UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
________________________
FORM
10-Q
________________________
|
(Mark
One)
|
|
|
þ
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
|
For
the quarterly period ended June 30, 2008
|
|
|
|
or
|
|
o
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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.
(Exact
name of registrant as specified in its charter)
|
Delaware
(State
or other jurisdiction of incorporation or organization)
|
94-2347624
(I.R.S.
Employer Identification Number)
|
1 DNA
Way, South San Francisco, California 94080-4990
(Address
of principal executive offices and Zip Code)
(650) 225-1000
(Registrant’s
telephone number, including area code)
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 þ No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
|
Large
accelerated filer þ
|
Accelerated
filer o
|
|
Non-accelerated
filer o (Do not
check if a smaller reporting company)
|
Smaller
reporting company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
Indicate
the number of shares outstanding of each of the issuer’s classes of Common
Stock, as of the latest practicable date.
|
Class
|
Number of Shares
Outstanding
|
|
Common
Stock $0.02 par value
|
1,055,649,792 Outstanding
at July 31, 2008
|
GENENTECH,
INC.
TABLE
OF CONTENTS
|
|
|
Page
No.
|
|
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PART
I—FINANCIAL INFORMATION
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|
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Item
1.
|
Financial
Statements (unaudited)
|
3
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Income—
for
the three months and six months ended June 30, 2008 and
2007
|
3
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows—
for
the six months ended June 30, 2008 and 2007
|
4
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets—
June
30, 2008 and December 31, 2007
|
5
|
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
6–17
|
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
18
|
|
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|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
19–45
|
|
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|
|
|
Item
3.
|
Quantitative and Qualitative
Disclosures About Market Risk
|
46
|
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
46
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PART
II—OTHER INFORMATION
|
|
|
|
|
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|
Item
1.
|
Legal
Proceedings
|
47
|
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
47–60
|
|
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
60–61
|
|
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
61–62
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|
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|
Item
6.
|
Exhibits
|
62
|
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|
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SIGNATURES
|
63
|
In
this report, “Genentech,” “we,” “us,” and “our” refer to Genentech,
Inc. and its consolidated subsidiaries. “Common Stock” refers to Genentech’s
Common Stock, par value $0.02 per share, “Special Common Stock” refers to
Genentech’s callable putable common stock, par value $0.02 per share, all of
which was redeemed by Roche Holdings, Inc. (RHI) on June 30, 1999.
We
own or have rights to various copyrights, trademarks, and trade names used in
our business, including the following: Activase®
(alteplase, recombinant) tissue-plasminogen activator; Avastin®
(bevacizumab) anti-VEGF antibody; Cathflo®
Activase®
(alteplase for catheter clearance); Genentech®;
Herceptin®
(trastuzumab) anti-HER2 antibody; Lucentis®
(ranibizumab) anti-VEGF antibody fragment; Nutropin®
(somatropin [rDNA origin] for injection) growth hormone; Nutropin AQ® and
Nutropin AQ Pen®
(somatropin [rDNA origin] for injection) liquid formulation growth hormone;
Pulmozyme® (dornase
alfa, recombinant) inhalation solution; Raptiva®
(efalizumab) anti-CD11a antibody; and TNKase®
(tenecteplase) single-bolus thrombolytic agent. Rituxan®
(rituximab) anti-CD20 antibody is a registered trademark of Biogen Idec Inc.;
Tarceva®
(erlotinib) is a registered trademark of OSI Pharmaceuticals, Inc.; and
Xolair®
(omalizumab) anti-IgE antibody is a registered trademark of Novartis AG. This
report also includes other trademarks, service marks, and trade names of other
companies.
GENENTECH,
INC.
(In
millions, except per share amounts)
(Unaudited)
|
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales (including amounts from related parties:
three
months—2008–$146; 2007–$256;
six
months—2008–$286; 2007–$522)
|
|
$ |
2,536 |
|
|
$ |
2,443 |
|
|
$ |
4,915 |
|
|
$ |
4,773 |
|
|
Royalties
(including amounts from related parties:
three
months—2008–$451; 2007–$296;
six
months—2008–$874; 2007–$557)
|
|
|
629 |
|
|
|
484 |
|
|
|
1,244 |
|
|
|
903 |
|
|
Contract
revenue (including amounts from related parties:
three
months—2008–$35; 2007–$34;
six
months—2008–$66; 2007–$104)
|
|
|
71 |
|
|
|
77 |
|
|
|
140 |
|
|
|
171 |
|
|
Total
operating revenue
|
|
|
3,236 |
|
|
|
3,004 |
|
|
|
6,299 |
|
|
|
5,847 |
|
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales (including amounts for related parties:
three
months—2008–$90; 2007–$140;
six
months—2008–$156; 2007–$265)
|
|
|
441 |
|
|
|
429 |
|
|
|
831 |
|
|
|
821 |
|
|
Research
and development (including amounts associated with related party
collaborations:
three
months—2008–$89; 2007–$79;
six
months—2008–$168; 2007–$147)
(including
amounts where reimbursement was recorded as contract revenue:
three
months—2008–$47; 2007–$60;
six
months—2008–$97; 2007–$106)
|
|
|
649 |
|
|
|
603 |
|
|
|
1,266 |
|
|
|
1,213 |
|
|
Marketing,
general and administrative
|
|
|
559 |
|
|
|
532 |
|
|
|
1,076 |
|
|
|
1,023 |
|
|
Collaboration
profit sharing (including related party amounts:
three
months—2008–$48; 2007–$49;
six
months—2008–$89; 2007–$96)
|
|
|
313 |
|
|
|
277 |
|
|
|
592 |
|
|
|
529 |
|
|
Recurring
amortization charges related to redemption and acquisition
|
|
|
43 |
|
|
|
26 |
|
|
|
86 |
|
|
|
52 |
|
|
Special
items: litigation-related
|
|
|
2 |
|
|
|
13 |
|
|
|
(300 |
) |
|
|
26 |
|
|
Total
costs and expenses
|
|
|
2,007 |
|
|
|
1,880 |
|
|
|
3,551 |
|
|
|
3,664 |
|
|
Operating
income
|
|
|
1,229 |
|
|
|
1,124 |
|
|
|
2,748 |
|
|
|
2,183 |
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income, net
|
|
|
93 |
|
|
|
75 |
|
|
|
166 |
|
|
|
149 |
|
|
Interest
expense
|
|
|
(15 |
) |
|
|
(17 |
) |
|
|
(32 |
) |
|
|
(35 |
) |
|
Total
other income, net
|
|
|
78 |
|
|
|
58 |
|
|
|
134 |
|
|
|
114 |
|
|
Income
before taxes
|
|
|
1,307 |
|
|
|
1,182 |
|
|
|
2,882 |
|
|
|
2,297 |
|
|
Income
tax provision
|
|
|
525 |
|
|
|
435 |
|
|
|
1,118 |
|
|
|
844 |
|
|
Net
income
|
|
$ |
782 |
|
|
$ |
747 |
|
|
$ |
1,764 |
|
|
$ |
1,453 |
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.74 |
|
|
$ |
0.71 |
|
|
$ |
1.68 |
|
|
$ |
1.38 |
|
|
Diluted
|
|
$ |
0.73 |
|
|
$ |
0.70 |
|
|
$ |
1.65 |
|
|
$ |
1.36 |
|
|
Shares
used to compute basic earnings per share
|
|
|
1,051 |
|
|
|
1,053 |
|
|
|
1,052 |
|
|
|
1,053 |
|
|
Shares
used to compute diluted earnings per share
|
|
|
1,064 |
|
|
|
1,070 |
|
|
|
1,066 |
|
|
|
1,071 |
|
See
Notes to Condensed Consolidated Financial Statements.
GENENTECH,
INC.
(In
millions)
(Unaudited)
|
|
|
Six
Months
Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
1,764 |
|
|
$ |
1,453 |
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
285 |
|
|
|
215 |
|
|
Employee
stock-based compensation
|
|
|
208 |
|
|
|
203 |
|
|
Deferred
income taxes
|
|
|
217 |
|
|
|
(103 |
) |
|
Deferred
revenue
|
|
|
(7 |
) |
|
|
(29 |
) |
|
Litigation-related
special items
|
|
|
(300 |
) |
|
|
26 |
|
|
Excess
tax benefit from stock-based compensation arrangements
|
|
|
(32 |
) |
|
|
(127 |
) |
|
Gain
on sales of securities available-for-sale and other
|
|
|
(52 |
) |
|
|
(12 |
) |
|
Write-downs
of securities available-for-sale and other
|
|
|
41 |
|
|
|
4 |
|
|
Loss
on property and equipment dispositions
|
|
|
3 |
|
|
|
30 |
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Receivables
and other current assets
|
|
|
(59 |
) |
|
|
(115 |
) |
|
Inventories
|
|
|
83 |
|
|
|
(180 |
) |
|
Investments
in trading securities
|
|
|
(16 |
) |
|
|
(72 |
) |
|
Accounts
payable, other accrued liabilities, and other long-term
liabilities
|
|
|
(455 |
) |
|
|
132 |
|
|
Accrued
litigation
|
|
|
(476 |
) |
|
|
– |
|
|
Net
cash provided by operating activities
|
|
|
1,204 |
|
|
|
1,425 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
Purchases
of securities available-for-sale
|
|
|
(953 |
) |
|
|
(465 |
) |
|
Proceeds
from sales of securities available-for-sale
|
|
|
837 |
|
|
|
335 |
|
|
Proceeds
from maturities of securities available-for-sale
|
|
|
159 |
|
|
|
261 |
|
|
Capital
expenditures
|
|
|
(398 |
) |
|
|
(475 |
) |
|
Change
in other intangible and long-term assets
|
|
|
24 |
|
|
|
(8 |
) |
|
Net
cash used in investing activities
|
|
|
(331 |
) |
|
|
(352 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
Stock
issuances
|
|
|
228 |
|
|
|
276 |
|
|
Stock
repurchases
|
|
|
(756 |
) |
|
|
(666 |
) |
|
Excess
tax benefit from stock-based compensation arrangements
|
|
|
32 |
|
|
|
127 |
|
|
Net
cash used in financing activities
|
|
|
(496 |
) |
|
|
(263 |
) |
|
Net
increase in cash and cash equivalents
|
|
|
377 |
|
|
|
810 |
|
|
Cash
and cash equivalents at beginning of period
|
|
|
2,514 |
|
|
|
1,250 |
|
|
Cash
and cash equivalents at end of period
|
|
$ |
2,891 |
|
|
$ |
2,060 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow data
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$ |
1,030 |
|
|
$ |
806 |
|
|
Interest
|
|
|
31 |
|
|
|
31 |
|
|
Non-cash
investing and financing activities
|
|
|
|
|
|
|
|
|
|
Capitalization
of construction in progress related to financing lease
transactions
|
|
|
75 |
|
|
|
101 |
|
See
Notes to Condensed Consolidated Financial Statements.
GENENTECH,
INC.
(In
millions)
(Unaudited)
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,891 |
|
|
$ |
2,514 |
|
|
Short-term
investments
|
|
|
1,614 |
|
|
|
1,461 |
|
|
Restricted
cash and investments
|
|
|
788 |
|
|
|
788 |
|
|
Accounts
receivable—product sales (net of allowances of:
2008–$145;
2007–$116; including amounts from related parties:
2008–$46;
2007–$2)
|
|
|
889 |
|
|
|
847 |
|
|
Accounts
receivable—royalties (including amounts from related
parties:
2008–$570;
2007–$463)
|
|
|
732 |
|
|
|
620 |
|
|
Accounts
receivable—other (including amounts from related parties:
2008–$96;
2007–$233)
|
|
|
200 |
|
|
|
299 |
|
|
Inventories
|
|
|
1,406 |
|
|
|
1,493 |
|
|
Deferred
tax assets
|
|
|
385 |
|
|
|
614 |
|
|
Prepaid
expenses
|
|
|
129 |
|
|
|
100 |
|
|
Other
current assets
|
|
|
19 |
|
|
|
17 |
|
|
Total
current assets
|
|
|
9,053 |
|
|
|
8,753 |
|
|
Long-term
marketable debt and equity securities
|
|
|
1,832 |
|
|
|
2,090 |
|
|
Property,
plant and equipment, net
|
|
|
5,266 |
|
|
|
4,986 |
|
|
Goodwill
|
|
|
1,577 |
|
|
|
1,577 |
|
|
Other
intangible assets
|
|
|
1,083 |
|
|
|
1,168 |
|
|
Other
long-term assets
|
|
|
308 |
|
|
|
366 |
|
|
Total
assets
|
|
$ |
19,119 |
|
|
$ |
18,940 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders’ equity
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
Accounts
payable (including amounts to related parties:
2008–$8;
2007–$2)
|
|
$ |
223 |
|
|
$ |
420 |
|
|
Commercial
paper
|
|
|
599 |
|
|
|
599 |
|
|
Deferred
revenue (including amounts from related parties:
2008–$67;
2007–$63)
|
|
|
81 |
|
|
|
73 |
|
|
Taxes
payable
|
|
|
7 |
|
|
|
173 |
|
|
Accrued
litigation
|
|
|
– |
|
|
|
776 |
|
|
Other
accrued liabilities (including amounts to related
parties:
2008–$218;
2007–$230)
|
|
|
1,795 |
|
|
|
1,877 |
|
|
Total
current liabilities
|
|
|
2,705 |
|
|
|
3,918 |
|
|
Long-term
debt
|
|
|
2,475 |
|
|
|
2,402 |
|
|
Deferred
revenue (including amounts from related parties:
2008–$374;
2007–$384)
|
|
|
404 |
|
|
|
418 |
|
|
Other
long-term liabilities
|
|
|
250 |
|
|
|
297 |
|
|
Total
liabilities
|
|
|
5,834 |
|
|
|
7,035 |
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
21 |
|
|
|
21 |
|
|
Additional
paid-in capital
|
|
|
10,878 |
|
|
|
10,695 |
|
|
Accumulated
other comprehensive income
|
|
|
105 |
|
|
|
197 |
|
|
Retained
earnings
|
|
|
2,281 |
|
|
|
992 |
|
|
Total
stockholders’ equity
|
|
|
13,285 |
|
|
|
11,905 |
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
19,119 |
|
|
$ |
18,940 |
|
See
Notes to Condensed Consolidated Financial Statements.
GENENTECH,
INC.
(Unaudited)
|
Note
1.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation
We
prepared the Condensed Consolidated Financial Statements following the
requirements of the United States (U.S.) Securities and Exchange Commission for
interim reporting. As permitted under those rules, certain footnotes or other
financial information that are normally required by U.S. generally accepted
accounting principles (GAAP) can be condensed or omitted. The information
included in this Quarterly Report on Form 10-Q should be read in conjunction
with the consolidated financial statements and accompanying notes included in
our Annual Report on Form 10-K for the year ended December 31, 2007. In the
opinion of management, the financial statements include all adjustments,
consisting only of normal and recurring adjustments, considered necessary for
the fair presentation of our financial position and operating
results.
Revenue,
expenses, assets, and liabilities can vary during each quarter of the year.
Therefore, the results and trends in these interim financial statements may not
be the same as those reported for the full year or any future
period.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Genentech and all of
our wholly owned subsidiaries. Material intercompany accounts and transactions
have been eliminated.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management
to make judgments, assumptions, and estimates that affect the amounts reported
in our Condensed Consolidated Financial Statements and accompanying notes.
