1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A-1
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the year ended: December 31, 1994
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number: 1-9813
GENENTECH, INC.
A Delaware Corporation 94-2347624
(I.R.S. employer identification number)
460 Point San Bruno Boulevard (415) 225-1000
South San Francisco, California 94080-4990 (telephone number)
Securities registered pursuant to Section 12(b) of the Act:
==============================================================================
Title of Each Class Name of Each Exchange on Which Registered
------------------------------------------------------------------------------
Redeemable Common Stock, New York Stock Exchange
$.02 par value Pacific Stock Exchange
==============================================================================
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The approximate aggregate market value of voting stock held by nonaffiliates
of the registrant is $1,938,520,599 as of March 13, 1995. (A)
Number of shares of Common Stock outstanding as of March 13, 1995: 67,133,409
Number of shares of Redeemable Common Stock outstanding as of March 13, 1995:
50,427,615
Documents incorporated by reference:
PARTS INCORPORATED
DOCUMENT BY REFERENCE
(1) Annual Report to stockholders for the year ended II
December 31, 1994 (specified portions)
(2) Definitive Proxy Statement with respect to the 1995 III
Annual Meeting of Stockholders filed by Genentech, Inc.
(SEC file No. 1-9813) with the Securities and Exchange
Commission (hereinafter referred to as "Proxy Statement")
-----------------------------------------------------------------------------
(A) Excludes 79,457,425 shares of Common Stock and Redeemable Common Stock held
by Directors, Officers and stockholders whose ownership exceeds five percent of
either the Common Stock or Redeemable Common Stock outstanding at March 13,
1995. Exclusion of shares held by any person should not be construed to indicate
that such person possesses the power, direct or indirect, to direct or cause the
direction of the management or policies of the registrant, or that such person
is controlled by or under common control with the registrant.
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(dollars in millions, except per share amounts)
OVERVIEW
Genentech, Inc. (the Company) is an international biotechnology company that
discovers, develops, manufactures and markets human pharmaceuticals for
significant medical needs. The science of biotechnological product discovery and
development is at the core of the Company's business and has led to ten of the
approved human pharmaceutical products of biotechnology. The Company
manufactures and markets five of these products directly and receives royalties
from the sales of five products which have originated from the Company's
technology.
RESULTS OF OPERATIONS
Annual % Change
Revenues 1994 1993 1992 94/93 93/92
--------------------------------------------------------------------------------
Revenues $ 795.4 $ 649.7 $ 544.3 22% 19%
Revenues have increased in each year since the Company's inception. The increase
in 1994 revenues resulted primarily from higher product sales. The increase in
1993 revenues resulted primarily from higher product sales, royalty income and
contract revenues.
Annual % Change
Product Sales 1994 1993 1992 94/93 93/92
--------------------------------------------------------------------------------
Activase $ 280.9 $ 236.3 $ 182.2 19% 30%
Protropin and
Nutropin 225.4 216.8 205.9 4 5
Pulmozyme 88.3 - - - -
Actimmune 6.4 4.3 2.9 49 48
------------------------------------------------------------
Total product sales $ 601.0 $ 457.4 $ 391.0 31% 17%
% of revenues 76% 70% 72%
Activase: The increase in Activase, registered trademark, sales in 1994 and 1993
is attributable to an increase in the number of patients being treated with
Activase as a result of the completion of the worldwide Global Utilization of
Streptokinase and Activase for occluded coronary arteries (GUSTO) clinical trial
and the reporting of its results in 1993. During 1994, Activase market share
increased to over 70% from approximately 66% and 50% in 1993 and 1992,
respectively, in the United States.
Protropin and Nutropin: Net sales of Protropin, registered trademark, and
Nutropin, registered trademark, continued to increase in 1994 due primarily to
the introduction of Nutropin for the treatment of chronic renal insufficiency
and to more growth hormone inadequate patients starting treatment. The Company
has not faced new competition in the growth hormone market, although this
possibility exists for 1995. If additional competitors enter the growth hormone
market, the Company expects that such competition will have an adverse effect on
its sales of Protropin and Nutropin which, depending on the extent and type of
competition, could be material to the Company's total growth hormone sales.
