Annual Report (Form 10-K), fiscal year 1994

ITEM 1. BUSINESS
Genentech, Inc. (the "Company") is an international biotechnology company that discovers, develops, manufactures and markets human pharmaceuticals for significant unmet medical needs. Genentech was organized in April 1976 as a California corporation and was reincorporated in Delaware in January 1987. The science of biotechnology product discovery and development is at the core of the Company's business and has led to ten of the approved pharmaceutical products of biotechnology. In September 1990, Roche Holdings, Inc. (Roche) acquired approximately 60% of the Company's voting stock in a merger transaction (Merger). The common stock Roche acquired in the Merger and redeemable common stock subsequently purchased on the open market represented approximately 65% of the outstanding equity of the Company as of March 13, 1995. Roche has the option to purchase all shares of outstanding redeemable common stock at $58.75 per share in the first calendar quarter of 1995, increasing to $60.00 per share on April 1, 1995. The redemption right expires on June 30, 1995. For the period of July 1, 1995 until June 30, 1996, Roche may submit a bid to purchase the remaining shares of the Company. The bid must not be for less than $60.00 per share and is subject to the approval of the Board of Directors and, subsequently, the non-Roche shareholders. Independent of its right to have the Company redeem the redeemable common stock, Roche is permitted to acquire additional shares of the Company's stock through open market or privately negotiated purchases, provided that Roche's aggregate holdings do not exceed 75% of the Company's stock outstanding on a fully diluted basis. As used in this report, except where the context otherwise indicates, the "Company" means Genentech, Inc. and its subsidiaries, including subsidiary operations in Europe, Canada and Japan.
Products
Genentech has five products that it has developed and currently manufactures and markets in the United States: 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; Pulmozyme, registered trademark, (dornase alfa) inhalation solution; and Actimmune, registered trademark, (Interferon gamma-1b) recombinant interferon gamma. Genentech also markets Activase, Protropin and Pulmozyme in Canada.
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 United States Food and Drug Administration (FDA) approved Activase for marketing in the United States in 1987 for the treatment of acute myocardial infarction (AMI or heart attack) and in 1990 for use in the treatment of acute pulmonary embolism (blood clots in the lungs). Phase III clinical trials are currently underway to evaluate Activase for ischemic stroke (stroke caused by blood clots in the arteries to the brain). Phase I studies are being performed to evaluate a second generation of t-PA which is anticipated to be easier to administer, work faster, cause less unwanted bleeding and require smaller doses than Activase.
In exchange for royalty payments, Genentech has licensed marketing rights to recombinant t-PA in Japan to Kyowa Hakko Kogyo, Ltd. (Kyowa) and Mitsubishi Kasei Corporation (Mitsubishi). Kyowa and Mitsubishi are marketing forms of recombinant t-PA under the trademarks Activacin, registered trademark, and GRTPA, registered trademark, respectively. In a number of countries outside of the United States, Canada and Japan, Genentech has licensed t-PA marketing rights to Boehringer Ingelheim International GmbH (Boehringer). Boehringer markets recombinant t-PA under the trademark Actilyse, registered trademark.
Prior to February 1995 t-PA was marketed in Canada by Genentech under the Activase trademark and by Boehringer under the trademark Lysatec. In February 1995, Genentech purchased all t-PA Canadian marketing rights from Boehringer.
Protropin: Human growth hormone is a naturally occurring human protein produced in the pituitary gland. It regulates metabolism and is responsible for growth in children. A recombinant growth hormone product developed by Genentech, Protropin was approved by the FDA in 1985 for marketing in the United States for the treatment of growth hormone inadequacy in children.