Actual results could differ materially from the estimates.
Recent
Accounting Pronouncements
In
February 2008, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Position (FSP) No. 157-2, which delays the effective date of FASB
Statement of Financial Accounting Standard (FAS) No. 157, “Fair Value Measurements” (FAS 157) for non-financial
assets and non-financial liabilities, except for items that are recognized or
disclosed at fair value on a recurring basis (items that are remeasured at least
annually). The FSP defers the effective date of FAS 157 for non-financial assets
and non-financial liabilities until our fiscal year beginning on January 1,
2009. We do not expect the adoption of this FSP to have a material effect on our
consolidated financial statements.
In
March 2008, the FASB issued FAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No.
133” (FAS 161).
FAS 161 requires us to provide greater transparency about how and why we use
derivative instruments, how the instruments and related hedged items are
accounted for under FAS 133, and how the instruments and related hedged items
affect our financial position, results of operations, and cash flows. FAS 161 is
effective for us beginning on January 1, 2009. We do not expect the adoption of
FAS 161 to have a material effect on our consolidated financial statements, but
we will be required to expand our disclosure regarding our derivative
instruments.
Revenue
Recognition
We
recognize revenue from the sale of our products, royalties earned, and contract
arrangements. Certain of our revenue arrangements that contain multiple elements
are divided into separate units of accounting if certain criteria are met,
including whether the delivered element has standalone value to the customer and
whether there is objective
and
reliable evidence of the fair value of the undelivered items. The consideration
we receive is allocated among the separate units based on their respective fair
values, and the applicable revenue recognition criteria are applied to each of
the separate units. Advance payments received in excess of amounts earned are
classified as deferred revenue until earned.
The
Avastin Patient Assistance Program is a voluntary program that enables eligible
patients who have received 10,000 milligrams (mg) of Avastin in a 12-month
period to receive free Avastin in excess of the 10,000 mg during the remainder
of the 12-month period. Based on the current wholesale acquisition cost, 10,000
mg is valued at $55,000 in gross revenue. We defer a portion of our gross
Avastin product sales revenue to reflect our estimate of the commitment to
supply free Avastin to patients who elect to enroll in the program. To calculate
our deferred revenue, we estimate several factors, most notably: the number
of patients who are currently being treated for U.S. Food and Drug
Administration (FDA)-approved indications and the start date of their
treatment regimen, the extent to which patients may elect to enroll in the
program, the number of patients who meet the financial eligibility requirements
of the program, and the duration and extent of treatment for the FDA-approved
indications, among other factors. We will continue to update our estimates for
each reporting period as new information becomes available. Based on these
estimates, we defer a portion of the Avastin revenue on product vials sold
through normal commercial channels. The deferred revenue is recognized when free
Avastin vials are delivered or after the associated patient eligibility period
has passed.
Earnings
Per Share
Basic
earnings per share (EPS) are computed based on the weighted-average number of
shares of our Common Stock outstanding. Diluted EPS are computed based on the
weighted-average number of shares of our Common Stock and other dilutive
securities.
The
following is a reconciliation of the numerators and denominators of the basic
and diluted EPS computations (in millions):
|
|
|
Three
Months
Ended
June 30,
|
|
|
Six
Months
Ended
June 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
782 |
|
|
$ |
747 |
|
|
$ |
1,764 |
|
|
$ |
1,453 |
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding used to compute basic earnings per
share
|
|
|
1,051 |
|
|
|
1,053 |
|
|
|
1,052 |
|
|
|
1,053 |
|
|
Effect
of dilutive stock options
|
|
|
13 |
|
|
|
17 |
|
|
|
14 |
|
|
|
18 |
|
|
Weighted-average
shares outstanding and dilutive securities used to compute diluted
earnings per share
|
|
|
1,064 |
|
|
|
1,070 |
|
|
|
1,066 |
|
|
|
1,071 |
|
Outstanding
employee stock options to purchase 49 million shares of our Common Stock were
excluded from the computation of diluted EPS for the second quarter and first
six months of 2008 because the effect would have been
anti-dilutive.
Comprehensive
Income
Comprehensive
income comprises net income and other comprehensive income (OCI). OCI includes
certain changes in stockholders’ equity that are excluded from net income.
Specifically, we include in OCI changes in the estimated fair value of
derivatives designated as effective cash flow hedges, unrealized gains and
losses on our securities available-for-sale, and the gains or losses and prior
service costs or credits related to our post-retirement benefit plan that arise
during the period but are not recognized as components of net periodic benefit
cost.
The
components of accumulated OCI, net of taxes, were as follows (in millions):
|
|
|
|
|
|
|
|
|
Net
unrealized gains on securities available-for-sale
|
|
$ |
161 |
|
|
$ |
219 |
|
|
Net
unrealized losses on cash flow hedges
|
|
|
(48 |
) |
|
|
(14 |
) |
|
Accumulated
changes in post-retirement benefit obligation
|
|
|
(8 |
) |
|
|
(8 |
) |
|
Accumulated
other comprehensive income
|
|
$ |
105 |
|
|
$ |
197 |
|
The
activity in comprehensive income, net of income taxes, was as follows (in millions):
|
|
|
Three
Months
Ended
June 30,
|
|
|
Six
Months
Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
782 |
|
|
$ |
747 |
|
|
$ |
1,764 |
|
|
$ |
1,453 |
|
|
Decrease in
unrealized gains on securities available-for-sale
|
|
|
(44 |
) |
|
|
(14 |
) |
|
|
(58 |
) |
|
|
(10 |
) |
|
Decrease
(increase) in unrealized losses on cash flow hedges
|
|
|
26 |
|
|
|
8 |
|
|
|
(34 |
) |
|
|
11 |
|
|
Comprehensive
income, net of income taxes
|
|
$ |
764 |
|
|
$ |
741 |
|
|
$ |
1,672 |
|
|
$ |
1,454 |
|
The
decrease in net unrealized losses on cash flow hedges during the second quarter
of 2008 was primarily due to the strengthening of the U.S. dollar during this
period. The increase in net unrealized losses on cash flow hedges during the
first six months of 2008 was primarily due to the overall weakening of the U.S.
dollar during this period, despite the strengthening that occurred during the
second quarter. In the periods in which the hedged transaction affects earnings,
any gains or losses on cash flow hedges will be offset by revenue denominated in
the underlying foreign currency.
Fair
Value of Financial Instruments
The
fair value of our financial instruments reflects the amounts that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date (exit price).
The fair value estimates presented in this report reflect the information
available to us as of June 30, 2008 and December 31, 2007. See Note 4, “Fair
Value Measurements.”
Derivative
Instruments
Our
derivative instruments, designated as cash flow hedges, consist of foreign
currency exchange options and forwards. As of June 30, 2008, unrealized net
losses of approximately $50 million were expected to be reclassified from
accumulated OCI to earnings within the next 12 months. If realized, these
amounts are expected to be offset by increases in the underlying
foreign-currency-denominated royalty revenue over this same 12-month
period.
|
Note
2.
|
Employee
Stock-Based Compensation
|
Stock-Based
Compensation Expense under FAS 123R
The
components of employee stock-based compensation expense recognized under FAS No.
123(R), “Share-Based Payment” (FAS 123R), were as follows
(in
millions):
|
|
|
Three
Months
Ended
June 30,
|
|
|
Six
Months
Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
$ |
18 |
|
|
$ |
16 |
|
|
$ |
41 |
|
|
$ |
33 |
|
|
Research
and development
|
|
|
38 |
|
|
|
39 |
|
|
|
80 |
|
|
|
77 |
|
|
Marketing,
general and administrative
|
|
|
41 |
|
|
|
47 |
|
|
|
87 |
|
|
|
93 |
|
|
Total
employee stock-based compensation expense
|
|
$ |
97 |
|
|
$ |
102 |
|
|
$ |
208 |
|
|
$ |
203 |
|
As
of June 30, 2008, total compensation cost related to unvested stock options not
yet recognized was $661 million, which
is expected to be allocated to expense and production costs over a
weighted-average period of 31 months. The portion
allocated to production costs will be recognized as cost of sales (COS) when the
related products are estimated to be sold.
The
carrying value of inventory on our Condensed Consolidated Balance Sheets as of
June 30, 2008 and December 31, 2007 included employee stock-based compensation
costs of $68 million and $72 million, respectively.
Valuation
Assumptions
The
employee stock-based compensation expense recognized under FAS 123R was
determined using the Black-Scholes option valuation model. Option valuation
models require the input of subjective assumptions, and these assumptions can
vary over time. The weighted-average assumptions used were as
follows:
|
|
|
Three
Months
Ended
June 30,
|
|
|
Six
Months
Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
3.3 |
% |
|
|
4.8 |
% |
|
|
3.0 |
% |
|
|
4.7 |
% |
|
Dividend
yield
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
Expected
volatility
|
|
|
25.0 |
% |
|
|
27.0 |
% |
|
|
25.0 |
% |
|
|
27.0 |
% |
|
Expected
term (years)
|
|
|
5.0 |
|
|
|
4.6 |
|
|
|
5.0 |
|
|
|
4.6 |
|
Due
to the redemption of our Special Common Stock in June 1999 by Roche Holdings,
Inc. (RHI), there is limited historical information available to support our
estimate of certain assumptions required to value our employee stock options. In
developing our estimate of expected term, we have assumed that our recent
historical stock option exercise experience is a relevant indicator of future
exercise patterns. We base our determination of expected volatility
predominantly on the implied volatility of our traded options with consideration
of our historical volatilities and the volatilities of comparable
companies.
|
Note
3.
|
Condensed
Consolidated Financial Statement
Detail
|
Inventories
The
components of inventories were as follows (in millions):
|
|
|
|
|
|
|
|
|
Raw
materials and supplies
|
|
$ |
125 |
|
|
$ |
119 |
|
|
Work-in-process
|
|
|
1,113 |
|
|
|
1,062 |
|
|
Finished
goods
|
|
|
168 |
|
|
|
312 |
|
|
Total
|
|
$ |
1,406 |
|
|
$ |
1,493 |
|
Included
in work-in-process as of June 30, 2008 were approximately $21 million
of inventories manufactured through a process that is awaiting regulatory
licensure.
|
Note
4.
|
Fair
Value Measurements
|
On January
1, 2008, we adopted FAS 157, which established a framework for measuring fair
value under GAAP and clarified the definition of fair value within that
framework. FAS 157 does not require assets and liabilities that were previously
recorded at cost to be recorded at fair value. For assets and liabilities that
are already required to be disclosed at fair value, FAS 157 introduced, or
reiterated, a number of key concepts that form the foundation of the fair value
measurement approach to be used for financial reporting purposes. The fair value
of our financial instruments reflects the amounts that we estimate we would
receive in connection with the sale of an asset or paid in connection with the
transfer of a liability in an orderly transaction between market participants at
the measurement date (exit price). FAS 157 also established a fair value
hierarchy that prioritizes the inputs used in valuation
techniques
into the following three levels:
Level
1—quoted prices in active markets for identical assets and
liabilities
Level
2—observable inputs other than quoted prices in active markets for identical
assets and liabilities
Level
3—unobservable inputs
The
adoption of FAS 157 did not have an effect on our financial condition or results
of operations, but FAS 157 introduced new disclosures about how we value certain
assets and liabilities. Much of the disclosure focuses on the inputs used to
measure fair value, particularly in instances in which the measurement uses
significant unobservable (Level 3) inputs. A substantial majority of our
financial instruments are valued using quoted prices in active markets or are
based on other observable inputs.
The
following table sets forth the fair value of our financial assets and
liabilities measured on a recurring basis, including those that are pledged as
collateral or are restricted. Assets and liabilities are measured on a
recurring basis if they are remeasured at least annually.
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,891 |
|
|
$ |
– |
|
|
$ |
2,514 |
|
|
$ |
– |
|
|
Restricted
cash
|
|
|
788 |
|
|
|
– |
|
|
|
788 |
|
|
|
– |
|
|
Short-term
investments
|
|
|
1,614 |
|
|
|
– |
|
|
|
1,461 |
|
|
|
– |
|
|
Long-term
marketable debt securities
|
|
|
1,458 |
|
|
|
– |
|
|
|
1,674 |
|
|
|
– |
|
|
Total
fixed income investment portfolio
|
|
|
6,751 |
|
|
|
– |
|
|
|
6,437 |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
marketable equity securities
|
|
|
374 |
|
|
|
– |
|
|
|
416 |
|
|
|
– |
|
|
Total
derivative financial instruments
|
|
|
28 |
|
|
|
82 |
|
|
|
30 |
|
|
|
19 |
|
|
Total
|
|
$ |
7,153 |
|
|
$ |
82 |
|
|
$ |
6,883 |
|
|
$ |
19 |
|
The
following table sets forth the fair value of our financial assets and
liabilities that were measured on a recurring basis as of June 30, 2008 (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
1,939 |
|
|
$ |
952 |
|
|
$ |
– |
|
|
$ |
2,891 |
|
|
Trading
securities
|
|
|
84 |
|
|
|
947 |
|
|
|
2 |
|
|
|
1,033 |
|
|
Securities
available-for-sale
|
|
|
205 |
|
|
|
2,467 |
|
|
|
155 |
|
|
|
2,827 |
|
|
Equity
securities
|
|
|
374 |
|
|
|
– |
|
|
|
– |
|
|
|
374 |
|
|
Derivative
financial instruments
|
|
|
18 |
|
|
|
10 |
|
|
|
– |
|
|
|
28 |
|
|
Total
|
|
$ |
2,620 |
|
|
$ |
4,376 |
|
|
$ |
157 |
|
|
$ |
7,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
financial instruments
|
|
$ |
– |
|
|
$ |
82 |
|
|
$ |
– |
|
|
$ |
82 |
|
Our
Level 1 assets include cash, money market instruments, U.S. Treasury securities,
marketable equity securities and equity forwards. Level 2 assets include other
government and agency securities, commercial paper, corporate bonds,
asset-backed securities, municipal bonds, preferred securities, and other
derivatives. Our Level 3 assets include student loan auction-rate securities and
structured investment vehicle securities. As of June 30, 2008, we held $157
million of investments which were measured using unobservable (Level
3) inputs, representing approximately 2% of our total fair value investment
portfolio. Student loan auction-rate securities of $155 million and structured
investment vehicle securities of $2 million were valued based on broker-provided
valuations, which approximate fair value. In February 2008, the auction-rate
securities market experienced a number of failed auctions for student
loan-backed securities, including those that we held and continue to hold, which
severely limited the liquidity of these securities. Due to market liquidity
constraints related to the failed auctions, we classified the auction-rate
securities as non-current assets consistent with the long-term maturity dates of
the underlying student loans. As of June 30, 2008, we believed that the
unrealized losses in the auction-rate securities were temporary
and
that
we had the ability to hold the assets to maturity. All of our auction-rate
securities are AAA/Aaa-rated and are collateralized by student loans that are
guaranteed by the U.S. government to be repaid at no less than 95% of par
value.
