporary inability's to process transactions, manufacture
products, or engage in similar normal business activities.
The Company has developed plans to address the potential exposures related to
the impact on its computer systems for the Year 2000 and beyond. An
assessment of key financial, informational and operational systems to
determine if they are Year 2000 compliant has been completed. Detailed plans
and timelines for implementation and testing of modifications and corrections
to the computer systems have been or are in process of being developed to
address computer systems problems as required by December 31, 1999. The
Company believes that with these detailed plans and completed modifications,
the Year 2000 issue will not pose significant operational problems for its
computer systems. However, if such modifications and conversions are not
made, or are not completed in a timely fashion, the Year 2000 issue could have
a material impact on the operations of the Company.
The total cost of the Year 2000 systems assessments and conversions is
funded through operating cash flows and the Company is expensing these costs.
The financial impact of making the required systems changes can not be known
precisely at this time, but is not expected to be material to the Company's
financial position, results of operations or cash flows.
Liquidity: The Company believes that its cash, cash equivalents, and short-
term investments, together with funds provided by operations and leasing
arrangements, will be sufficient to meet its foreseeable operating cash
requirements. In addition, the Company believes it could access additional
funds from the capital and debt markets. Factors affecting the Company's cash
position include, but are not limited to, future levels of the Company's
product sales, royalty and contract revenues, expenses, in-licensing
activities, including timing and amount of related development funding or
milestone payments and capital expenditures.
Roche Holdings, Inc.: At December 31, 1997, Roche held approximately 66.9% of
the Company's outstanding common equity. The Company expects to continue to
have material transactions with Roche, including royalty and contract
revenues, product sales and joint product development costs.
Market Risk: The Company is exposed to market risk, including changes to
interest rates, foreign currency exchange rates and equity investments prices.
To reduce the volatility relating to these exposures, the Company enters into
various derivative transactions pursuant to the Company's investment and risk
management policies and procedures in areas such as hedging and counterparty
exposure practices. The Company does not use derivatives for speculative
purposes.
A discussion of the Company's accounting policies for financial instruments
and further disclosures relating to financial instruments is included in the
Financial Review and Description of Business and Significant Accounting
Policies and Financial Instruments notes in the Notes to Consolidated
Financial Statements in the Company's 1997 Annual Report to Stockholders (Part
II, Item 8 of this Form 10K).
Credit Risk of Counterparties: The Company could be exposed to losses related
to the above financial instruments should one of its counterparties default.
This risk is mitigated through credit monitoring procedures.
Legal Proceedings: The Company is a party to various legal proceedings
including patent infringement cases and various cases involving product
liability and other matters. See Item 3. Legal Proceedings and the Leases,
Commitments and Contingencies note in the Notes to Consolidated Financial
Statements in the Company's 1997 Annual Report to Stockholders (Part II, Item
8 of this Form 10-K) for further information.
Government Regulation
The pharmaceutical industry is subject to stringent regulation with respect to
product safety and efficacy by various federal, state and local authorities.
Of particular significance are the FDA's requirements covering research and
development, testing, manufacturing, quality control, labeling and promotion
of drugs for human use. A pharmaceutical product cannot be marketed in the
U.S. until it has been approved by the FDA, and then can only be marketed for
the indications and claims approved by the FDA. As a result of these
requirements, the length of time, the level of expenditures and the laboratory
and clinical information required for approval of an NDA, a PLA (Product
License Application), a BLA (Biologics License Application) or an ELA
(Establishment License Application) are substantial and can require a number
of years, although recently revised regulations are designed to reduce
somewhat the time for approval of new products.
Although it is difficult to predict the ultimate effect, if any, these matters
or any other pending or future legislation, regulations or government actions
may have on its business, the Company believes that the development of new and
improved products which address unmet medical needs should enable it to
compete effectively within this environment.
Research and Development
A major portion of the Company's operating expenses to date have been related
to the R&D of products either on its own behalf or under contracts. During
1997, 1996 and 1995 the Company's research and development expenses were
$470.9 million, $471.1 million and $363.0 million, respectively. The Company
has sponsored approximately 86%, 89% and 95% of its research and development
for the years 1997, 1996 and 1995, respectively.