Factors that may influence future Protropin and Nutropin sales include: the
number and market entry dates of new competitive products and their effect on
the Company's market share and pricing; the availability of third party
reimbursement for the costs of such therapies; and the outcome of litigation
involving the Company's patents for growth hormone and related processes.
3
Pulmozyme: Pulmozyme, registered trademark, was launched during 1994 in the
United States, Canada and certain European countries. In 1994, sales totaled
$88.3 million. In 1995, as approvals for marketing the product in other European
countries are received and a full year of sales is achieved in countries in
which Pulmozyme sales began in 1994, the Company expects sales to grow. Other
factors that may influence future sales of Pulmozyme for the management of
cystic fibrosis include: the number and kinds of patients benefiting from such
therapy; the availability of third party reimbursement for the costs of such
therapies, physicians' personal experiences in the use and results of the
therapy; the development of alternate therapies for the treatment and cure of
cystic fibrosis; the development of additional indications for using Pulmozyme;
and the cost of Pulmozyme therapy. To protect the Company from adverse changes
in foreign currency exchange rates, the Company has purchased simple put options
to hedge anticipated non-dollar denominated revenue. All options mature within
one year. See Note 6 in the "Notes to Consolidated Financial Statements" for
further information.
Actimmune: Actimmune, registered trademark, sales increased in 1994 and 1993
primarily due to the sales of interferon gamma to licensee Boehringer Ingelheim
International GmbH, which has approval to market interferon gamma in several
countries in its licensed territory.
Royalties, Contract and Other, and Interest Income Annual % Change
1994 1993 1992 94/93 93/92
--------------------------------------------------------------------------------
Royalties $ 126.0 $ 112.9 $ 91.7 12% 23%
Contract and other 25.6 37.9 16.7 (32) 127
Interest income 42.7 41.5 44.9 3 (8)
The Company receives royalty payments from the sales of various human health
care products. These payments have increased in each of the past three years
primarily due to increases in product sales by the Company's licensees. In 1994,
the largest dollar increase was attributable to royalties earned from the sales
of recombinant human insulin. In 1993, the largest dollar increase was
attributable to hepatitis B vaccine royalties. Cash flows from royalty income
include non-dollar denominated revenues. The Company currently purchases simple
foreign currency put options to hedge these cash flows, all of which expire
within the next two years. Royalty expense obligations associated with these
revenues are included in marketing, general and administrative expenses. In
December 1994, the Company and Eli Lilly and Company (Lilly) reached an
agreement regarding all patent infringement and contract actions between the two
parties, which included the Company granting to Lilly licenses, options to
license, or immunities from suit for certain of the Company's patents. Future
payments are required from Lilly on sales of these products. 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. See Note 12 in the "Notes to Consolidated
Financial Statements" for further information.
Contract revenues in 1993 included $18.2 million related to fixed license fees
receivable through 1996 from Schering Corporation and its affiliates for a
world-wide license to certain patented technology and processes used to produce
recombinant interferon alpha. Contract and other revenues will continue to
fluctuate due to variations in the timing of contract benchmark achievements,
the initiation of new contractual arrangements, and the conclusion of existing
arrangements.
Interest income was slightly higher in 1994 due to a larger investment portfolio
in 1994 more than offsetting the decline in the average portfolio yield.
Similarly, interest income was lower in 1993 compared to 1992 primarily due to
the lower average portfolio yield in 1993. The Company enters into interest rate
swaps as part of its overall strategy of managing the duration of its investment
portfolio. See Note 6 in the "Notes to Consolidated Financial Statements" for
further information. Due to the approximately two year effective average
duration of the portfolio, which includes the impact of the swaps, the average
yield on the portfolio in any one year is primarily a function of financial
instruments purchased in prior years. The average portfolio yield decline in
1993 and 1994 reflected the generally continuous
4
decline in interest rates between 1990 and the first quarter of 1994. As
discussed in Note 6, during 1994, the Company terminated certain swaps which
resulted in an unamortized loss of $6.2 million being recorded at December 31,
1994. The amortization of these losses over the next four years will reduce
yields during those years.