The
following table sets forth a summary of the changes in the fair value of our
Level 3 financial assets, which were measured at fair value on a recurring
basis for the second quarter and first six months of 2008 (in millions).
|
|
|
Three
Months
Ended
June 30, 2008
|
|
|
Six
Months
Ended
June 30, 2008
|
|
|
|
|
Structured
Investment Vehicle Securities
|
|
|
|
|
|
Structured
Investment Vehicle Securities
|
|
|
|
|
|
Beginning
balance
|
|
$ |
2 |
|
|
$ |
161 |
|
|
$ |
7 |
|
|
$ |
– |
|
|
Transfer
into Level 3(1)
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
174 |
|
|
Total
unrealized losses(2)
|
|
|
– |
|
|
|
(3 |
) |
|
|
(1 |
) |
|
|
(16 |
) |
|
Purchases,
issuances, settlement
|
|
|
– |
|
|
|
(3 |
) |
|
|
(4 |
) |
|
|
(3 |
) |
|
Ending
balance
|
|
$ |
2 |
|
|
$ |
155 |
|
|
$ |
2 |
|
|
$ |
155 |
|
___________
|
(1)
|
During
the first quarter of 2008, we held $174 million of auction-rate securities
that were transferred to Level 3 assets.
|
|
(2)
|
The
unrealized loss of $3 million in the second quarter and $16 million in the
first six months of 2008 was included in OCI as of June 30,
2008.
|
We
are a party to various legal proceedings, including licensing and contract
disputes, and other matters.
On
October 4, 2004, we received a subpoena from the U.S. Department of Justice
requesting documents related to the promotion of Rituxan, a prescription
treatment now approved for five indications. We are cooperating with the
associated investigation. Through counsel we are having discussions with
government representatives about the status of their investigation and
Genentech’s views on this matter, including potential resolution. Previously the
investigation had been both criminal and civil in nature. We have been informed
by the prosecutor handling this matter that the government has declined to
prosecute the company criminally in connection with this investigation. The
civil matter is still ongoing. The outcome of this matter cannot be
determined at this time.
We
and the City of Hope National Medical Center (COH) are parties to a 1976
agreement related to work conducted by two COH employees, Arthur Riggs and
Keiichi Itakura, and patents that resulted from that work, which are referred to
as the “Riggs/Itakura Patents.” Since that time, we have entered into license
agreements with various companies to manufacture, use, and sell the products
covered by the Riggs/Itakura Patents. On August 13, 1999, COH filed a complaint
against us in the Superior Court in Los Angeles County, California, alleging
that we owe royalties to COH in connection with these license agreements, as
well as product license agreements that involve the grant of licenses under the
Riggs/Itakura Patents. On June 10, 2002, a jury voted to award COH approximately
$300 million in compensatory damages. On June 24, 2002, a jury voted to award
COH an additional $200 million in punitive damages. Such amounts were accrued as
an expense in the second quarter of 2002. Included within current liabilities in
“Accrued litigation” in the accompanying Condensed Consolidated Balance Sheet at
December 31, 2007 was $776 million, which represented our estimate of
the costs for the resolution of the COH matter as of that reporting
date. We filed a notice of appeal of the verdict and damages awards with
the California Court of Appeal. On October 21, 2004, the California Court of
Appeal affirmed the verdict and damages awards in all respects. On November 22,
2004, the California Court of Appeal modified its opinion without changing the
verdict and denied Genentech’s request for rehearing. On November 24, 2004, we
filed a petition seeking review by the California Supreme Court. On February 2,
2005, the California Supreme Court granted that petition. The California Supreme
Court heard our appeal on this matter on February 5, 2008, and on April 24, 2008
overturned the award of $200 million in punitive damages to COH but upheld the
award of $300 million in compensatory damages. We paid $476 million to COH
in the second quarter of 2008, reflecting the amount of compensatory damages
awarded plus interest thereon from the date of the original decision, June 10,
2002.
As
a result of the April 24, 2008 California Supreme Court decision, we reversed a
$300 million net litigation accrual related to the punitive damages and accrued
interest, which we recorded as “Special items: litigation-related” in our
Condensed Consolidated Statements of Income for the first quarter and first six
months of 2008. In the second quarter and first six months of 2007, we recorded
accrued interest and bond costs on both the compensatory and punitive damages,
totaling $13 million and $26 million, respectively. In conjunction with the COH
judgment in 2002, we posted a surety bond and were required to pledge cash and
investments of $788 million to secure the bond, and this balance was reflected
in “Restricted cash and investments” in the accompanying Condensed Consolidated
Balance Sheets. Subsequent to June 30, 2008, the court completed certain
administrative procedures to dismiss the case. As a result, the restrictions
were lifted from the restricted cash and investments accounts, and the funds
became available for use in our operations.
On
April 11, 2003, MedImmune, Inc. filed a lawsuit against Genentech, COH, and
Celltech R & D Ltd. in the U.S. District Court for the Central District of
California (Los Angeles). The lawsuit related to U.S. Patent No. 6,331,415 (the
Cabilly patent) that we co-own with COH and under which MedImmune and other
companies have been licensed and are paying royalties to us. The lawsuit
included claims for violation of anti-trust, patent, and unfair competition
laws. MedImmune sought a ruling that the Cabilly patent was invalid and/or
unenforceable, a determination that MedImmune did not owe royalties under the
Cabilly patent on sales of its Synagis® antibody
product, an injunction to prevent us from enforcing the Cabilly patent, an award
of actual and exemplary damages, and other relief. On June 11, 2008, we
announced that we settled this litigation with MedImmune. Pursuant to the
settlement agreement, the U.S. District Court dismissed all the claims against
us in the lawsuit. The litigation has been fully resolved and dismissed and the
settlement did not have a material effect on our operating results for the
second quarter and first six months of 2008.
On
May 13, 2005, a request was filed by a third party for reexamination of the
Cabilly patent. The request sought reexamination on the basis of non-statutory
double patenting over U.S. Patent No. 4,816,567. On July 7, 2005, the U.S.
Patent and Trademark Office (Patent Office) ordered reexamination of the Cabilly
patent. On September 13, 2005, the Patent Office mailed an initial non-final
Patent Office action rejecting all 36 claims of the Cabilly patent. We filed our
response to the Patent Office action on November 25, 2005. On December 23, 2005,
a second request for reexamination of the Cabilly patent was filed by another
third party, and on January 23, 2006, the Patent Office granted that request. On
June 6, 2006, the two reexaminations were merged into one proceeding. On August
16, 2006, the Patent Office mailed a non-final Patent Office action in the
merged proceeding, rejecting all the claims of the Cabilly patent based on
issues raised in the two reexamination requests. We filed our response to the
Patent Office action on October 30, 2006. On February 16, 2007, the Patent
Office mailed a final Patent Office action rejecting all the claims of the
Cabilly patent. We responded to the final Patent Office action on May 21, 2007
and requested continued reexamination. On May 31, 2007, the Patent Office
granted the request for continued reexamination, and in doing so withdrew the
finality of the February 2007 Patent Office action and agreed to treat our May
21, 2007 filing as a response to a first Patent Office action. On February 25,
2008, the Patent Office mailed a final Patent Office action rejecting all the
claims of the Cabilly patent. We filed our response to that final Patent Office
action on June 6, 2008. On July 19, 2008, the Patent Office mailed an advisory
action replying to our response and confirming the rejection of all claims of
the Cabilly patent. We intend to file a notice of appeal challenging the
rejection. The Cabilly patent, which expires in 2018, relates to methods that we
and others use to make certain antibodies or antibody fragments, as well as
cells and deoxyribonucleic acid (DNA) used in these methods. We have licensed
the Cabilly patent to other companies and derive significant royalties from
those licenses. The Cabilly patent licenses contributed royalty revenue of $75
million and $159 million in the second quarter and first six months of 2008,
respectively. The claims of the Cabilly patent remain valid and enforceable
throughout the reexamination and appeals processes. The outcome of this matter
cannot be determined at this time.
In
2006, we made development decisions involving our humanized anti-CD20 program,
and our collaborator, Biogen Idec Inc., disagreed with certain of our
development decisions related to humanized anti-CD20 products. Under our 2003
collaboration agreement with Biogen Idec, we believe that we are permitted to
proceed with further trials of certain humanized anti-CD20 antibodies, and
Biogen Idec disagreed with our position. The disputed issues have been submitted
to arbitration. In the arbitration, Biogen Idec filed motions for a preliminary
injunction and summary judgment seeking to stop us from proceeding with certain
development activities, including planned clinical trials. On April 20, 2007,
the arbitration panel denied Biogen Idec’s motion for a preliminary injunction
and Biogen Idec’s motion for summary judgment. Resolution of the arbitration
could require that both parties agree to certain development decisions before
moving forward with humanized anti-CD20 antibody clinical trials
(and
possibly
clinical trials of other collaboration products, including Rituxan), in which
case we may have to alter or cancel planned clinical trials in order to obtain
Biogen Idec’s approval. The hearing of this matter is scheduled to begin in
September 2008. We expect a final decision within six months of the conclusion
of the hearing, unless the parties are able to resolve the matter earlier
through settlement discussions or otherwise. The outcome of this matter cannot
be determined at this time.
On
June 28, 2003, Mr. Ubaldo Bao Martinez filed a lawsuit against Porriño Town
Council and Genentech España S.L. in the Contentious Administrative Court
Number One of Pontevedra, Spain. The lawsuit challenges the Town
Council’s decision to grant licenses to Genentech España S.L. for the
construction and operation of a warehouse and biopharmaceutical
manufacturing facility in Porriño, Spain. On January 16, 2008, the
Administrative Court ruled in favor of Mr. Bao on one of the claims in the
lawsuit and ordered the closing and demolition of the facility, subject to
certain further legal proceedings. On February 12, 2008, we and the Town Council
filed appeals of the Administrative Court decision at the High Court in Galicia,
Spain. In addition, we are evaluating with legal counsel in Spain whether there
may be other administrative remedies available to overcome the Administrative
Court’s ruling. We sold the assets of Genentech España S.L., including the
Porriño facility, to Lonza Group Ltd. in December 2006, and Lonza has operated
the facility since that time. Under the terms of that sale, we retained
control of the defense of this lawsuit and agreed to indemnify Lonza against
certain contractually defined liabilities up to a specified limit, which is
currently estimated to be approximately $100 million. The outcome of this
matter, and our indemnification obligation to Lonza, if any, cannot be
determined at this time.
On
May 30, 2008, Centocor, Inc. filed a patent lawsuit against Genentech and COH in
the U.S. District Court for the Central District of California. The lawsuit
relates to the Cabilly patent that we co-own with COH and under which Centocor
and other companies have been licensed and are paying royalties to us. The
lawsuit seeks a declaratory judgment of patent invalidity and unenforceability
with regard to the Cabilly patent and of patent non-infringement with regard to
Centocor’s marketed product ReoPro®
(Abciximab) and its unapproved product CNTO 1275 (Ustekinumab). Centocor also
seeks to recover the royalties it has paid to Genentech for ReoPro® and the
monies it alleges that Celltech has paid to Genentech for Remicade®
(infliximab), a product marketed by Centocor under an agreement between Centocor
and Celltech. Genentech is scheduled to respond to the complaint on August 7,
2008. The outcome of this matter cannot be determined at this time.
On
May 8, 2008 and June 11, 2008, Genentech was named as a defendant, along with
InterMune, Inc. and its former chief executive officer, W. Scott Harkonen, in
two separate class-action complaints in the U.S. District Court for the Northern
District of California. Both complaints seek relief for a specific class of
plaintiffs who allegedly received Actimmune® for the
treatment of idiopathic pulmonary fibrosis and they allege violations of federal
racketeering laws, unfair competition laws, and consumer protection laws, and
also seek damages for unjust enrichment. Actimmune® is an
interferon-gamma product that was licensed by Genentech to Connectics
Corporation and was subsequently assigned to InterMune. InterMune currently
sells Actimmune® in the
U.S. The complaints are related in part to royalties that we received in
connection with the Actimmune® product.
The outcome of this matter cannot be determined at this time.
On
July 21, 2008, we announced that we received an unsolicited proposal from Roche
to acquire all of the outstanding shares of our stock not owned by Roche at a
price of $89.00 in cash per share. See also Note 9, “Subsequent Event,” for more
information regarding the proposal. Subsequently, twenty-six shareholder
lawsuits have been filed against Genentech and/or the members of its Board of
Directors, and various Roche entities, including Roche Holdings, Inc., Roche
Holding AG and Roche Holding Ltd. The lawsuits are currently pending in various
state courts, including the Delaware Court of Chancery, San Francisco County
Superior Court, and San Mateo County Superior Court, as well as one lawsuit in
the United States District Court for the Northern District of California. The
lawsuits generally assert class action claims for breach of fiduciary duty and
aiding and abetting breaches of fiduciary duty based in part on allegations
that, in connection with Roche’s offer to purchase the remaining shares, some or
all of the defendants have failed to properly value Genentech, have failed to
solicit other potential acquirers and are engaged in improper self-dealing. Two
of the lawsuits allege derivative claims alleging breaches of fiduciary duty by
defendants in connection with adoption of the July 1999 Affiliation Agreement
with RHI (Affiliation Agreement), and those two and one other of the lawsuits
seek the invalidation, in whole or in part, of the Affiliation Agreement. One of
the lawsuits seeks an order deeming Articles 8 and 9 of the Company’s Amended
and Restated Certificate of Incorporation inapplicable or invalid to a
potential transaction with Roche. The outcome of these matters cannot be
determined at this time.
|
Note
6.
|
Relationship
with Roche Holdings, Inc. and Related Party
Transactions
|
Roche Holdings, Inc.’s Ability to Maintain Percentage
Ownership Interest in Our Stock
We
issue shares of Common Stock in connection with our stock option and stock
purchase plans, and we may issue additional shares for other purposes. Our
Affiliation Agreement with RHI provides, among other things, that with respect
to any issuance of our Common Stock in the future, we will repurchase a
sufficient number of shares so that immediately after such issuance, the
percentage of our Common Stock owned by RHI will be no lower than 2% below the
“Minimum Percentage” (subject to certain conditions). The Minimum Percentage
equals the lowest number of shares of Genentech Common Stock owned by RHI since
its July 1999 offering of our Common Stock (to be adjusted in the future for
dispositions of shares of Genentech Common Stock by RHI as well as for stock
splits or stock combinations) divided by 1,018,388,704 (to be adjusted in the
future for stock splits or stock combinations), which is the number of shares of
Genentech Common Stock outstanding at the time of the July 1999 offering, as
adjusted for stock splits. We have repurchased shares of our Common Stock since
2001. The Affiliation Agreement also provides that, upon RHI’s request, we will
repurchase shares of our Common Stock to increase RHI’s ownership to the Minimum
Percentage. In addition, RHI will have a continuing option to buy stock from us
at prevailing market prices to maintain its percentage ownership interest. Under
the terms of the Affiliation Agreement, RHI’s Minimum Percentage is 57.7%, and
RHI’s ownership percentage is to be no lower than 55.7%. RHI’s ownership
percentage of our outstanding shares was 55.9% as of June 30, 2008 and
55.6% as of July 31, 2008. Future share repurchases under our share repurchase
program, including the May 2008 prepaid share repurchase arrangement (see also
Note 8, “Capital Stock”), may increase Roche’s ownership percentage. However,
significant option exercises and stock purchases by employees could result in
further dilution, and limitations in the number of shares we receive under, or
modification or cancellation of, our existing prepaid share repurchase
arrangement could negatively affect our ability to offset dilution.