The Company's research efforts have been the primary source of the Company's
products. The Company intends to maintain its strong commitment to research
as an essential component of its product development effort. Licensed
technology developed by outside parties is an additional source of potential
products.
Human Resources
As of December 31, 1997, the Company had 3,242 employees.
Environment
The Company seeks to comply with all applicable statutory and administrative
requirements concerning environmental quality. The Company has made, and will
continue to make, the necessary expenditures for environmental compliance and
protection. Expenditures for compliance with environmental laws have not had
and are not expected to have a material effect on the Company's capital
expenditures, results of operation, financial position or competitive
position.
ITEM 2. PROPERTIES
The Company's primary facilities are located in a research and industrial park
in South San Francisco, California in both leased and owned properties. The
Company currently occupies twenty-two buildings for its research and
development, manufacturing, marketing and administrative activities. Fourteen
of the buildings are owned property and eight are leased. The Company has
made and continues to make improvements to these properties to accommodate its
growth. In addition, the Company owns approximately 17 acres adjacent to its
current facilities that may be used for future expansion. In 1995, the
Company began development of a new manufacturing facility of approximately
309.2 thousand square feet in Vacaville, California under an operating lease
arrangement. Completion of the project is expected in 1998. The Company also
has leases for certain additional office facilities in several locations in
the U.S.
The Company believes its facilities are in good operating condition and that
the real property owned or leased, combined with the new Vacaville site under
construction, are adequate for all present and foreseeable future uses. The
Company believes any additional facilities could be obtained or constructed
with the Company's capital resources.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various legal proceedings including patent
infringement cases involving human growth hormone products and Activase,
registered trademark, product liability cases involving Protropin, registered
trademark, and other matters. In addition, in July 1997, an action was filed
in the United States (U.S.) District Court for the Northern District of
California alleging that the Company's manufacture, use and sale of its
Nutropin, registered trademark, human growth hormone products infringed a
patent (the Goodman Patent) owned by the Regents of the University of
California (UC). This action is substantially the same as a previous action
filed in 1990 against the Company by UC alleging that the Company's
manufacture, use and sale of its Protropin human growth hormone products
infringed the Goodman Patent and it has been consolidated with that prior
case. The case is expected to commence trial on June 22, 1998. In October
1997, the Company was named, along with several other pharmaceutical
companies, in a lawsuit brought by Novo Nordisk A/S (Novo) in the U.S.
District Court for the District of New Jersey alleging infringement of a
patent held by Novo relating to the Company's manufacture, use and sale of its
Nutropin human growth hormone products. Novo seeks to permanently enjoin the
Company from the alleged patent infringement and also seeks compensatory and
enhanced damages from the Company. In February 1997 and February 1998, the
Company received grand jury document subpoenas from the U.S. District Court
for the Northern District of California for documents relating to the
Company's past clinical, sales and marketing activities associated with human
growth hormone. The government is investigating this matter, and the Company
believes that it is a subject of that investigation.
Based upon the nature of the claims made and the investigations completed to
date by the Company and its counsel, the Company believes that the outcome of
these cases 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
GENENTECH, INC.
EXECUTIVE OFFICERS
The executive officers of the Company and their respective ages (ages as of
December 31, 1997) and positions with the Company are as follows:
Name Age Position
Arthur D. Levinson, Ph.D. 47 President and Chief Executive Officer
William D. Young 53 Chief Operating Officer
Louis J. Lavigne, Jr. 49 Executive Vice President and Chief
Financial Officer
Susan D. Hellmann, M.D., M.P.H. 40 Senior Vice President - Development and
Chief Medical Officer
Judy Heyboer 48 Senior Vice President, Human Resources
Robert Arathoon, Ph.D. 45 Vice President - Process Sciences
Gregory Baird 47 Vice President - Corporate Communications
Joffre Baker, Ph.D. 50 Vice President - Research Discovery
Lars Barfod 38 Vice President - Marketing
David W. Beier 49 Vice President - Government Affairs
John Curd, M.D. 52 Vice President - Clinical Development
Robert Garnick, Ph.D. 48 Vice President - Regulatory Affairs
Bradford S. Goodwin 43 Vice President - Finance
Dennis J. Henner, Ph.D. 46 Vice President - Research
Paul F. Hohenschuh 54 Vice President - Operations Planning
Logistics
Paula Jardieu, Ph.D. 47 Vice President - Pharmacological Sciences
Edmon R. Jennings 50 Vice President - Corporate Development
Stephen G. Juelsgaard 49 Vice President, General Counsel and
Secretary
Cynthia J. Ladd 42 Vice President - Corporate Law and
Assistant Secretary
Polly Moore, Ph.D. 50 Vice President - Information Resources
James P. Panek 44 Vice President - Manufacturing,
Engineering and Facilities
Kim Popovits 39 Vice President - Sales
Nicholas J. Simon 43 Vice President - Business and Corporate
Development
David Stump, M.D. 48 Vice President - Clinical Research and
Genentech Fellow
John M. Whiting 42 Controller and Chief Accounting Officer
All officers are elected annually by the Board of Directors. There is no
family relationship among any of the officers or directors.