Annual % Change
Costs and Expenses 1994 1993 1992 94/93 93/92
--------------------------------------------------------------------------------
Cost of sales $ 95.8 $ 70.5 $ 66.8 36% 6%
Research and
development 314.3 299.4 278.6 5 7
Marketing, general and
administrative 248.6 214.4 172.5 16 24
Interest expense 7.1 6.5 4.4 9 48
----------------------------------------------------------
Total costs
and expenses $665.8 $ 590.8 $ 522.3 13% 13%
% of revenues 84% 91% 96%
Cost of sales as % of
product sales 16% 15% 17%
R&D as % of revenues 40 46 51
MG&A as % of revenues 31 33 32
Cost of Sales: Cost of Sales increased in 1994 primarily due to increased
product sales and an addition to inventory reserves of $11.9 million. The
increase to the inventory reserves was recorded for the likely expiration of
Pulmozyme and Nutropin product prior to sale. These products were launched in
the beginning of the year and did not meet the Company's initial expectations
for sales in 1994. Cost of sales increased in 1993 due to increased product
sales.
Research and Development: The increase in R&D expenses in 1994 and 1993 reflects
the Company's continued commitment to developing new products and new
indications for existing products. Overall increases resulted from the higher
level of activity and associated costs of products in the later stages of
clinical trials and the manufacture of products for clinical trials. As a
percentage of revenues, research and development has declined over the last
three years due to increasing revenues combined with the Company's disciplined
approach to its research and development investment. The Company now has 12
products in the clinic and two products in preclinical development. At the end
of 1993 the Company had nine products in the clinic and four products in
preclinical development.
To gain additional access to potential new products and technologies, the
Company has established research collaborations, including equity investments,
with companies developing technologies that fall outside the Company's research
focus and with companies having the potential to generate new products through
technology exchanges and investments. The Company has also entered into product-
specific collaborations to acquire development and marketing rights for
products. In December 1994, the Company entered into a collaboration with Scios
Nova Inc. (Scios Nova) for the U.S. and Canadian development of Scios Nova's
Auriculin, registered trademark, (anaritide) for the treatment of acute renal
failure, which is currently in Phase III clinical trials. See Note 2 in the
"Notes to Consolidated Financial Statements" for a further description of this
collaboration.
Marketing, General and Administrative: Marketing, general and administrative
expenses increased in 1994 primarily due to the launch of Pulmozyme in Europe
and higher corporate expenses, including litigation related expenses, and $12.6
million in charges due to the write-down of marketable equity securities of
several of the biotechnology companies that are strategic alliance partners of
the Company. The declines in the fair value of such securities were considered
other than temporary. The increase in 1993 compared to 1992 was primarily due to
additional Activase marketing expenses, Pulmozyme marketing costs in preparation
for the anticipated U.S. and European product launches in 1994, and increased
growth hormone marketing expenses in anticipation of future competition.
5
Interest expense in 1994, 1993 and 1992, net of amounts capitalized, relates
primarily to interest on the Company's 5% convertible subordinated debentures.
Income Before Taxes and Income Taxes 1994 1993 1992
-----------------------------------------------------------------------------
Income before taxes $ 129.6 $ 58.9 $ 21.9
Income tax provision 5.2 - 1.1
Effective tax rate 4% - 5%
Deferred tax assets less
deferred tax liabilities $ 118.6 $ 123.0 $ 132.8
Valuation allowance 84.4 123.0 132.8
--------------------------------
Total net deferred taxes $ 34.2 $ - $ -
================================
Approximately $26 million of the valuation allowance at December 31, 1994,
reflected above relates to the tax benefits of stock option deductions which
will be credited to additional paid-in capital when realized.
Realization of the net deferred taxes, future effective tax rates, and future
reversals of the valuation allowance (that is, recognition of deferred tax
assets) depend on future earnings from existing and new products and new
indications for existing products. The timing and amount of future earnings will
depend on continued success in marketing and sales of the Company's current
products, scientific success, results of clinical trials and regulatory approval
of products under development.
The net increase in the effective tax rate from 1993 to 1994 was primarily
related to limitations on the utilization of existing carryforwards related to
the U.S. alternative minimum tax. Expected increases in future effective tax
rates are also attributable to these limitations. Additionally, possible changes
in tax legislation could affect the Company's effective tax rate. Based on
current projections, the Company estimates its 1995 effective tax rate to be
around 15%.