See
also Note 8, “Capital Stock,” and Note 9, “Subsequent Event,” regarding our
prepaid share repurchase arrangement and Roche’s proposal to acquire all
outstanding shares of our stock not owned by Roche.
Related
Party Transactions
We
enter into transactions with related parties, Roche Holding AG and affiliates
(Roche) and Novartis AG and affiliates (Novartis). The accounting policies that
we apply to our transactions with our related parties are consistent with those
applied in transactions with independent third parties, and all related
party agreements are negotiated on an arm’s-length basis.
In
our royalty and supply arrangements with related parties, we are the principal,
as defined under Emerging Issues Task Force (EITF) Issue No. 99-19, “Reporting Revenue Gross as a
Principal versus Net as an Agent” (EITF 99-19), because we
bear the manufacturing risk, general inventory risk, and the risk to defend our
intellectual property. For circumstances in which we are the principal in the
transaction, we record the transaction on a gross basis in accordance with EITF
99-19; otherwise, our transactions are recorded on a net
basis.
Roche
We
signed two product supply agreements with Roche in July 2006, each of which was
amended in November 2007. The Umbrella Manufacturing Supply Agreement (Umbrella
Agreement) supersedes our previous product supply agreements with Roche. The
Short-Term Supply Agreement (Short-Term Agreement) supplements the terms of the
Umbrella Agreement. Under the Short-Term Agreement, Roche has agreed to purchase
specified amounts of Herceptin, Avastin, and Rituxan through 2008. Under the
Umbrella Agreement, Roche has agreed to purchase specified amounts of Herceptin
and Avastin through 2012, and on a perpetual basis, either party may order other
collaboration products from the other party, including Herceptin and Avastin
after 2012, pursuant to certain forecast terms. The Umbrella Agreement also
provides that either party may terminate its obligation to purchase and/or
supply Avastin and/or Herceptin with six years notice on or after December 31,
2007. To date, we have not received such notice of termination from
Roche.
Under
the July 1999 amended and restated licensing and marketing agreement and the
July 1998 licensing and marketing agreement related to anti-HER2 antibodies
(including Herceptin and pertuzumab), Roche has the right to opt in to
development programs we undertake on our products at certain pre-defined stages
of development. When Roche opts in to a program, we record the opt-in payments
received as deferred revenue, which we recognize over the expected development
periods or product life, as appropriate. As of June 30, 2008, the amounts
in short-term and long-term deferred revenue related to opt-in payments received
from Roche were $48 million and $193 million, respectively. For the second
quarter and first six months of 2008, we recognized $13 million and $24 million,
respectively, as contract revenue related to opt-in payments previously received
from Roche. For the second quarter and first six months of 2007, we recognized
$11 million and $23 million, respectively, as contract revenue related to opt-in
payments previously received from Roche.
In
February 2008, Roche acquired Ventana Medical Systems, Inc., and as a result of
the acquisition, Ventana is considered a related party. We have engaged in
transactions with Ventana prior to and since the acquisition, but these
transactions have not been material to our results of operations.
In
May 2008, Roche acquired Piramed Limited, a privately held entity based in the
United Kingdom, and as a result of the transaction, Piramed is considered a
related party. We have a previously existing licensing agreement with Piramed
related to a molecule in our development pipeline.
In
June 2008, we entered into a licensing agreement with Roche, under which we
obtained rights to a preclinical small molecule drug development program. We
recorded $35 million in research and development (R&D) expense in the second
quarter of 2008 related to this agreement. The future R&D costs incurred
under the agreement and any profit and loss from global commercialization will
be shared equally with Roche.
In
July 2008, we signed an agreement with Chugai-Pharmaceuticals Co., Ltd., a
Japan-based entity and a member of Roche, under which we agreed to manufacture
Actemra, a product of Chugai, at our Vacaville, California facility. After an
initial term of five years, the agreement may be terminated subject to certain
terms and conditions under the contract.
We
currently have no commercialized products subject to profit sharing arrangements
with Roche.
Under
our existing arrangements with Roche, including our licensing and marketing
agreements, we recognized the following amounts (in millions):
|
|
|
Three
Months
Ended
June 30,
|
|
|
Six
Months
Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales to Roche
|
|
$ |
144 |
|
|
$ |
253 |
|
|
$ |
281 |
|
|
$ |
516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalties
earned from Roche
|
|
$ |
391 |
|
|
$ |
283 |
|
|
$ |
762 |
|
|
$ |
538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
revenue from Roche
|
|
$ |
20 |
|
|
$ |
30 |
|
|
$ |
40 |
|
|
$ |
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales on product sales to Roche
|
|
$ |
89 |
|
|
$ |
137 |
|
|
$ |
152 |
|
|
$ |
258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expenses incurred on joint development projects with
Roche
|
|
$ |
77 |
|
|
$ |
70 |
|
|
$ |
148 |
|
|
$ |
128 |
|
Certain
R&D
expenses are partially reimbursable to us by Roche. Amounts that Roche owes us,
net of amounts reimbursable to Roche by us on these projects, are recorded as
contract revenue. Conversely, R&D expenses may include the net settlement of
amounts we owe Roche on R&D expenses that Roche incurred on joint
development projects, less amounts reimbursable to us by Roche on these
projects.
Novartis
Based
on information available to us at the time of filing this Quarterly Report on
Form 10-Q, we believe that the Novartis Group holds approximately 33.3% of the
outstanding voting shares of Roche. As a result of this ownership, the Novartis
Group is deemed to have an indirect beneficial ownership interest under FAS No.
57, “Related Party
Disclosures” (FAS 57), of more than
10% of our voting stock.
We
have an agreement with Novartis Pharma AG (a wholly owned subsidiary of Novartis
AG; Novartis Pharma AG and affiliates are collectively referred to
hereafter as Novartis) under which it has the exclusive right to develop and
market Lucentis outside the U.S. for indications related to diseases or
disorders of the eye. As part of this agreement, the parties will share the cost
of certain of our ongoing development expenses for Lucentis.
We
and Novartis are co-developing and co-promoting Xolair in the U.S. We record all
sales, COS, and marketing and sales expenses in the U.S.; Novartis markets
the product in and records all sales, COS, and marketing and sales expenses
in Europe. We and Novartis share the resulting U.S. and European operating
profits according to prescribed profit sharing percentages. Generally, we
evaluate whether we are a net recipient or payor of funds on an annual basis in
our cost and profit sharing arrangements. Net amounts received on an annual
basis under such arrangements are classified as contract revenue, and net
amounts paid on an annual basis are classified as profit sharing expense. With
respect to the U.S. operating results, for the full year in 2007 we were a net
payor to Novartis, and for the full year in 2008 we similarly anticipate being a
net payor to Novartis. As a result, for the second quarters and first six months
of 2008 and 2007, the portion of the U.S. operating results that we owed to
Novartis was recorded as collaboration profit sharing expense. With respect to
the European operating results, for the full year in 2007 we were a net payor to
Novartis, and for the full year in 2008 we anticipate being a net recipient from
Novartis. As a result, for the second quarter and first six months of 2008, the
portion of the European operating results that Novartis owed us was recorded as
contract revenue. For the same periods in 2007, however, our portion of the
European operating results was recorded as collaboration profit sharing expense.
Effective with our acquisition of Tanox, Inc. on August 2, 2007, Novartis also
makes: (1) additional profit sharing payments to us on U.S. sales of
Xolair, which reduces our profit sharing expense; (2) royalty payments to us on
sales of Xolair worldwide, which we record as royalty revenue; and (3)
manufacturing service payments related to Xolair, which we record as contract
revenue.
Under
our existing arrangements with Novartis, we recognized the following amounts
(in
millions):
|
|
|
Three
Months
Ended
June 30,
|
|
|
Six
Months
Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales to Novartis
|
|
$ |
2 |
|
|
$ |
3 |
|
|
$ |
5 |
|
|
$ |
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalties
earned from Novartis
|
|
$ |
60 |
|
|
$ |
13 |
|
|
$ |
112 |
|
|
$ |
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
revenue from Novartis
|
|
$ |
15 |
|
|
$ |
4 |
|
|
$ |
26 |
|
|
$ |
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales on product sales to Novartis
|
|
$ |
1 |
|
|
$ |
3 |
|
|
$ |
4 |
|
|
$ |
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expenses incurred on joint development projects with
Novartis
|
|
$ |
12 |
|
|
$ |
9 |
|
|
$ |
20 |
|
|
$ |
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaboration
profit sharing expense to Novartis
|
|
$ |
48 |
|
|
$ |
49 |
|
|
$ |
89 |
|
|
$ |
96 |
|
Contract
revenue in the first six months of 2007 included a $30 million milestone payment
from Novartis for European Union approval of Lucentis for the treatment of
neovascular (wet) age-related macular degeneration (AMD).
Certain
R&D
expenses are partially reimbursable to us by Novartis. The amounts that Novartis
owes us, net of amounts reimbursable to Novartis by us on those projects, are
recorded as contract revenue. Conversely, R&D
expenses may
include the net settlement of amounts we owe Novartis on R&D expenses that
Novartis incurred on joint development projects, less amounts reimbursable to us by Novartis on
those projects.
Our
effective income tax rate was 40% in the second quarter of 2008 compared to 37%
in the second quarter of 2007, mainly due to a $33 million settlement with the
Internal Revenue Service (IRS) for an item related to prior years. Our effective
income tax rate was 39% in the first six months of 2008 compared to 37% in the
first six months of 2007, mainly due to the IRS settlement.
In
May 2008, we entered into a prepaid share repurchase arrangement with an
investment bank pursuant to which we delivered $500 million to the investment
bank. The investment bank is obligated to deliver to us, by September 30, 2008,
not fewer than five million shares of our Common Stock based on a pre-determined
formula, subject to a possible reduction in the number of shares received, an
extension of the date on which shares are to be delivered, or other
modifications or cancellation of the plan in certain circumstances. The prepaid
amount has been reflected as a reduction of our stockholders’ equity as of June
30, 2008. There was no effect on EPS for the three or six months ended June 30,
2008 as a result of entering into this agreement.
On
July 21, 2008, we announced that we received an unsolicited proposal from
Roche to acquire all of the outstanding shares of our stock not owned by Roche
at a price of $89.00 in cash per share. Roche’s ownership percentage of our
outstanding shares was 55.9% as of June 30, 2008 and 55.6% as of July 31,
2008. A special committee of our Board of Directors, composed of the
independent directors, has been formed to review, evaluate, and, in the special
committee’s discretion, negotiate and recommend or not recommend the proposal.
The Board of Directors has resolved that it will not recommend any possible
transaction with Roche without the prior favorable recommendation of such
transaction by the special committee. The outcome of the process has not been
pre-determined, and there can be no assurance that the special committee will
approve any transaction with Roche.
The
Board of Directors and Stockholders of Genentech, Inc.
We
have reviewed the condensed consolidated balance sheet of Genentech, Inc. as of
June 30, 2008, and the related condensed consolidated statements of income for
the three-month and six-month periods ended June 30, 2008 and 2007 and cash
flows for the six-month periods ended June 30, 2008 and 2007. These financial
statements are the responsibility of the Company’s management.
We
conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based
on our review, we are not aware of any material modifications that should be
made to the condensed consolidated financial statements referred to above for
them to be in conformity with U.S. generally accepted accounting
principles.
We
have previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
Genentech, Inc. as of December 31, 2007, and the related consolidated statements
of income, stockholders’ equity, and cash flows for the year then ended, not
presented herein, and in our report dated February 5, 2008, we expressed an
unqualified opinion on those consolidated financial statements and included an
explanatory paragraph relating to the change in method of accounting for
stock-based compensation in accordance with guidance provided in Statement of
Financial Accounting Standards No. 123(R), “Share-based Payment.” In our
opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 2007, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
Palo
Alto, California
July
30, 2008
GENENTECH,
INC.
FINANCIAL
REVIEW
Overview
The
information included in this Quarterly Report on Form 10-Q should be read in
conjunction with the Consolidated Financial Statements and accompanying notes
included in our Annual Report on Form 10-K for the year ended December 31,
2007.
The
Company
Genentech
is a leading biotechnology company that discovers, develops, manufactures, and
commercializes medicines for patients with significant unmet medical needs. We
commercialize multiple biotechnology products and also receive royalties from
companies that are licensed to market products based on our
technology.
Major
Developments During the Second Quarter of 2008
We
primarily earn revenue and income and generate cash from product sales and
royalty revenue. In the second quarter of 2008, our total operating revenue was
$3,236 million, an increase of 8% from $3,004 million in the second quarter of
2007. Our net income for the second quarter of 2008 was $782 million, an
increase of 5% from $747 million in the second quarter of 2007. In the
first six months of 2008, our total operating revenue was $6,299 million, an
increase of 8% from $5,847 million in the first six months of 2007. Our net
income for the first six months of 2008 was $1,764 million, an increase of 21%
from $1,453 million in the first six months of 2007.
On
April 14, 2008, we and Biogen Idec announced that OLYMPUS, a Phase II/III study
of Rituxan for primary-progressive multiple sclerosis (PPMS), did not meet its
primary endpoint as measured by the time to confirmed disease progression during
the 96-week treatment period. However, we did observe evidence of biologic
activity in a subset of patients. We will continue to analyze the results of the
study with Biogen Idec and expect to submit the data for presentation at an
upcoming medical meeting.
On
April 20, 2008, we announced an update to the previously reported results from
B017704, the Roche-sponsored international Phase III clinical study of Avastin
in combination with gemcitabine and cisplatin chemotherapy in patients with
advanced, non-squamous, non-small cell lung cancer (NSCLC). The update confirmed
the clinically and statistically significant improvement in the primary endpoint
of progression-free survival (PFS) for the two different doses of Avastin
studied in the trial (15 mg/kg/every-three-weeks and 7.5
mg/kg/every-three-weeks) compared to chemotherapy alone. The study did not
demonstrate a statistically significant prolongation of overall survival, a
secondary endpoint, for either dose in combination with gemcitabine and
cisplatin chemotherapy compared to chemotherapy alone. Median survival of
patients in all arms of the study exceeded one year, which is longer than
previously reported survival times in this indication.
On
April 24, 2008, we announced that the California Supreme Court overturned the
award of $200 million in punitive damages to COH but upheld the award of $300
million in compensatory damages resulting from a contract dispute brought by
COH. The punitive damages were part of a 2004 decision of the California
Court of Appeal, which upheld a 2002 Los Angeles County Superior Court jury
verdict awarding these amounts. As a result of the California Supreme Court
decision, we reversed a $300 million net litigation accrual related to the
punitive damages and accrued interest, which was recorded as “Special items:
litigation-related” in our Condensed Consolidated Statements of Income for the
first quarter and first six months of 2008. We paid $476 million to COH in the
second quarter of 2008, reflecting the amount of compensatory damages awarded,
plus interest thereon from the date of the original decision in
2002.
On
April 29, 2008, we announced that EXPLORER, the Phase II/III study of Rituxan
for systemic lupus erythematosus (SLE, commonly called lupus), did not meet its
primary endpoint, defined as the proportion of Rituxan treated patients who
achieved a major clinical response (MCR) or partial clinical response (PCR),
measured
by
the British Isles Lupus Assessment Group (BILAG), a lupus activity response
index, compared to placebo at 52 weeks. The study also did not meet any of the
six secondary endpoints.