Business Experience
Dr. Levinson was appointed President and Chief Executive Officer of the
Company in July 1995. He had previously served as Senior Vice President of
the Company since January 1993. Dr. Levinson has held a number of other
positions, including Vice President, Research, Vice President, Research
Technology, Director, Cell Genetics Department and Staff Scientist subsequent
to joining the Company in May 1980 as a Senior Scientist.
Mr. Young was appointed Chief Operating Officer of the Company in April 1997.
He previously served as Executive Vice President of the Company from January
1996 to April 1997, as Senior Vice President from September 1988 to January
1996 and as Vice President, Manufacturing and Process Sciences from April 1983
to September 1988. Mr. Young joined the Company in September 1980 as
Director, Manufacturing from Eli Lilly and Company.
Mr. Lavigne was appointed Executive Vice President of the Company in March
1997 and Chief Financial Officer in August 1988. He previously served as
Senior Vice President from July 1994 to March 1997 and as Vice President from
July 1986 to July 1994. Mr. Lavigne joined the Company in July 1982 from
Pennwalt Corporation and became Controller in May 1983 and an officer of the
Company in February 1984.
Dr. Hellmann was appointed Senior Vice President, Development in December 1997
and Chief Medical Officer in December 1996. She joined the Company in March
1995 as Clinical Scientist and subsequently held the positions of Associate
Director from August 1995 to January 1996, Senior Director from January 1996
to March 1996 and Vice President, Medical Affairs from March 1996 to November
1997. Prior to joining the Company, she held the positions of Associate
Director at Bristol-Myers Squibb from February 1993 to February 1995 and
Medical Oncologist at Lexington Oncology Associates from June 1992 to February
1993.
Ms. Heyboer joined the Company as Senior Vice President, Human Resources in
August 1996. Prior to joining the Company, she held the positions of Vice
President, Employee Relations and later Senior Vice President at Acuson
Corporation from October 1983 to July 1996.
Dr. Arathoon was appointed Vice President, Process Sciences in April 1996.
Since joining the Company in 1983 from Wellcome Foundation, Dr. Arathoon has
held a series of positions of increasing responsibility, most recently as
Senior Director, Process Sciences from November 1994 to April 1996.
Mr. Baird joined the Company in February 1992 as Vice President, Corporate
Communications. Prior to joining the Company, Mr. Baird was employed by G.D.
Searle & Co. for five years as Vice President, Corporate Communications (G.D.
Searle & Co. is a wholly-owned subsidiary of Monsanto Company).
Dr. Baker was appointed Vice President, Research Discovery in February 1997.
He previously held the positions of Senior Director, Research Discovery from
March 1993 to February 1997 and Director, Cardiovascular Research Development
from September 1990 to September 1993. He has also been a member of the
Research Review Committee (RRC) since March 1993.
Mr. Barfod joined the Company in May 1997 as Vice President, Marketing. He
was previously employed by Novo Nordisk Pharmaceuticals, Inc. (Novo). While
at Novo, he held the positions of Vice President, Marketing & Business
Development, U.S. and Acting Vice President, Sales, U.S. from 1995 to 1997,
Vice President, Business Development, U.S. from 1994 to 1995 and Marketing
Director, Japan from 1991 to 1994.