Annual % Change
Net Income 1994 1993 1992 94/93 93/92
-------------------------------------------------------------------------------
Net income $124.4 $ 58.9 $ 20.8 111% 183%
Net income per share 1.04 0.50 0.18
Net income as a
% of revenue 16% 9% 4%
Net income as a percent of revenue has increased each year as careful expense
management, particularly R&D expense management, has allowed an increasing
proportion of revenues to flow to net income. Earnings in 1995 will depend on a
continuation of the positive impact of the GUSTO trial results on Activase
sales, sales of Pulmozyme, Protropin and Nutropin competition, and the level of
costs and expenses.
6
LIQUIDITY AND CAPITAL RESOURCES 1994 1993 1992
-------------------------------------------------------------------------------
Cash, cash equivalents, short-term investments
and long-term marketable debt and equity
securities $ 920.9 $ 719.8 $ 646.9
Working capital 776.6 694.6 447.0
Cash provided by (used in):
Operating activities 200.4 114.5 36.0
Investing activities (322.3) (121.3) (126.4)
Financing activities 71.2 49.9 35.6
Capital expenditures
(included in investing activities above) $ (82.8) $ (87.5) $(126.0)
Current ratio 4.5:1 4.6:1 4.3:1
Cash generated from operating activities was used to purchase short-term
investments, long-term marketable securities, and property, plant and equipment,
increasing the amount of cash used in investing activities. Cash provided by
financing activities increased from the issuance of redeemable common stock
under employee stock plans and the exercise of warrants.
Capital expenditures in 1994 include costs incurred for additional manufacturing
facilities and the addition of a central process utility plant. Capital
expenditures decreased in 1993 as compared to 1992 primarily due to completing
construction in 1992 of the Founders Research Center, a state-of-the-art
facility housing many of the Company's research activities, and substantially
completing in 1992 new manufacturing facilities for Pulmozyme.
PROSPECTIVE INFORMATION
Market Potential/Risk: Over the longer term, the Company's (and its partners')
ability to successfully market current products, expand their usage, and bring
new products to the marketplace will depend on many factors, including the
effectiveness and safety of the products, FDA and foreign regulatory agencies'
approvals for new indications, the degree of patent protection afforded to
particular products, Orphan Drug Act legislation, the possible future enactments
of biotechnology product protection in the United States as well as in Europe
and Japan, and the outcome in the United States of potential health care reform
legislation. The Company believes it has strong patent protection or the
potential for strong patent protection for a number of its products that
generate royalty revenue or that the Company is developing; however, the courts
will determine the ultimate strength of patent protection of the Company's
products and those on which the Company earns royalties. A product that has
received an Orphan Drug designation for a specific indication, when approved,
will be protected from FDA approval of similar products for similar indications
during the first seven years of product sales in the United States. Loss of
Orphan Drug Act protection for the Company's products that are currently
marketed or in development, resulting from expiration of Orphan Drug status or
amendment of the Orphan Drug Act, could lead to increased competition for those
products and potentially lower future product revenues.
Roche Holdings, Inc. : At December 31, 1994, the Company was 65% owned by Roche
Holdings, Inc. (Roche). See Note 9 in the "Notes to Consolidated Financial
Statements" for further information.
Foreign Exchange: The Company receives revenues from countries throughout the
world. As a result, risk exists that revenues maybe impacted by changes in the
exchange rates between the U.S. dollar and foreign currencies. To mitigate this
risk, the Company hedges certain of these revenues as discussed in Note 6 in the
"Notes to Consolidated Financial Statements."
Legal Proceedings: The Company is a party to various legal proceedings. See Note
12 in the "Notes to Consolidated Financial Statements" for further information.
7
General: The Company believes that its cash, cash equivalents, and short-term
and long-term investments, together with funds provided by operations and
leasing arrangements, will be sufficient to meet its operating cash
requirements, including capital expenditures and the development of existing and
new products through internal research and development activities, product
in-licensing, research collaborations, equity investments and geographic
expansion.
8
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: September 18, 1995
By: LOUIS J. LAVIGNE, JR.
----------------------------------
Louis J. Lavigne, Jr.
Senior Vice President and
Chief Financial Officer
By: BRADFORD S. GOODWIN
----------------------------------
Bradford S. Goodwin
Vice President and Controller