On
June 11, 2008, we announced that we settled the patent litigation with MedImmune
involving the Cabilly patent. The settlement resolves disputed issues with
respect to MedImmune’s marketed product Synagis® as well
as a related product for which MedImmune is seeking regulatory approval. The
settlement also permits MedImmune to obtain licenses for certain additional
pipeline products under the Cabilly patent family.
On
July 21, 2008, we announced that we received an unsolicited proposal from
Roche to acquire all of the outstanding shares of our stock not owned by Roche
at a price of $89.00 in cash per share. Roche’s ownership percentage of our
outstanding shares was 55.9% as of June 30, 2008 and 55.6% as of July 31,
2008. A special committee of our Board of Directors, composed of the
independent directors, has been formed to review, evaluate, and, in the special
committee’s discretion, negotiate and recommend or not recommend the proposal.
The Board of Directors has resolved that it will not recommend any possible
transaction with Roche without the prior favorable recommendation of such
transaction by the special committee. The outcome of the process has not been
pre-determined, and there can be no assurance that the special committee will
approve any transaction with Roche.
Our
Strategy and Goals
As
announced in 2006, our business objectives for the years 2006 through 2010
include bringing at least 20 new molecules into clinical development, bringing
at least 15 major new products or indications onto the market, becoming the
number one U.S. oncology company in sales, and achieving certain financial
growth measures. These objectives are reflected in our revised Horizon 2010
strategy and goals summarized on our website at www.gene.com/gene/about/corporate/growthstrategy.
In 2007, we announced an internal stretch goal to add a total of 30 molecules
into development during the five-year period from the beginning of 2006 through
the end of 2010.
Economic
and Industry-wide Factors
Our
strategy and goals are challenged by economic and industry-wide factors that
affect our business. Key factors that affect our future growth are discussed
below.
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We
face significant competition in the diseases of interest to us from
pharmaceutical and biotechnology companies. The introduction of new
competitive products or follow-on biologics, new information about
existing products, and pricing and distribution decisions by us or our
competitors may result in lost market share for us, reduced utilization of
our products, lower prices, and/or reduced product sales, even for
products protected by patents. We monitor the competitive landscape and
develop strategies in response to new
information.
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Our
long-term business growth depends upon our ability to continue to
successfully develop and commercialize important novel therapeutics to
treat unmet medical needs. We recognize that the successful development of
pharmaceutical products is highly difficult and uncertain, and that it
will be challenging for us to continue to discover and develop innovative
treatments. Our business requires significant investment in R&D over
many years, often for products that fail during the R&D process. Once
a product receives FDA approval, it remains subject to ongoing FDA
regulation, including changes to the product label, new or revised
regulatory requirements for manufacturing practices, written advisement to
physicians, and product recalls or
withdrawals.
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Our
business model requires appropriate pricing and reimbursement for our
products to offset the costs and risks of drug development. Some of the
pricing and distribution of our products have received negative press
coverage and public and governmental scrutiny. We will continue to meet
with patient groups, payers, and other stakeholders in the healthcare
system to understand their issues and concerns. The pricing and
reimbursement environment for our products may change in the future and
become more challenging due to, among other reasons, new policies of the
next presidential administration or new healthcare legislation passed by
congress.
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As
the Medicare and Medicaid programs are the largest payers for our
products, rules related to the programs’ coverage and reimbursement
continue to represent an important issue for our business. New regulations
related to hospital and physician payment continue to be implemented
annually. As a result of the Deficit Reduction Act of 2005, new
regulations became effective in the fourth quarter of 2007 that will
affect the discounted price for our products paid by Medicaid and
government-affiliated customers. We consider these rules as we plan our
business and work to represent our point of view to the legislators and
payers.
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Intellectual
property protection of our products is crucial to our business. Loss of
effective intellectual property protection could result in lost sales to
competing products and loss of royalty payments (for example, royalty
income associated with the Cabilly patent) from licensees, and may
negatively affect our sales, royalty revenue, and operating results. We
are often involved in disputes over contracts and intellectual property,
and we work to resolve these disputes in confidential negotiations or
litigation. We expect legal challenges in this area to continue. We plan
to continue to build upon and defend our intellectual property
position.
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Manufacturing
pharmaceutical products is difficult and complex, and requires facilities
specifically designed and validated to run biotechnology production
processes. Difficulties or delays in product manufacturing or in obtaining
materials from our suppliers, or difficulties in accurately forecasting
manufacturing capacity needs or complying with regulatory requirements,
could negatively affect our business. Additionally, we have had, and may
continue to have, an excess of available capacity, which could lead to
idling of a portion of our manufacturing facilities, during which
time we would incur unabsorbed or idle plant charges or other excess
capacity charges, resulting in an increase in our COS. We use integrated
demand management and manufacturing processes to optimize our production
processes.
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Our
ability to attract and retain highly qualified and talented people in all
areas of the company, and our ability to maintain our unique culture, will
be critical to our success over the long-term. We are working diligently
across the company to make sure that we successfully hire, train, and
integrate new employees into the Genentech culture and
environment.
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Marketed
Products
We
commercialize the pharmaceutical products listed below in the
U.S.:
Avastin (bevacizumab) is an
anti-VEGF (vascular endothelial growth factor) humanized antibody approved for
use in combination with intravenous 5-fluorouracil-based chemotherapy as a
treatment for patients with first- or second-line metastatic cancer of the colon
or rectum. It is also approved for use in combination with carboplatin and
paclitaxel chemotherapy for the first-line treatment of unresectable, locally
advanced, recurrent or metastatic non-squamous NSCLC. On February 22, 2008,
we received accelerated approval from the FDA to market Avastin in combination
with paclitaxel chemotherapy for the treatment of patients who have not received
prior chemotherapy for metastatic HER2-negative breast cancer (BC).
Rituxan (rituximab) is an
anti-CD20 antibody that we commercialize with Biogen Idec. It is approved for
first-line treatment of patients with follicular, CD20-positive, B-cell
non-Hodgkin’s lymphoma (NHL) in combination with cyclophosphamide, vincristine,
and prednisone (CVP) chemotherapy regimens or following CVP chemotherapy in
patients with stable disease or who achieve a partial or complete response
following first-line treatment with CVP chemotherapy. Rituxan is also approved
for treatment of patients with relapsed or refractory, low-grade or follicular,
CD20-positive, B-cell NHL, including retreatment and bulky diseases. Rituxan is
indicated for first-line treatment of patients with diffuse large B-cell,
CD20-positive NHL in combination with cyclophosphamide, doxorubicin,
vincristine, and prednisone (CHOP) or other anthracycline-based chemotherapy.
Rituxan is also indicated for use in combination with methotrexate to reduce
signs and symptoms and slow the progression of structural damage in adult
patients with moderate-to-severe rheumatoid arthritis (RA) who have had an
inadequate response to one or more tumor necrosis factor (TNF) antagonist
therapies.
Herceptin (trastuzumab) is a
humanized anti-HER2 antibody approved for treatment of patients (who have
tumors
that
overexpress the HER2 protein) with node-positive or node-negative (Estrogen
Receptor/Progesterone Receptor negative or with one high-risk feature) BC as
part of an adjuvant treatment regimen containing 1) doxorubicin,
cyclophosphamide, and either paclitaxel or docetaxel; 2) docetaxel and
carboplatin and as a single agent following multi-modality anthracycline-based
therapy. It is also approved for use as a first-line therapy in combination with
paclitaxel and as a single agent in patients who have received one or more
chemotherapy regimens for metastatic disease.
Lucentis (ranibizumab) is an
anti-VEGF antibody fragment approved for the treatment of neovascular (wet)
AMD.
Xolair (omalizumab) is a
humanized anti-IgE (immunoglobulin E) antibody that we commercialize with
Novartis Pharma AG. Xolair is approved for adults and adolescents (age 12 or
older) with moderate-to-severe persistent asthma who have a positive skin test
or in vitro reactivity to a perennial aeroallergen and whose symptoms are
inadequately controlled with inhaled corticosteroids.
Tarceva (erlotinib), which we
commercialize with OSI Pharmaceuticals, Inc., is a small-molecule tyrosine
kinase inhibitor of the HER1/epidermal growth factor receptor signaling pathway.
Tarceva is approved for the treatment of patients with locally advanced or
metastatic NSCLC after failure of at least one prior chemotherapy regimen. It is
also approved, in combination with gemcitabine chemotherapy, for the
first-line treatment of patients with locally advanced, unresectable, or
metastatic pancreatic cancer.
Nutropin (somatropin [rDNA
origin] for injection) and Nutropin AQ are growth
hormone products approved for the treatment of growth hormone deficiency in
children and adults, growth failure associated with chronic renal insufficiency
prior to kidney transplantation, short stature associated with Turner syndrome,
and long-term treatment of idiopathic short stature.
Activase (alteplase) is a
tissue-plasminogen activator (t-PA) approved for the treatment of acute
myocardial infarction (heart attack), acute ischemic stroke (blood clots in the
brain) within three hours of the onset of symptoms, and acute massive pulmonary
embolism (blood clots in the lungs).
TNKase (tenecteplase) is a
modified form of t-PA approved for the treatment of acute myocardial infarction
(heart attack).
Cathflo Activase (alteplase,
recombinant) is a t-PA approved in adult and pediatric patients for the
restoration of function to central venous access devices that have become
occluded due to a blood clot.
Pulmozyme (dornase alfa,
recombinant) is an inhalation solution of deoxyribonuclease I, approved for the
treatment of cystic fibrosis.
Raptiva (efalizumab) is a
humanized anti-CD11a antibody approved for the treatment of chronic
moderate-to-severe plaque psoriasis in adults age 18 or older who are candidates
for systemic therapy or phototherapy.
Licensed
Products
We
receive royalty revenue from various licensees, including significant royalty
revenue from Roche on sales of:
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Herceptin,
Pulmozyme, and Avastin outside the
U.S.;
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Rituxan
outside the U.S., excluding Japan;
and
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Nutropin
products, Activase, and TNKase in
Canada.
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See
Note 5, “Contingencies,” in the Notes to Condensed Consolidated Financial
Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for
information regarding certain patent-related legal proceedings.
Available
Information
The
following information can be found on our website at www.gene.com, or can be
obtained free of charge by contacting our Investor Relations Department at (650)
225-4150 or by sending an e-mail message to
investor.relations@gene.com:
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Our
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, and all amendments to those reports as soon as is
reasonably practicable after such material is electronically filed with
the U.S. Securities and Exchange
Commission;
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Our
policies related to corporate governance, including our Principles of
Corporate Governance, Good Operating Principles, and Code of Ethics, which
apply to our Chief Executive Officer, Chief Financial Officer, and senior
financial officials; and
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The
charters of the Audit Committee and the Compensation Committee of our
Board of Directors.
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Critical
Accounting Policies and the Use of Estimates
The
accompanying discussion and analysis of our financial condition and results of
operations are based on our Condensed Consolidated Financial Statements and the
related disclosures, which have been prepared in accordance with U.S. GAAP. The
preparation of these Condensed Consolidated Financial Statements requires
management to make estimates, assumptions, and judgments that affect the
reported amounts in our Condensed Consolidated Financial Statements and
accompanying notes. These estimates form the basis for the carrying values of
assets and liabilities. We base our estimates and judgments on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, and we have established internal controls related to
the preparation of these estimates. Actual results and the timing of the results
could differ materially from these estimates.
We
believe the following policies to be critical to understanding our financial
condition, results of operations, and expectations for 2008, because these
policies require management to make significant estimates, assumptions, and
judgments about matters that are inherently uncertain.
Loss
Contingencies
We
are currently, and have been, involved in certain legal proceedings, including
licensing and contract disputes, shareholder lawsuits, and other matters. See
Note 5, “Contingencies,” in the Notes to Condensed Consolidated Financial
Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more
information on these matters. We assess the likelihood of any adverse judgments
or outcomes for these legal matters as well as potential ranges of probable
losses. We record an estimated loss as a charge to income if we determine that,
based on information available at the time, the loss is probable and the amount
of loss can be reasonably estimated. The nature of these matters is highly
uncertain and subject to change; as a result, the amount of our liability for
certain of these matters could exceed or be less than the amount of our current
estimates, depending on the final outcome of these matters. An outcome of such
matters that differs from our current estimates could have a material effect on
our financial position or our results of operations in any one
quarter.
Revenue
Recognition–Avastin U.S. Product Sales and Patient Assistance
Program
In
February 2007, we launched the Avastin Patient Assistance Program, which is a
voluntary program that enables eligible patients who have received 10,000 mg of
Avastin in a 12-month period to receive free Avastin in excess of the 10,000 mg
during the remainder of the 12-month period. Based on the current wholesale
acquisition cost, the 10,000 mg is valued at $55,000 in gross revenue. Eligible
patients include those who are being treated for an FDA-approved indication and
who meet the financial eligibility requirements for this program. The program is
available for eligible patients who enroll, regardless of whether they are
insured. We defer a portion of our gross Avastin product sales revenue to
reflect our estimate of the commitment to supply free Avastin to eligible
patients who elect to enroll in the program.
In
order to estimate the amount of free Avastin to be provided to patients under
the Avastin Patient Assistance Program, we need to estimate several factors,
most notably: the number of patients who are currently being treated for
FDA-approved indications and the start date for their treatment regimen, the
extent to which patients may elect to enroll in the program, the number of
patients who will meet the financial eligibility requirements of the program,
and the duration and extent of treatment for the FDA-approved indications, among
other factors. We have based our enrollment assumptions on physician surveys and
other information that we consider relevant. We will continue to update our
estimates in each reporting period as new information becomes available. If the
actual results underlying this deferred revenue accounting vary significantly
from our estimates, we will need to adjust these estimates. Based on these
estimates, we defer a portion of Avastin revenue on product vials sold through
normal commercial channels. The deferred revenue will be recognized when free
Avastin vials are delivered. In the second quarter and first six months of 2008,
we deferred $1 million and $2 million, respectively, of Avastin product sales,
resulting in a total deferred revenue liability in connection with the Avastin
Patient Assistance Program of $4 million in our Condensed Consolidated Balance
Sheet as of June 30, 2008. In the first six months of 2007, we
deferred $3 million of Avastin product sales in connection with the Avastin
Patient Assistance Program. Usage of the Avastin Patient Assistance Program may
increase with the approval of Avastin for the treatment of metastatic
HER2-negative BC. As we continue to evaluate the amount of revenue to defer
related to the Avastin Patient Assistance Program, we may recognize previously
deferred revenue in Avastin U.S. product sales in future periods or increase the
amount of revenue deferred.
Product
Sales Allowances
Revenue
from U.S. product sales is recorded net of allowances and accruals for rebates,
healthcare provider contractual chargebacks, prompt-pay sales discounts, product
returns, and wholesaler inventory management allowances, all of which are
established at the time of sale. Sales allowances and accruals are based
on estimates of the amounts earned or to be claimed on the related sales.
The amounts reflected in our Condensed Consolidated Statements of Income as
product sales allowances have been relatively consistent at approximately seven
to eight percent of gross sales. In order to prepare our Condensed Consolidated
Financial Statements, we are required to make estimates regarding the amounts
earned or to be claimed on the related product sales.
Definitions
for the product sales allowance types are as follows:
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Rebate
allowances and accruals include both direct and indirect rebates. Direct
rebates are contractual price adjustments payable to direct customers,
mainly to wholesalers and specialty pharmacies that purchase products
directly from us. Indirect rebates are contractual price adjustments
payable to healthcare providers and organizations such as clinics,
hospitals, pharmacies, Medicaid, and group purchasing organizations that
do not purchase products directly from
us.