Mr. Beier joined the Company in March 1989 as Vice President, Government
Affairs. Prior to joining the Company, Mr. Beier spent 10 years as Counsel to
the Committee on the Judiciary of the U.S. House of Representatives where he
was responsible for intellectual property and international trade issues.
Dr. Curd was appointed Vice President, Clinical Development in October 1997.
He previously held the positions of Senior Director, Medical Affairs from
January 1996 to October 1997 and Director, Oncology, Immunology and Infectious
Diseases from December 1991 to January 1996.
Dr. Garnick was appointed Vice President, Regulatory Affairs in February 1998.
He had previously served as Vice President, Quality since April 1994 and was
Senior Director, Quality Control from 1990 to 1994 and Director, Quality
Control from 1988 to 1990. Dr. Garnick joined the Company in August 1984 from
Armour Pharmaceutical.
Mr. Goodwin was appointed Vice President, Finance in October 1997. He had
served as Vice President, Finance and Controller since December 1996. He has
been a Vice President of the Company since July 1993 and served as Controller
from June 1989 to October 1997. He has also held the positions of Director,
Financial Planning and Analysis, the Assistant Controller and the General
Auditor. Before joining the Company in April 1987, Mr. Goodwin worked for
Price Waterhouse, a public accounting firm.
Dr. Henner was appointed Vice President, Research in April 1996. He had
served as Vice President, Research Technology from July 1994 to April 1996,
and as Senior Director, Research Technology from December 1990 to July 1994.
From May 1990 to December 1990, Dr. Henner was Director and Senior Scientist,
Cell Genetics Department. Dr. Henner joined the Company in 1981 as a
Scientist in Research. Prior to joining the Company, he was at the Scripps
Clinic and Research Foundation.
Mr. Hohenschuh was appointed Vice President, Operations Planning Logistics in
January 1998. Previously, he had served as Vice President, Manufacturing
since September 1989, Vice President, Biochemical Manufacturing from July 1986
to September 1989 and Senior Director, Biochemical Manufacturing from June
1985 to June 1986. Mr. Hohenschuh joined the Company in October 1982 as
Director, Biochemical Manufacturing.
Dr. Jardieu was appointed Vice President, Pharmacological Sciences in February
1997. She previously held the positions of Senior Director, Pharmacological
Sciences from 1996 to February 1997, Staff Scientist from 1992 to 1996, Senior
Scientist from 1989 to 1992 and Scientist from 1986 to 1989.
Mr. Jennings was appointed Vice President, Corporate Development in December
1995. He was Vice President, Sales and Marketing from January 1994 to
December 1995, and had served as Vice President, Sales since January 1991. He
joined the Company in September 1985 as Western Area Sales Manager. Prior to
joining the Company, Mr. Jennings was Western Region Sales Manager of Bristol-
Myers' Oncology Division.
Mr. Juelsgaard was appointed Vice President and General Counsel in July 1994
and Secretary in April 1997. He joined the Company in July 1985 as Corporate
Counsel and subsequently served as Senior Corporate Counsel from 1988 to 1990,
Chief Corporate Counsel from 1990 to 1993, Vice President, Corporate Law from
1993 to 1994, and Assistant Secretary from 1994 to 1997.
Ms. Ladd was appointed Vice President, Corporate Law in February 1996 and
Assistant Secretary in April 1997. She joined the Company in 1989 as
Corporate Counsel and subsequently held the positions of Senior Corporate
Counsel from November 1990 to June 1993 and Chief Corporate Counsel from June
1993 to February 1996.
Dr. Moore was elected Vice President, Information Resources in April 1994.
She was Senior Director, Information Resources from July 1992 to April 1994
and Director, Computer Resources from November 1987 to July 1992. Dr. Moore
joined the Company in August 1982 as a Senior Systems Analyst in Scientific
Computing.
Mr. Panek was appointed Vice President, Manufacturing, Engineering and
Facilities in July 1997. He joined the Company in September 1982 and
subsequently held the positions of Director, Engineering and Facilities since
May 1988, Senior Director, Engineering and Facilities since July 1991, and
Vice President, Engineering and Facilities since July 1993.