In exchange for royalty payments, Genentech has licensed rights to recombinant growth hormone outside the United States and Canada to Pharmacia AB (formerly Kabivitrum AB), which manufactures and markets recombinant growth hormone under the trademarks Somatonorm, registered trademark, and Genotropin, registered trademark. Under the terms of the agreement with Pharmacia, Genentech will have the right to begin selling growth hormone in certain European countries in late 1995, and Pharmacia will have the right in late 1995 to begin selling their own growth hormone in the United States and Canada provided they have received regulatory approval.
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. It was approved by the FDA in March 1994 for marketing for the treatment of growth hormone inadequacy in children. Nutropin was approved in November 1993 and launched in January 1994 for marketing in the United States 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 medical problems, including growth hormone inadequacy. The condition affects an estimated 3,000 children in the United States. Nutropin has been designated an Orphan Drug for treatment of growth hormone inadequacy in children with CRI in the United States. The Company is awaiting regulatory approvals to market a liquid formulation of Nutropin, aimed at providing improved convenience in administration. Phase III clinical trials are underway to evaluate Nutropin as a treatment for children with short stature associated with Turner Syndrome (a genetic disorder). Phase II clinical trials are currently underway with Nutropin to treat growth hormone inadequacy in adults.
Pulmozyme: Pulmozyme is marketed in the United States, Canada and Europe for the management of cystic fibrosis, for which it has Orphan Drug designation in the United States. There are an estimated 53,000 patients with cystic fibrosis worldwide, a significant portion of whom are expected to be candidates for treatment.
In 1992, the Company entered into a collaboration with F. Hoffmann-LaRoche, Ltd. (HLR) to codevelop and copromote Pulmozyme in Europe. In connection with this collaboration and the Company's efforts to expand its markets, Genentech Europe Limited (GEL), a Bermuda company, was established. GEL and affiliates are currently copromoting Pulmozyme in the United Kingdom, Ireland, Germany and the Netherlands. Presently, HLR is responsible for promoting the drug for cystic fibrosis in the remaining western European countries in the collaboration. In addition to sharing profits related to Pulmozyme sales from all Western European collaborative countries with HLR, the Company has received and will continue to receive milestone payments and technical support from HLR. Also, as part of the agreement with HLR, and in return for royalties on product sales, the Company has granted HLR an exclusive license to distribute Pulmozyme in countries outside of Western Europe, the United States and Canada.
Phase III international trials are ongoing to study the use of Pulmozyme to treat Chronic Obstructive Pulmonary Disease (COPD), a clinical syndrome of airway inflammation, infection and obstruction that leads to lung destruction.
Actimmune: Actimmune is approved in the United States 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 an Orphan Drug for the treatment of CGD in the United States. Phase III clinical trials are ongoing to investigate the use of Actimmune to treat renal cell carcinoma, a cancer of the kidneys. Depending on clinical trial results, the Company hopes to expand the market potential of Actimmune over time by obtaining new approvals for indications with larger populations, but such expansion is not assured. Additionally, the Company receives royalty payments from Boehringer from the sale of interferon gamma in certain countries outside of the United States, Canada and Japan.
Licensed Products:
In addition to the royalties mentioned above, the Company also receives royalties on the following human health care products:
In December 1994, the Company and Lilly reached an agreement regarding all patent infringement and breach of contract actions then pending between the two parties. Under the terms of the settlement, Lilly agreed to pay the Company up to $145 million ($25 million initially and 16 quarterly payments of $7.5 million), subject to certain restrictions, and the Company granted Lilly licenses, options to licenses, or immunities from suit for certain of the Company's patents. Future payments are required from Lilly on sales of these products. See "Item 3






ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The sections labeled "Common Stock and Redeemable Common Stock Information" and Notes 9 and 11 of the Notes to Consolidated Financial Statements appearing on pages 64, 54 through 55, and 56 through 58, respectively, of the Company's 1994 Annual Report to Stockholders are incorporated herein by reference.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The section labeled "11-Year Financial Summary" appearing on pages 62 and 63 of the Company's 1994 Annual Report to Stockholders is incorporated herein by reference.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The section labeled "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing on pages 33 through 38 of the Company's 1994 Annual Report to Stockholders is incorporated herein by reference.
ITEM 8.


ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Notes to Consolidated Financial Statements appearing on pages 40 through 60, the Report of Ernst & Young LLP, Independent Auditors, appearing on page 61 and the section entitled "Quarterly Financial Data (unaudited)" appearing on page 61 of the Company's 1994 Annual Report to Stockholders are incorporated herein by reference.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) The sections labeled "Nominees" and "Section 16 Reporting" appearing in the Company's Proxy Statement in connection with the 1995 Annual Meeting of Stockholders on pages 3 through 5 and 11 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.

ITEM 11. EXECUTIVE COMPENSATION
The sections labeled "Executive Compensation", "Compensation of Directors", "Compensation of Executive Officers", "Summary of Compensation", "Stock Option Grants and Exercises", "Employment Agreements", "Loans and Other Compensation" and "Compensation Committee Interlocks and Insider Participation" appearing in the Company's Proxy Statement in connection with the 1995 Annual Meeting of Stockholders on pages 11 through 18 and 20 are incorporated herein by reference.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The sections labeled "Merger with Roche Holdings, Inc.", "Principal Stockholders of Genentech" and "Security Ownership of Management" appearing in the Company's Proxy Statement in connection with the 1995 Annual Meeting of Stockholders on pages 1 through 2 and 10 through 11 are incorporated herein by reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section labeled "Certain Relationships and Related Transactions" appearing in the Company's Proxy Statement in connection with the 1995 Annual Meeting of Stockholders on pages 21 through 23 is incorporated herein by reference.
PART IV
ITEM 14.

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 1994 Annual Report to Stockholders and are incorporated herein by reference pursuant to Item 8 of this Form 10-K.
Page(s) in 1994 Annual Report to Stockholders ---------------------- Consolidated Statements of Income for each of the three years in the period ended December 31, 1994 40
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1994 41
Consolidated Balance Sheets at December 31, 1994 and 1993 42
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1994 43
Notes to Consolidated Financial Statements 44-60
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, 1994.
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
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the quarter ended December 31, 1994.
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(1) Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31, 1985 and incorporated herein by reference. (2) Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31, 1986 and incorporated herein by reference. (3) Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31, 1988 and incorporated herein by reference. (4) Filed as an exhibit to Form 8-K dated May 3, 1988 and incorporated herein by reference. (5) Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31, 1988 and incorporated herein by reference. (6) Filed as an exhibit to Form 8-K dated February 15, 1990 and incorporated herein by reference. (7) Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31, 1989 and incorporated herein by reference. (8) Filed as an exhibit to Form S-4 dated May 2, 1990 and incorporated herein by reference. (9) Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31, 1990 and incorporated herein by reference. (10) Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated herein by reference. (11) Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. (12) Filed with this document.
* 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. For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statements on Form S-8 Nos. 2-95744, 33-9292, 33-16671, 33-39631 and 33-60816:
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and shall be governed by the final adjudication of such issue.
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 30, 1995 By: /S/BRADFORD S. GOODWIN ---------------------------------- Bradford S. Goodwin Vice President and Controller (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., Senior Vice President and Chief Financial Officer, and Bradford S. Goodwin, Vice President and Controller, 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 --------- ----- ----
Chief Executive Officer:
/S/G. KIRK RAAB President, Chief Executive March 30, 1995 --------------------------- Officer and Director G. Kirk Raab
Principal Financial Officer:
/S/LOUIS J. LAVIGNE, JR. Senior Vice President and March 30, 1995 --------------------------- Chief Financial Officer Louis J. Lavigne, Jr.
Director:
/S/HERBERT W. BOYER Director March 30, 1995 --------------------------- Herbert W. Boyer
/S/JURGEN DREWS Director March 30, 1995 --------------------------- Jurgen Drews
/S/ARMIN M. KESSLER Director March 30, 1995 --------------------------- Armin M. Kessler
/S/LINDA F. LEVINSON Director March 30, 1995 --------------------------- Linda F. Levinson
/S/J. RICHARD MUNRO Director March 30, 1995 --------------------------- J. Richard Munro
/S/DONALD L. MURFIN Director March 30, 1995 --------------------------- Donald L. Murfin
/S/JOHN T. POTTS, JR. Director March 30, 1995 --------------------------- John T. Potts, Jr.
/S/C. THOMAS SMITH, JR. Director March 30, 1995 --------------------------- C. Thomas Smith, Jr.
/S/ROBERT A. SWANSON Director March 30, 1995 --------------------------- Robert A. Swanson
/S/DAVID S. TAPPAN, JR. Director March 30, 1995 --------------------------- David S. Tappan, Jr.
INDEX OF EXHIBITS FILED WITH FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1994
Exhibit No. Description ----------- ----------- 10.15 1991 Employee Stock Plan, as amended.
13.1 1994 Annual Report to Stockholders
23.1 Consent of Ernst & Young LLP, Independent Auditors
27.1 Financial Data Schedule