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Product
return allowances are established in accordance with our Product Returns
Policy. Our returns policy allows product returns within the period
beginning two months prior to and six months following product
expiration.
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Prompt-pay
sales discounts are credits granted to wholesalers for remitting payment
on their purchases within established cash payment incentive
periods.
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Wholesaler
inventory management allowances are credits granted to wholesalers for
compliance with various contractually defined inventory management
programs. These programs were created to align purchases with underlying
demand for our products and to maintain consistent inventory levels,
typically at two to three weeks of sales depending on the
product.
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Healthcare
provider contractual chargebacks are the result of our contractual
commitments to provide products to healthcare providers at specified
prices or discounts.
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We
believe that our estimates related to wholesaler inventory management payments
are not material amounts, based on the historical levels of credits and
allowances as a percentage of product sales. We believe that our estimates
related to healthcare provider contractual chargebacks and prompt-pay sales
discounts do not have a high degree of estimation complexity or uncertainty, as
the related amounts are settled within a short period of time.
We
consider
rebate allowances and accruals and product returns allowances to be the only
estimations that involve material amounts and require a higher degree of
subjectivity and judgment to account for the obligations. As a result of the
uncertainties involved in estimating rebate allowances and accruals and
product returns allowances, there is a possibility that materially different
amounts could be reported under different conditions or using different
assumptions.
Our
rebates are based on definitive agreements or legal requirements (such as
Medicaid). These rebates are primarily estimated using historical and other
data, including patient usage, customer buying patterns, applicable contractual
rebate rates, and contract performance by the benefit providers. Direct rebates
are accrued at the time of sale and recorded as allowances against trade
accounts receivable; indirect rebates (including Medicaid) are accrued at
the time of sale and recorded as liabilities. Rebate estimates are evaluated
quarterly and may require changes to better align our estimates with actual
results. As part of this evaluation, we review changes to Medicaid legislation
and state rebate contracts, changes in the level of discounts, and significant
changes in product sales trends. Although rebates are accrued at the time of
sale, rebates are typically paid out, on average, up to six months after the
sale. We believe that our rebate allowances and accruals estimation process
provides a high degree of confidence in the annual allowance amounts
established. Based on our estimation, the changes in rebate allowances and
accruals estimates related to prior years have not exceeded 3%. To further
illustrate our sensitivity to changes in the rebate allowances and accruals
process, a 10% change in our annualized rebate allowances and accruals provision
experienced to date in 2008 (which is in excess of three times the level of
variability that we reasonably expect to observe for rebates) would have an
approximate $20 million unfavorable effect on our results (or approximately
$0.01 per share). The total rebate allowances and accruals recorded in our
Condensed Consolidated Balance Sheets were $78 million as of June 30, 2008 and
$70 million as of December 31, 2007.
At
the time of sale, we record product returns allowances based on our best
estimate of the portion of sales that will be returned by our customers in the
future. Product returns allowances are established in accordance with our
returns policy, which allows buyers to return our products with two months or
less remaining prior to product expiration and up to six months following
product expiration. As part of the estimating process, we compare historical
return data to the related sales on a production lot basis. Historical rates of
return are then determined by product and may be adjusted for known or expected
changes in the marketplace. Actual annual product returns processed were less
than 0.5% of gross product sales in all periods between 2005 and 2007, while
annual provisions for expected future product returns were less than 1% of gross
product sales in all such periods. Although product returns allowances are
recorded at the time of sale, the majority of the returns are expected to occur
within two years of sale. Therefore, our provisions for product returns
allowances may include changes in the estimate for a prior period due to the lag
time. However, to date such changes have not been material. For example, in
2007, changes in estimates related to prior years were approximately 0.3% of
2007 gross product sales. To illustrate our sensitivity to changes in the
product returns allowances, if we were to experience an adjustment rate of 0.5%
of 2007 gross product sales, which is nearly twice the level of annual
variability that we have historically observed for product returns, that change
in estimate would likely have an unfavorable effect of approximately $50 million
(or approximately $0.03 per share) on our results of operations. Product returns
allowances recorded in our Condensed Consolidated Balance Sheets were $87
million as of June 30, 2008 and $60 million as of December 31,
2007.
All
of the aforementioned categories of allowances and accruals are evaluated
quarterly and adjusted when trends or significant events indicate that a change
in estimate is appropriate. Such changes in estimate could materially affect our
results of operations or financial position; however, to date they have not been
material. It is possible that we may need to adjust our estimates in future
periods. Our Condensed Consolidated Balance Sheets reflected estimated product
sales allowance reserves and accruals totaling $214 million as of June 30, 2008
and $176 million as of December 31, 2007.
Royalties
For
substantially all of our agreements with licensees, we estimate royalty revenue
and royalty receivables in the period the royalties are earned, which is in
advance of collection. Royalties from Roche, which are approximately 60% of our
total royalty revenue, are reported based on actual sales reports from Roche.
Our estimates of royalty revenue and receivables from non-Roche licensees are
primarily based on communication with some licensees, historical information,
forecasted sales trends, and our assessment of collectibility. Differences
between actual royalty revenue and estimated royalty revenue are adjusted for in
the period in which they become known, typically
the
following quarter. Since 2005, the adjustment to our royalty revenue related to
prior periods has not exceeded 1% of total annual royalty revenue. However, on a
quarterly basis, adjustments related to prior quarters have been higher than 1%
of total royalty revenue for the respective quarter. To further illustrate our
sensitivity to the royalty estimation process, a 1% adjustment to total annual
royalty revenue, which is at the upper end of the range of our historic
experience, would result in an adjustment to total 2007 annual royalty revenue
of approximately $25 million (or approximately $0.01 to $0.02 per
share, net of any related royalty expenses).
For
cases in which the collectibility of a royalty amount is doubtful, royalty
revenue is not recorded in advance of payment, but is recognized as cash is
received. In the case of a receivable related to previously recognized royalty
revenue that is subsequently determined to be uncollectible, the receivable is
reserved for by reversing the previously recorded royalty revenue in the period
in which the circumstances that make collectibility doubtful are determined, and
future royalties from the licensee are recognized on a cash basis until it is
determined that collectibility is reasonably assured.
We
have confidential licensing agreements with a number of companies under which we
receive royalty revenue on sales of products that are covered by the Cabilly
patent. The Cabilly patent, which expires in 2018, relates to methods that we
and others use to make certain antibodies or antibody fragments, as well as
cells and DNA used in those methods. The Patent Office is performing a
reexamination of the patent, and on February 25, 2008 issued a final Patent
Office action rejecting all the claims of the Cabilly patent. We filed our
response to that final Patent Office action on June 6, 2008. On July 19, 2008,
the Patent Office mailed an advisory action replying to our response and
confirming the rejection of all claims of the Cabilly patent. We intend to file
a notice of appeal challenging the rejection. The claims of the patent remain
valid and enforceable throughout the reexamination and appeals processes. In
addition, in May 2008, Centocor, Inc. filed a lawsuit against us challenging the
Cabilly patent. See also Note 5, “Contingencies,” in the Notes to Condensed
Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on
Form 10-Q for more information on our Cabilly patent litigation and
reexamination.
Cabilly
patent royalties are generally due 60 days after the end of the quarter in which
they are earned and recorded by us as royalty revenue. Additionally, we pay COH
a percentage of our Cabilly patent royalty revenue 60 days after the quarter in
which we receive payments from our licensees. As of June 30, 2008, our Condensed
Consolidated Balance Sheet included Cabilly patent receivables totaling
approximately $69 million and related COH payables totaling approximately $30
million.
Income
Taxes
Our
income tax provision is based on income before taxes and is computed using the
liability method in accordance with FAS No. 109, “Accounting for Income
Taxes.” Deferred
tax assets and liabilities are determined based on the difference between the
financial statement and tax basis of assets and liabilities using tax rates
projected to be in effect for the year in which the differences are expected to
reverse. Significant estimates are required in determining our provision for
income taxes. Some of these estimates are based on interpretations of existing
tax laws or regulations, or the findings or expected results from any tax
examinations. Various internal and external factors may have favorable or
unfavorable effects on our future effective income tax rate. These factors
include, but are not limited to, changes in tax laws, regulations, and/or rates;
the results of any tax examinations; changing interpretations of existing tax
laws or regulations; changes in estimates of prior years’ items; past and future
levels of R&D spending; acquisitions; changes in our corporate
structure; and changes in overall levels of income before taxes all of which may
result in periodic revisions to our effective income tax rate. For example,
the effective income tax rates in the second quarter and first six months of
2008 were unfavorably affected by a $33 million settlement with the IRS for an
item related to prior years. Uncertain tax positions are accounted for in
accordance with FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes.” We accrue tax-related interest and penalties related to
uncertain tax positions, and include these items with income tax expense in the
Condensed Consolidated Statements of Income.
Inventories
Inventories
may include currently marketed products manufactured under a new process or at
facilities awaiting regulatory licensure. These inventories are capitalized
based on our judgment of probable near-term regulatory licensure. Excess or idle
capacity costs, resulting from utilization below a plant’s normal capacity, are
expensed in
the
period in which they are incurred. The valuation of inventory requires us to
estimate the value of inventory that may expire prior to use or that may fail to
be released for commercial sale. For example, in the second quarter of 2008, we
recognized a $50 million charge related to failed lots from a manufacturing
start-up campaign. The determination of obsolete inventory requires us to
estimate the future demands for our products, and in the case of pre-approval
inventories, to estimate the regulatory approval date for the product or for the
licensure of either the manufacturing facility or the new manufacturing process.
We may be required to expense previously capitalized inventory costs upon a
change in our estimate, due to, among other potential factors, the denial or
delay of approval of a product or the licensure of either a manufacturing
facility or a new manufacturing process by the necessary regulatory bodies, or
new information that suggests that the inventory will not be
salable.
Valuation
of Acquired Intangible Assets
We
have acquired intangible assets in connection with our acquisition of Tanox.
These intangible assets consist of developed product technology and core
technologies associated with intellectual property and rights thereon, primarily
related to the Xolair molecule, and assets related to the fair value write-up of
Tanox’s royalty contracts, as well as goodwill. When significant identifiable
intangible assets are acquired, we determine the fair value of these assets as
of the acquisition date, using valuation techniques such as discounted cash flow
models. These models require the use of significant estimates and assumptions
including, but not limited to, determining the timing and expected costs to
complete the in-process projects, projecting regulatory approvals, estimating
future cash flows from product sales resulting from completed products and
in-process projects, and developing appropriate discount rates and probability
rates by project.
We
believe that the fair value assigned to the intangible assets acquired is based
on reasonable estimates and assumptions, given the available facts and
circumstances as of the acquisition date. However, we may record adjustments to
goodwill resulting from our acquisition of Tanox for the resolution of
pre-acquisition contingencies, our restructuring activities, tax matters, and
other estimates related to the acquisition for a period of up to one year after
the acquisition date. Further, we will have to continually evaluate whether the
fair value of any or all intangible assets has been impaired.
Employee
Stock-Based Compensation
Under
the provisions of FAS 123R, employee stock-based compensation is estimated at
the date of grant based on the employee stock award’s fair value using the
Black-Scholes option-pricing model and is recognized as expense ratably over the
requisite service period in a manner similar to other forms of compensation paid
to employees. The Black-Scholes option-pricing model requires the use of certain
subjective assumptions. The most significant of these assumptions are our
estimates of the expected volatility of the market price of our stock and the
expected term of the award. Due to the redemption of our Special Common Stock in
June 1999 (Redemption) by RHI, there is limited historical information available
to support our estimate of certain assumptions required to value our stock
options. When establishing an estimate of the expected term of an award, we
consider the vesting period for the award, our recent historical experience of
employee stock option exercises (including forfeitures), the expected
volatility, and a comparison to relevant peer group data. As required under
GAAP, we review our valuation assumptions at each grant date, and, as a result,
our valuation assumptions used to value employee stock-based awards granted in
future periods may change. See Note 2, “Employee Stock-Based Compensation,” in
the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of
this Quarterly Report on Form 10-Q for more information.
Results
of Operations
(In
millions, except per share amounts)
|
|
|
Three
Months
Ended
June 30,
|
|
|
|
|
|
Six
Months
Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales
|
|
$ |
2,536 |
|
|
$ |
2,443 |
|
|
|
4
|
% |
|
$ |
4,915 |
|
|
$ |
4,773 |
|
|
|
3
|
% |
|
Royalties
|
|
|
629 |
|
|
|
484 |
|
|
|
30 |
|
|
|
1,244 |
|
|
|
903 |
|
|
|
38 |
|
|
Contract
revenue
|
|
|
71 |
|
|
|
77 |
|
|
|
(8 |
) |
|
|
140 |
|
|
|
171 |
|
|
|
(18 |
) |
|
Total
operating revenue
|
|
|
3,236 |
|
|
|
3,004 |
|
|
|
8 |
|
|
|
6,299 |
|
|
|
5,847 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
441 |
|
|
|
429 |
|
|
|
3 |
|
|
|
831 |
|
|
|
821 |
|
|
|
1 |
|
|
Research
and development
|
|
|
649 |
|
|
|
603 |
|
|
|
8 |
|
|
|
1,266 |
|
|
|
1,213 |
|
|
|
4 |
|
|
Marketing,
general and administrative
|
|
|
559 |
|
|
|
532 |
|
|
|
5 |
|
|
|
1,076 |
|
|
|
1,023 |
|
|
|
5 |
|
|
Collaboration
profit sharing
|
|
|
313 |
|
|
|
277 |
|
|
|
13 |
|
|
|
592 |
|
|
|
529 |
|
|
|
12 |
|
|
Recurring
amortization charges related to redemption and acquisition
|
|
|
43 |
|
|
|
26 |
|
|
|
65 |
|
|
|
86 |
|
|
|
52 |
|
|
|
65 |
|
|
Special
items: litigation-related
|
|
|
2 |
|
|
|
13 |
|
|
|
(85 |
) |
|
|
(300 |
) |
|
|
26 |
|
|
|
* |
|
|
Total
costs and expenses
|
|
|
2,007 |
|
|
|
1,880 |
|
|
|
7 |
|
|
|
3,551 |
|
|
|
3,664 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
1,229 |
|
|
|
1,124 |
|
|
|
9 |
|
|
|
2,748 |
|
|
|
2,183 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income, net
|
|
|
93 |
|
|
|
75 |
|
|
|
24 |
|
|
|
166 |
|
|
|
149 |
|
|
|
11 |
|
|
Interest
expense
|
|
|
(15 |
) |
|
|
(17 |
) |
|
|
(12 |
) |
|
|
(32 |
) |
|
|
(35 |
) |
|
|
(9 |
) |
|
Total
other income, net
|
|
|
78 |
|
|
|
58 |
|
|
|
34 |
|
|
|
134 |
|
|
|
114 |
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before taxes
|
|
|
1,307 |
|
|
|
1,182 |
|
|
|
11 |
|
|
|
2,882 |
|
|
|
2,297 |
|
|
|
25 |
|
|
Income
tax provision
|
|
|
525 |
|
|
|
435 |
|
|
|
21 |
|
|
|
1,118 |
|
|
|
844 |
|
|
|
32 |
|
|
Net
income
|
|
$ |
782 |
|
|
$ |
747 |
|
|
|
5 |
|
|
$ |
1,764 |
|
|
$ |
1,453 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.74 |
|
|
$ |
0.71 |
|
|
|
4
|
% |
|
$ |
1.68 |
|
|
$ |
1.38 |
|
|
|
22
|
% |
|
Diluted
|
|
$ |
0.73 |
|
|
$ |
0.70 |
|
|
|
4 |
|
|
$ |
1.65 |
|
|
$ |
1.36 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales as a % of product sales
|
|
|
17
|
% |
|
|
18
|
% |
|
|
|
|
|
|
17
|
% |
|
|
17
|
% |
|
|
|
|
|
Research
and development as a % of operating revenue
|
|
|
20 |
|
|
|
20 |
|
|
|
|
|
|
|
20 |
|
|
|
21 |
|
|
|
|
|
|
Marketing,
general and administrative as a % of operating revenue
|
|
|
17 |
|
|
|
18 |
|
|
|
|
|
|
|
17 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax
operating margin
|
|
|
38
|
% |
|
|
37
|
% |
|
|
|
|
|
|
44
|
% |
|
|
37
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
income tax rate
|
|
|
40
|
% |
|
|
37
|
% |
|
|
|
|
|
|
39
|
% |
|
|
37
|
% |
|
|
|
|
________________________
|
*
|
Calculation
not meaningful.
|
|
|
Percentages
in this table and throughout the discussion and analysis of our financial
condition and results of operations may reflect rounding
adjustments.
|
Total
Operating Revenue
Total
operating revenue increased 8% in the second quarter and first six months of
2008 from the comparable periods in 2007. These increases were primarily
due to higher product sales and royalty revenue, and are discussed
below.