Ms. Popovits was elected Vice President, Sales in October 1994. She was
Director, Field Sales from January 1993 to October 1994 and Regional Manager,
Northeast Region from October 1989 to January 1993. Ms. Popovits was at
American Critical Care, a Division of American Hospital Supply Corporation,
for six years prior to joining the Company in November 1987 as Division
Manager, Southeast Region.
Mr. Simon was appointed Vice President, Business and Corporate Development in
December 1995. He had been Vice President, Business Development since
December 1994. He was Senior Director, Business Development from December
1993 to December 1994. Mr. Simon joined the Company as a Director in Business
Development in December 1989 from Xoma Corporation.
Dr. Stump was appointed Genentech Fellow in January 1996, in addition to his
responsibilities as Vice President, Clinical Research, a position he has held
since July 1995. He joined the Company in July 1989 as Director, Clinical
Research and was appointed Senior Director, Clinical Research in August 1991.
Prior to joining the Company, Dr. Stump was Associate Professor of Medicine
and Biochemistry at the University of Vermont.
Mr. Whiting was appointed Controller and Chief Accounting Officer in October
1997. He previously held the positions of Director, Financial Planning and
Analysis from January 1997 to October 1997, Director, Operations, Financial
Planning and Analysis from December 1996 to January 1997, Associate Director,
Operations, Financial Planning and Analysis from March 1996 to December 1996,
Plant Controller from April 1993 to March 1996, and Group Controller from July
1991 to April 1993.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The section labeled "Common Stock, Special Common Stock and Redeemable Common
Stock Information," and footnotes labeled "Relationship with Roche Holdings,
Inc." and "Capital Stock" in the Notes to Consolidated Financial Statements,
appearing on pages 64, 57 and 58 through 60, respectively, of the Company's
1997 Annual Report to Stockholders are incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The section labeled "11-Year Financial Summary" appearing on pages 62 and 63
of the Company's 1997 Annual Report to Stockholders is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The section labeled "Financial Review" appearing on pages 31 through 40 of the
Company's 1997 Annual Report to Stockholders is incorporated herein by
reference.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Notes to Consolidated Financial
Statements appearing on pages 42 through 60, the Report of Ernst & Young LLP,
Independent Auditors, appearing on page 61 and the section labeled "Quarterly
Financial Data (unaudited)" appearing on page 61 of the Company's 1997 Annual
Report to Stockholders are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) The sections labeled "Nominees" and "Section 16 (a) Beneficial Ownership
Reporting Compliance" of the Company's Proxy Statement in connection with the
1998 Annual Meeting of Stockholders are incorporated herein by reference.
(b) Information concerning the Company's Executive Officers is set forth in
Part I of the Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The sections labeled "Executive Compensation," "Compensation of Directors,"
"Compensation of Executive Officers," "Summary of Compensation," "Summary
Compensation Table," "Stock Option Grants and Exercises," "Option Grants in
Last Fiscal Year," "Aggregated Option Exercises in Last Fiscal Year and FY-End
Option Values," "Long-Term Incentive Plans," "Long-Term Incentive Plans -
Awards in Last Fiscal Year," "Loans and Other Compensation" and "Compensation
Committee Interlocks and Insider Participation" of the Company's Proxy
Statement in connection with the 1998 Annual Meeting of Stockholders are
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The sections labeled "Merger with Roche Holdings, Inc.," "Security Ownership
of Certain Beneficial Owners," "Security Ownership of Management" and "Amount
and Nature of Beneficial Ownership" of the Company's Proxy Statement in
connection with the 1998 Annual Meeting of Stockholders are incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section labeled "Certain Relationships and Related Transactions" of the
Company's Proxy Statement in connection with the 1998 Annual Meeting of
Stockholders is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Index to Financial Statements
The following Financial Statements and supplementary data are included in
the Company's 1997 Annual Report to Stockholders and are incorporated herein
by reference pursuant to Item 8 of this Form 10-K.
Page(s) in
1997 Annual
Report to Stockholders
----------------------
Consolidated Statements of Income for each
of the three years in the period ended
December 31, 1997 42
Consolidated Statements of Cash Flows for each
of the three years in the period ended
December 31, 1997 43
Consolidated Balance Sheets at December 31,
1997 and 1996 44
Consolidated Statements of Stockholders' Equity
for each of the three years in the period ended
December 31, 1997 45
Notes to Consolidated Financial Statements 46-60
Report of Ernst & Young LLP, Independent Auditors 61
Quarterly Financial Data (unaudited) 61
2. Financial Statement Schedule
The following schedule is filed as part of this Form 10-K:
Schedule II- Valuation and Qualifying Accounts for each of the three years in
the period ended December 31, 1997.
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the consolidated
financial statements or notes thereto.
3. Exhibits
Exhibit No. Description
----------- -----------
3.1 Certificate of Incorporation.(1)
3.2 Amended Certificate of Incorporation.(5)
3.3 Restated By-Laws.(3)
4.1 Indenture, dated March 27, 1987 ("Indenture") for U.S. $150,000,000
5% Convertible Subordinated Debentures due 2002.(2)
4.2 First Supplemental to Indenture, dated August 17, 1990.(3)
4.3 Second Supplemental to Indenture, dated October 18, 1995. (7)
10.1 Patent License Agreement with Columbia University dated October 12,
1988.(2)
10.2 Amended and Restated Contract for the Sale and Distribution of
Protropin dated as of March 1, 1991.(4)
10.3 Agreement and Plan of Merger, dated as of May 23, 1995, as amended
and restated, among the Company, Roche Holdings, Inc. and HLR
(U.S.) II, Inc. with exhibits.(5)
10.4 Amended and Restated Governance Agreement, dated October 25, 1995,
between the Company and Roche Holdings, Inc.(5)
10.5 Agreement between Genentech and F. Hoffman-La Roche Ltd
regarding commercialization of Genentech's products outside the
United States dated as of October 25, 1995.(5)
10.6 Guaranty Agreement between Genentech and Roche Holding, Ltd dated
as of October 25, 1995.(5)
10.7 Guiding Principles for the Genentech/Roche Relationship.(8)
13.1 1997 Annual Report to Stockholders.(11)
23.1 Consent of Ernst & Young LLP, Independent Auditors.(11)
27.1 Financial Data Schedule.(11)
28.1 Description of the Company's capital stock.(1)
99.1* 1984 Incentive Stock Option Plan, as amended and restated as of
October 16, 1996.(8)
99.2* 1984 Non-Qualified Stock Option Plan, as amended and restated
as of October 16, 1996.(8)
99.3* Restated Relocation Loan Program.(4)
99.4* Restated 401(k) Plan.(7)
99.5* 1990 Stock Option/Stock Incentive Plan, as amended and restated
as of October 16, 1996.(8)
99.6* Supplemental Plan.(4)
99.7* 1994 Stock Option Plan, as amended and restated as of October 16,
1996.(8)
99.8* 1996 Stock Option/Stock Incentive Plan, as amended and restated
as of October 16, 1996.(8)
99.9* Deferred Compensation Plan.(8)
99.10* 1991 Employee Stock Plan, as amended April 10, 1997.(9)
99.11* Incentive Units Plan.(10)
* As required by Item 14(a)(3) of Form 10-K, the Company identifies this
Exhibit as a management contract or compensatory plan or arrangement of the
Company.
- --------------------
(1) Filed as an exhibit to Annual Report on Form 10-K for the year ended
December 31, 1986 and incorporated herein by reference.
(2) Filed as an exhibit to Annual Report on Form 10-K for the year ended
December 31, 1987 and incorporated herein by reference.
(3) Filed as an exhibit to Annual Report on Form 10-K for the year ended
December 31, 1990 and incorporated herein by reference.
(4) Filed as an exhibit to Annual Report on Form 10-K for the year ended
December 31, 1991 and incorporated herein by reference.
(5) Filed as an exhibit to Form S-4 dated October 25, 1995 (registration
statement no. 33-59949) and incorporated herein by reference.
(6) Filed as an exhibit to Form S-8 dated October 25, 1995 (registration
statement no. 33-59949-01) and incorporated herein by reference.
(7) Filed as an exhibit to Annual Report on Form 10-K for the year
ended December 31, 1995 and incorporated herein by reference.