Total
Product Sales
(In
millions)
|
|
|
Three
Months
|
|
|
|
|
|
Six
Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
U.S. product sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avastin
|
|
$ |
650 |
|
|
$ |
564 |
|
|
|
15
|
% |
|
$ |
1,250 |
|
|
$ |
1,097 |
|
|
|
14
|
% |
|
Rituxan
|
|
|
651 |
|
|
|
582 |
|
|
|
12 |
|
|
|
1,255 |
|
|
|
1,117 |
|
|
|
12 |
|
|
Herceptin
|
|
|
338 |
|
|
|
329 |
|
|
|
3 |
|
|
|
678 |
|
|
|
640 |
|
|
|
6 |
|
|
Lucentis
|
|
|
216 |
|
|
|
209 |
|
|
|
3 |
|
|
|
414 |
|
|
|
420 |
|
|
|
(1 |
) |
|
Xolair
|
|
|
129 |
|
|
|
120 |
|
|
|
8 |
|
|
|
246 |
|
|
|
231 |
|
|
|
6 |
|
|
Tarceva
|
|
|
119 |
|
|
|
102 |
|
|
|
17 |
|
|
|
230 |
|
|
|
203 |
|
|
|
13 |
|
|
Nutropin
products
|
|
|
89 |
|
|
|
94 |
|
|
|
(5 |
) |
|
|
173 |
|
|
|
185 |
|
|
|
(6 |
) |
|
Thrombolytics
|
|
|
68 |
|
|
|
67 |
|
|
|
1 |
|
|
|
135 |
|
|
|
135 |
|
|
|
0 |
|
|
Pulmozyme
|
|
|
63 |
|
|
|
55 |
|
|
|
15 |
|
|
|
120 |
|
|
|
107 |
|
|
|
12 |
|
|
Raptiva
|
|
|
28 |
|
|
|
27 |
|
|
|
4 |
|
|
|
54 |
|
|
|
51 |
|
|
|
6 |
|
|
Total
U.S. product sales(1)
|
|
|
2,351 |
|
|
|
2,149 |
|
|
|
9 |
|
|
|
4,556 |
|
|
|
4,186 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
product sales to collaborators
|
|
|
185 |
|
|
|
294 |
|
|
|
(37 |
) |
|
|
359 |
|
|
|
587 |
|
|
|
(39 |
) |
|
Total
product sales
|
|
$ |
2,536 |
|
|
$ |
2,443 |
|
|
|
4 |
|
|
$ |
4,915 |
|
|
$ |
4,773 |
|
|
|
3 |
|
______________________
|
(1)
|
The
totals may not appear to equal the sum of the individual line items due to
rounding.
|
Total
product sales increased 4% in the second quarter and 3% in the first six months
of 2008 from the comparable periods in 2007. Total U.S. product sales
increased 9% to $2,351 million in the second quarter and 9% to $4,556 million in
the first six months of 2008 from the comparable periods in 2007. The increases
in U.S. sales were due to higher sales across most products, in particular
higher sales of our oncology products. Increased U.S. sales volume accounted for
65%, or $131 million, of the increase in U.S. net product sales in the second
quarter of 2008, and 67%, or $247 million, of the increase in the first six
months of 2008. Changes in net U.S. sales prices across the majority of products
in the portfolio accounted for most of the remainder of the increases in
U.S. net product sales in the second quarter and first six months of
2008.
Our
references below to market adoption and penetration, as well as patient share,
are derived from our analyses of market tracking studies and surveys that we
undertake with physicians. We consider these tracking studies and surveys
indicative of trends and information with respect to our end users’ buying
patterns. We use statistical analyses and management judgment to interpret the
data that we obtain, and as such, the adoption, penetration, and patient share
data presented herein represent estimates. Limitations in sample size and the
timeliness in receiving and analyzing this data result in inherent margins of
error; thus, where presented, we have rounded our percentage estimates to the
nearest 5%.
Avastin
Net
U.S. sales of Avastin increased 15% to $650 million in the second quarter and
14% to $1,250 million in the first six months of 2008 from the comparable
periods in 2007. Net U.S. sales in the second quarter and first six months of
2008 excluded net revenue of $1 million and $2 million, respectively that
was deferred in connection with our Avastin Patient Assistance Program. The
increases in sales were primarily due to increased use of Avastin for first-line
treatment of metastatic BC, which received accelerated approval from the FDA in
the first quarter of 2008, and for first-line treatment of metastatic
NSCLC.
Avastin
received accelerated approval on February 22, 2008 for use in combination with
paclitaxel chemotherapy for patients who have not received prior chemotherapy
for metastatic HER2-negative BC. For first-line treatment of metastatic
HER2-negative BC patients, we estimate that Avastin penetration in the second
quarter of 2008 was approximately 35%, an increase from the rate of adoption in
the second quarter of 2007 and the first quarter of 2008. With respect to
dose, the percentage of metastatic BC patients receiving the high dose of
Avastin, defined as 5 mg/kg/weekly-equivalent, remained approximately 75%
in the second quarter of 2008, in-line with the first quarter
of
2008. The U.S. labeled dose of Avastin in metastatic BC is 10 mg/kg,
administered intravenously every two weeks. Data from AVADO, the
Roche-sponsored, placebo-controlled Phase III trial, was presented at the
American Society of Clinical Oncology (ASCO) annual meeting in June 2008.
In the AVADO study, two dose levels of Avastin, a
7.5 mg/kg/every-three-weeks dose and a 15 mg/kg/every-three-week dose,
in combination with docetaxel chemotherapy, showed a statistically
significant improvement in PFS and response rate compared to docetaxel
chemotherapy alone. While the study was not designed to detect a difference
between the Avastin doses, positive trends towards the higher dose were seen
across the primary and secondary end points. The overall survival data for AVADO
is anticipated in the first half of 2009. No new safety signals were detected in
this study. We are required to submit the results of the AVADO study and RIBBON
I, a Phase III study in first-line metastatic BC, to the FDA by mid-2009 for the
FDA to consider converting the accelerated approval into a full approval. The
RIBBON I study results are expected later this year, with a primary endpoint of
PFS.
For
first-line treatment of metastatic NSCLC patients, among the approximately 50%
to 60% of patients with first-line metastatic lung cancer who are eligible for
Avastin therapy, we estimate that penetration in the second quarter of 2008 was
approximately 65%, an increase from approximately 60% reported in previous
quarters. With respect to dose, the percentage of lung cancer patients receiving
the high dose of Avastin, defined as at least 5 mg/kg/weekly-equivalent,
was approximately 70% in the second quarter of 2008, in-line with the
second quarter of 2007 and the first quarter of 2008. The labeled dose of
Avastin in lung cancer is 15 mg/kg, administered intravenously every three
weeks. However, we expect dose in metastatic NSCLC to continue to be a source of
uncertainty for Avastin. The Roche-sponsored BO17704 study, which was presented
at the ASCO annual meeting in June 2007, evaluated a
15 mg/kg/every-three-weeks dose of Avastin (the dose approved in the U.S.
for use in combination with carboplatin and paclitaxel) and a
7.5 mg/kg/every-three-weeks dose of Avastin (a dose not approved for use in
the U.S.) in combination with gemcitabine and cisplatin chemotherapy
compared to chemotherapy alone in patients with previously untreated, advanced
NSCLC. Both doses met the primary endpoint of prolonging PFS compared to
chemotherapy alone. Although the study was not designed to compare the Avastin
doses, a similar treatment effect in PFS was observed between the two arms. On
April 20, 2008, we announced that the study did not demonstrate a statistically
significant prolongation of overall survival, a secondary endpoint, for either
dose in combination with gemcitabine and cisplatin chemotherapy compared to
chemotherapy alone. Median survival of patients in all arms of the study
exceeded one year, which is longer than previously reported survival times in
this indication. Based on these results, additional physicians may adopt
Avastin at the lower dose of 7.5 mg/kg/every-three-weeks or choose not to
prescribe Avastin.
In
both first- and second-line treatment of metastatic colorectal cancer (CRC),
penetration in the second quarter of 2008 increased from the second quarter of
2007, but was in-line compared to the first quarter of 2008.
At
the ASCO meeting in June 2008, we also presented data on our adjuvant colon
cancer study, C-08, sponsored by the National Cancer Institute and conducted by
the National Surgical Adjuvant Breast and Bowel Project (NSABP). The preliminary
safety analysis showed no new or unexpected safety events in the Avastin arm and
supports the decision by the NSABP to continue the study as planned. We expect
the NSABP to conduct an interim analysis of the study in the fourth quarter of
2008, and if the study continues past the interim analysis, we expect the final
analysis in 2009.
In
the second quarter of 2008, we and Roche distributed a Dear Healthcare Provider
Letter describing the previously reported findings of microangiopathic hemolytic
anemia (MAHA) in patients treated with Avastin and Sutent® in
two metastatic renal cell cancer trials, an investigator sponsored trial and the
SABRE-R clinical trial. The events were reversible upon discontinuation of
Avastin and Sutent®, and to
date, MAHA has been observed in Avastin treatment only when it is combined with
Sutent®. All of
our SABRE studies evaluating this combination have been
discontinued.
Rituxan
Net
U.S. sales of Rituxan increased 12% to $651 million in the second quarter and
12% to $1,255 million in the first six months of 2008 from the comparable
periods in 2007. In the oncology setting, sales growth continues to be driven
primarily by use of Rituxan following first-line therapy in indolent NHL.
Overall adoption of Rituxan in other areas of NHL and chronic lymphocytic
leukemia, an unapproved indication, remained stable compared to the second
quarter of 2007.
In
the RA setting, the primary driver of growth was an increased share of patients
who have failed anti-TNF therapies. It remains difficult to precisely determine
the sales split between Rituxan use in oncology and immunology settings since
many treatment centers treat both types of patients. In June 2008, we received a
report of a fatal progressive multifocal leukoencephalopathy (PML) case in a
patient who received Rituxan in the REFLEX trial and extension study for Rituxan
in RA. The final course of Rituxan was completed 18 months prior to the
development of PML and the patient had multiple confounding factors associated
with immunosuppression. Immunology investigators have been informed, and we will
continue to work with the FDA to discuss what additional steps need to be
taken.
On
April 14, 2008, we and Biogen Idec announced that OLYMPUS, a Phase II/III study
of Rituxan for PPMS, did not meet its primary endpoint as measured by the time
to confirmed disease progression during the 96-week treatment period. We
observed biologic activity in a subset of patients, and will continue to
analyze the results of the study with Biogen Idec and will submit the data for
presentation at an upcoming medical meeting.
On
April 29, 2008, we announced that EXPLORER, the Phase II/III study of Rituxan
for SLE, did not meet its primary endpoint defined as the proportion of Rituxan
treated patients who achieved a MCR or PCR measured by BILAG, a lupus activity
response index, compared to placebo at 52 weeks. The study also did not meet any
of the six secondary endpoints. Our market research indicates that approximately
one percent of U.S. Rituxan sales are attributable to Rituxan use in the lupus
setting (an unapproved use).
Herceptin
Net
U.S. sales of Herceptin increased 3% to $338 million in the second quarter and
6% to $678 million in the first six months of 2008 from the comparable periods
in 2007. The sales growth was primarily due to price increases in 2008 and 2007
and increased use of Herceptin in the treatment of early-stage HER2-positive
BC. We estimate that Herceptin penetration in the adjuvant setting was
approximately 85% in the second quarter of 2008, an increase from the second
quarter of 2007. In first-line treatment of metastatic HER2-positive BC
patients, Herceptin penetration was approximately 75% for the second quarter of
2008, an increase from the second quarter of 2007.
On
May 22, 2008, the FDA approved two additional label expansions for Herceptin in
HER2-positive, adjuvant BC. One of the label expansions added the use of a new
treatment option with Herceptin in combination with docetaxel and carboplatin
chemotherapies, which provides a shorter, less cardiotoxic regimen as an
alternative for some patients. The other label expansion added the use of a new
treatment option with Herceptin in combination with anthracycline,
cyclophosphamide, and docetaxel chemotherapies.
Lucentis
Net
U.S. sales of Lucentis increased 3% to $216 million in the second quarter and
decreased 1% to $414 million in the first six months of 2008 from the comparable
periods in 2007. The launch of improved patient access programs in March
2008, a revised promotional campaign, and enhanced distribution options for
Lucentis that began in May 2008, along with a more stable market environment,
contributed to the sales growth in the second quarter of 2008. We believe that
the percentage of newly diagnosed patients who were treated with Lucentis during
the second quarter of 2008 was approximately 45% compared to approximately 40%
during the first quarter of 2008 and 55% during the second quarter of 2007.
Although sales increased in the second quarter of 2008, it is difficult to
interpret a sales trend during a period that has a change in distribution, and
while the continued unapproved use of Avastin and reimbursement concerns from
retinal specialists remain challenges.
Xolair
Net
U.S. sales of Xolair increased 8% to $129 million in the second quarter and 6%
to $246 million in the first six months of 2008 from the comparable periods in
2007.
On
April 10, 2008, we and Novartis announced that a Phase III study evaluating
Xolair in patients 6 to 11 years of age with moderate-to-severe, persistent,
inadequately controlled allergic asthma met its primary endpoint, demonstrating
a statistically significant reduction in exacerbations in Xolair-treated
patients compared to placebo
treated
patients, with no new safety signals reported. We will work with Novartis to
evaluate the complete study results, including feedback from the FDA, to
determine the next steps.