(8) Filed as an exhibit to Annual Report on Form 10-K for the year
ended December 31, 1996 and incorporated herein by reference.
(9) Filed as an exhibit to the Quarterly Report on Form 10-Q filed for the
quarterly period ended March 31, 1997.
(10) Filed as an exhibit to the Quarterly report on Form 10-Q filed for the
quarterly period ended June 30, 1997
(11) Filed with this document.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the quarter ended December 31,
1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GENENTECH, INC.
Registrant
Date: March 3, 1998
By: /S/JOHN M. WHITING
----------------------------------
John M. Whiting
Controller and Chief Accounting
Officer
(Principal Accounting Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Louis J. Lavigne, Jr., Executive Vice President
and Chief Financial Officer, and John M. Whiting, Controller and Chief
Accounting Officer, his attorney-in-fact, with the full power of substitution,
for him in any and all capacities, to sign any amendments to this report, and
to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorney-in-fact, or his substitute or substitutes,
may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
Principal Executive Officer:
/S/ARTHUR D. LEVINSON President, Chief Executive March 3, 1998
- --------------------------- Officer and Director
Arthur D. Levinson
Principal Financial Officer:
/S/LOUIS J. LAVIGNE, JR. Executive Vice President March 3, 1998
- --------------------------- and Chief Financial Officer
Louis J. Lavigne, Jr.
Director:
/S/HERBERT W. BOYER Director March 3, 1998
- ---------------------------
Herbert W. Boyer
/S/JONATHAN K.C. KNOWLES Director March 3, 1998
- ---------------------------
Jonathan K.C. Knowles
/S/FRANZ B. HUMER Director March 3, 1998
- ---------------------------
Franz B. Humer
/S/LINDA F. LEVINSON Director March 3, 1998
- ---------------------------
Linda F. Levinson
/S/J. RICHARD MUNRO Director March 3, 1998
- ---------------------------
J. Richard Munro
/S/DONALD L. MURFIN Director March 3, 1998
- ---------------------------
Donald L. Murfin
/S/JOHN T. POTTS, JR. Director March 3, 1998
- ---------------------------
John T. Potts, Jr.
/S/C. THOMAS SMITH, JR. Director March 3, 1998
- ---------------------------
C. Thomas Smith, Jr.
/S/DAVID S. TAPPAN, JR. Director March 3, 1998
- ---------------------------
David S. Tappan, Jr.
SCHEDULE II
GENENTECH, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1997, 1996 and 1995
(in thousands)
Additions
Balance at Charged to Balance at
Beginning of Costs and End of
Period Expenses Deductions(1) Period
---------- ---------- ---------- ----------
Allowance for doubtful accounts
and returns:
Year Ended December 31, 1997: $ 7,869 $ 13,976 $ (7,310) $ 14,535
========== ========== ========== ==========
Year Ended December 31, 1996: $ 6,672 $ 12,320 $ (11,123) $ 7,869
========== ========== ========== ==========
Year Ended December 31, 1995: $ 4,422 $ 10,972 $ (8,722) $ 6,672
========== ========== ========== ==========
Inventory reserves:
Year Ended December 31, 1997: $ 9,279 $ 5,901 $ (3,125) $ 12,055
========== ========== ========== ==========
Year Ended December 31, 1996: $ 6,909 $ 4,950 $ (2,580) $ 9,279
========== ========== ========== ==========
Year Ended December 31, 1995: $ 13,008 $ 3,690 $ (9,789) $ 6,909
========== ========== ========== ==========
Reserve for non-marketable
equity securities:
Year Ended December 31, 1997: $ 4,990 $ 500 $ - $ 5,490
========== ========== ========== ==========
Year Ended December 31, 1996: $ 5,092 $ - $ (102) $ 4,990
========== ========== ========== ==========
Year Ended December 31, 1995: $ 4,623 $ 469 $ - $ 5,092
========== ========== ========== ==========
<FN>
(1) Represents amounts written off or returned against the allowance or reserves.
INDEX OF EXHIBITS FILED WITH FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
Exhibit No. Description
- ----------- -----------
13.1 1997 Annual Report to Stockholders
23.1 Consent of Ernst & Young LLP, Independent Auditors
27.1 Financial Data Schedule
2
2