Tarceva
Net
U.S. sales of Tarceva increased 17% to $119 million in the second quarter and
13% to $230 million in the first six months of 2008 from the comparable periods
in 2007. The sales growth was primarily due to price increases in 2008 and 2007
and lower return reserve requirements in the second quarter and first six months
of 2008. We estimate that Tarceva penetration in second-line treatment of NSCLC
in the second quarter of 2008 remained stable at approximately 30% compared to
the same period in 2007. In the first-line pancreatic cancer setting, we
estimate that Tarceva penetration in the second quarter of 2008 was
approximately 40%, an increase from the second quarter of 2007.
Nutropin
Products
Combined
net U.S. sales of our Nutropin products decreased 5% to $89 million in the
second quarter and 6% to $173 million in the first six months of 2008 from the
comparable periods in 2007.
Thrombolytics
Combined
net U.S. sales of our three thrombolytics products—Activase, Cathflo Activase,
and TNKase—increased 1% to $68 million in the second quarter and remained flat
in the first six months of 2008 from the comparable periods in 2007. Sales in
the second quarter and first six months of 2008 were favorably affected by price
increases in 2008 and 2007 and increases in sales volume. However, these
increases were offset by increased product return reserve
requirements.
Pulmozyme
Net
U.S. sales of Pulmozyme increased 15% to $63 million in the second quarter and
12% to $120 million in the first six months of 2008 from the comparable periods
in 2007.
Raptiva
Net
U.S. sales of Raptiva increased 4% to $28 million in the second quarter and 6%
to $54 million in the first six months of 2008 from the comparable periods in
2007.
Sales
to Collaborators
Product
sales to collaborators, which were for non-U.S. markets, decreased 37% to $185
million in the second quarter and 39% to $359 million in the first six months of
2008 from the comparable periods in 2007. The decreases were primarily due to
the quarterly timing of Herceptin and Avastin sales to Roche. For 2008, we
forecast sales to collaborators to increase by approximately 10% to 15% over
2007 with quarterly fluctuations due to the timing of the production and order
plan.
Herceptin
sales to Roche since the third quarter of 2006 reflect more favorable pricing
terms that were part of the supply agreement with Roche signed at that time.
These favorable pricing terms will continue through the end of
2008.
Royalties
Royalty
revenue increased 30% to $629 million in the second quarter and 37% to $1,244
million in the first six months of 2008 from the comparable periods in
2007. Excluding the effect of a collaboration agreement in the second quarter of
2007, which resulted in one-time royalty revenue of approximately $65 million in
that quarter, royalty revenue increased 50% in the second quarter and 48% in the
first six months of 2008 from the comparable periods in 2007. The majority of
the increases were due to higher sales by Roche of our Avastin, Herceptin,
and Rituxan products, and higher sales by Novartis of our Lucentis product. In
addition, approximately $40 million of
the
increase in the second quarter of 2008 and approximately $85 million of the
increase in the first six months of 2008 was due to net foreign-exchange-related
benefits from the weaker U.S. dollar during these periods compared to the same
periods of 2007. Royalty revenue for the first six months of 2008 also included
approximately $20 million of net adjustments increasing royalty revenue due to
changes in estimates for amounts reported in 2007, compared to immaterial
amounts of such net adjustments recorded in the first six months of
2007.
Cash
flows from royalty income include revenue denominated in foreign currencies. We
currently enter into foreign currency option contracts (options) and forwards to
hedge a portion of these foreign currency cash flows. These existing options and
forwards are due to expire between 2008 and 2010, and we expect to continue
to enter into similar contracts in accordance with our hedging
policy.
Of
the overall royalties received, royalties from Roche represented approximately
62% in the second quarter and 61% in the first six months of 2008 compared to
approximately 58% in the second quarter and 60% in the first six months of 2007.
Royalties from other licensees included royalty revenue on our patent licenses,
including our Cabilly patent, as discussed below.
We
have confidential licensing agreements with a number of companies under which we
receive royalty revenue on sales of products covered by the Cabilly patent. The
Cabilly patent expires in December 2018, but is the subject of litigation and an
ongoing reexamination, and an appeals process. The net pretax contributions
related to the Cabilly patent were as follows (in millions, except per share
amounts):
|
|
|
Three
Months
Ended
June 30,
|
|
|
Six
Months
Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty
revenue
|
|
$ |
75 |
|
|
$ |
46 |
|
|
$ |
159 |
|
|
$ |
108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
expenses(1)
|
|
$ |
35 |
|
|
$ |
27 |
|
|
$ |
71 |
|
|
$ |
57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
of tax effect of Cabilly patent on diluted EPS
|
|
$ |
0.02 |
|
|
$ |
0.01 |
|
|
$ |
0.05 |
|
|
$ |
0.03 |
|
______________________
|
(1)
|
Gross
expenses include COH’s share of royalty revenue and royalty COS on our
U.S. product sales.
|
See
also Note 5, “Contingencies,” in the Notes to Condensed Consolidated Financial
Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more
information on our Cabilly patent litigation and reexamination.
Royalties
are difficult to forecast because of the number of products involved, the
availability of licensee sales data, potential contractual and intellectual
property disputes, and the volatility of foreign currency exchange rates. For
2008, we forecast royalty revenue to grow approximately 20% to 30% relative to
2007, but a number of factors could affect these results. Higher than forecasted
licensed product sales could positively affect royalty revenue. However, royalty
revenue growth could be negatively affected by a number of factors, including
the strengthening of the U.S. dollar, lower than expected sales of licensees’
products, the termination of licenses, changes to the terms of contracts under
which licenses have been granted, or the failure of licensees to meet their
contractual payment obligations for any reason, including an adverse decision or
ruling in litigation involving the Cabilly patent, the Cabilly patent
reexamination or related proceedings.
Contract
Revenue
Contract
revenue decreased 8% to $71 million in the second quarter and 18% to $140
million in the first six months of 2008 from the comparable periods in 2007. The
decreases were mainly due to lower reimbursements from Roche related to
R&D efforts on Avastin. The decrease in the first six months of 2008
was also due to the receipt of a milestone payment from Novartis Pharma AG in
the first quarter of 2007 related to European Union approval of Lucentis.
Contract revenue in the second quarter and first six months of 2008 included
manufacturing service payments related to Xolair, which Novartis pays us as a
result of our acquisition of Tanox, and our share of European profits related to
Xolair. See “Related Party Transactions” below for more information on
contract revenue from Roche and Novartis.
For
2008, we forecast contract revenue to remain relatively flat compared to 2007.
However, contract revenue varies each quarter and is dependent on a number of
factors, including the timing and level of reimbursements from ongoing
development efforts, milestones, opt-in payments received, new contract
arrangements, and foreign currency exchange rates.
Cost
of Sales
Cost
of sales (COS) as a percentage of product sales was 17% in the second quarter
and first six months of 2008 compared to 18% in the second quarter and 17% in
the first six months of 2007. COS as a percentage of product sales during
the second quarter and first six months of 2008 was favorably affected by a
decreased volume of lower margin sales to collaborators. However, COS for these
periods included a $50 million charge related to failed lots from a
manufacturing start-up campaign at one of our facilities, as well as smaller
charges related to the ongoing effect of our Voluntary Severance Program (VSP)
and excess manufacturing capacity in our manufacturing network. The VSP gave
certain manufacturing employees the opportunity to voluntarily resign from the
company in exchange for a severance package. For the first six months of 2008,
compensation charges related to the VSP included in COS were $27 million. Since
a substantial majority of the employees enrolled under the VSP departed during
the first six months of 2008, the remaining charges that will be recorded in the
second half of 2008 are not expected to have a material effect on our results of
operations.
Research
and Development
Research
and development (R&D) expenses increased 8% to $649 million in the second
quarter and 4% to $1,266 million in the first six months of 2008 from the
comparable periods in 2007. The higher levels of expenses in the second quarter
and first six months of 2008 reflected increased development activity mainly as
a result of collaboration arrangements entered into in 2007, increased clinical
manufacturing expenses, and higher research expenses. The increases in R&D
expenses were offset by a reduction of in-licensing expenses of approximately
$140 million in the first six months of 2008 compared to the first six
months of 2007, due to significant new collaborations entered into during
the first six months of 2007. R&D as a percentage of operating revenue was
20% in the second
quarter and first six months of 2008 compared to 20% in the second quarter and
21% in the first six months of 2007.
Marketing,
General and Administrative
Marketing,
general and administrative (MG&A) expenses increased 5% to $559 million in the second
quarter and 5% to $1,076 million in the first six months of 2008 from the
comparable periods in 2007. These increases were primarily due to an increase in
royalty expense, primarily to Biogen Idec, resulting from higher Roche sales of
Rituxan. MG&A as a percentage of operating revenue was 17% in the second quarter
and in the first six months of 2008 compared to 18% in the second quarter and
17% in the first six months 2007.
Collaboration
Profit Sharing
Collaboration
profit sharing expenses increased 13% to $313 million in the second
quarter and 12% to $592 million in the first six months of 2008 from the
comparable periods in 2007, primarily due to higher sales of Rituxan and
Tarceva.
The
following table summarizes the amounts resulting from the respective profit
sharing collaborations for the periods presented (in millions):
|
|
|
Three
Months
Ended
June 30,
|
|
|
|
|
|
Six
Months
Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Rituxan profit sharing expense
|
|
$ |
213 |
|
|
$ |
188 |
|
|
|
13
|
% |
|
$ |
404 |
|
|
$ |
354 |
|
|
|
14
|
% |
|
U.S.
Tarceva profit sharing expense
|
|
|
52 |
|
|
|
40 |
|
|
|
30 |
|
|
|
99 |
|
|
|
79 |
|
|
|
25 |
|
|
Total
Xolair profit sharing expense
|
|
|
48 |
|
|
|
49 |
|
|
|
(2 |
) |
|
|
89 |
|
|
|
96 |
|
|
|
(7 |
) |
|
Total
collaboration profit sharing expense
|
|
$ |
313 |
|
|
$ |
277 |
|
|
|
13 |
|
|
$ |
592 |
|
|
$ |
529 |
|
|
|
12 |
|
We
and Novartis share the U.S. and European operating profits for Xolair according
to prescribed profit sharing percentages. Generally, we evaluate whether we are
a net recipient or payor of funds on an annual basis in our cost and profit
sharing arrangements. Net amounts received on an annual basis under such
arrangements are classified as contract revenue, and net amounts paid on an
annual basis are classified as profit sharing expense. With respect to the U.S.
operating results, for the full year in 2007 we were a net payor to Novartis,
and for the full year in 2008 we similarly anticipate being a net payor to
Novartis. As a result, for the second quarters and first six months of 2008 and
2007, the portion of the U.S. operating results that we owed to Novartis was
recorded as collaboration profit sharing expense. With respect to the European
operating results, for the full year in 2007 we were a net payor to Novartis,
and for the full year in 2008 we anticipate being a net recipient from Novartis.
As a result, for the second quarter and first six months of 2008, the portion of
the European operating results that Novartis owed us was recorded as contract
revenue. For the same periods in 2007, however, our portion of the European
operating results was recorded as collaboration profit sharing expense.
Effective with our acquisition of Tanox on August 2, 2007, Novartis also makes
additional profit sharing payments to us on U.S. sales of Xolair, which reduces
our profit sharing expense.
Currently,
our most significant collaboration profit sharing agreement is with Biogen Idec,
with which we co-promote Rituxan in the U.S. Under the collaboration agreement,
Biogen Idec granted us a worldwide license to develop, commercialize, and market
Rituxan for multiple indications. In exchange for these worldwide rights, Biogen
Idec has co-promotion rights in the U.S. and a contractual arrangement under
which we share a portion of the pretax U.S. co-promotion profits of Rituxan and
pay royalty expense based on sales of Rituxan outside the U.S. In June 2003, we
amended and restated the collaboration agreement with Biogen Idec to include the
development and commercialization of one or more anti-CD20 antibodies targeting
B-cell disorders, in addition to Rituxan, for a broad range of
indications.
Under
the amended and restated collaboration agreement, our share of the current
pretax U.S. co-promotion profit sharing formula is approximately 60% of
operating profits, and Biogen Idec’s share is approximately 40%. For each
calendar year or portion thereof following the approval date of the first new
anti-CD20 product, after a period of transition, our share of the pretax U.S.
co-promotion profits will change to approximately 70% of operating profits, and
Biogen Idec’s share will be approximately 30%.
Collaboration
profit sharing expense, exclusive of R&D expenses, related to Biogen Idec
for the periods ended June 30, 2008 and 2007 consisted of the following (in millions):
|
|
|
Three
Months
Ended
June 30,
|
|
|
|
|
|
Six
Months
Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales, net
|
|
$ |
651 |
|
|
$ |
582 |
|
|
|
12
|
% |
|
$ |
1,255 |
|
|
$ |
1,117 |
|
|
|
12
|
% |
|
Combined
commercial costs and expenses
|
|
|
150 |
|
|
|
146 |
|
|
|
3 |
|
|
|
294 |
|
|
|
276 |
|
|
|
7 |
|
|
Combined
co-promotion profits
|
|
$ |
501 |
|
|
$ |
436 |
|
|
|
15 |
|
|
$ |
961 |
|
|
$ |
841 |
|
|
|
14 |
|
|
Amount
due to Biogen Idec for their share of co-promotion profits–included in
collaboration profit sharing expense
|
|
$ |
213 |
|
|
$ |
188 |
|
|
|
13
|
% |
|
$ |
404 |
|
|
$ |
354 |
|
|
|
14
|
% |
In
addition to Biogen Idec’s share of the combined co-promotion profits for
Rituxan, collaboration profit sharing expense includes the quarterly
settlement of Biogen Idec’s portion of the combined commercial costs. Since we
and Biogen Idec each individually incur commercial costs related to Rituxan and
the spending mix between the parties can vary, collaboration profit sharing
expense as a percentage of sales can also vary accordingly.
Total
revenue and expenses related to our collaboration with Biogen Idec included the
following (in
millions):
|
|
|
Three
Months
Ended
June 30,
|
|
|
|
|
|
Six
Months
Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
revenue from Biogen Idec (R&D reimbursement)
|
|
$ |
32 |
|
|
$ |
34 |
|
|
|
(6 |
)
% |
|
$ |
65 |
|
|
$ |
55 |
|
|
|
18
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Co-promotion
profit sharing expense
|
|
$ |
213 |
|
|
$ |
188 |
|
|
|
13
|
% |
|
$ |
404 |
|
|
$ |
354 |
|
|
|
14
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty
expense on sales of Rituxan outside the U.S. and other patent
costs–included in MG&A expenses
|
|
$ |
76 |
|
|
$ |
51 |
|
|
|
49
|
% |
|
$ |
144 |
|
|
$ |
107 |
|
|
|
35
|
% |
Recurring
Amortization Charges Related to Redemption and Acquisition
On
June 30, 1999, RHI exercised its option to cause us to redeem all of our Special
Common Stock held by stockholders other than RHI. The Redemption was reflected
as the purchase of a business, which under GAAP required push-down accounting to
reflect in our financial statements the amounts paid for our stock in excess of
our net book value.
On
August 2, 2007, we acquired Tanox. In connection with the acquisition, we
recorded approximately $814 million of intangible assets, representing developed
product technology and core technology, which are being amortized over 12
years.
We
recorded recurring charges related to the amortization of intangibles associated
with the Redemption and our acquisition of Tanox. These charges were $43 million
in the second quarter of 2008 and $86 million in the first six months
of 2008, and were $26 million in the second quarter and $52 million in the first
six months of 2007.
Special
Items: Litigation-Related
The
California Supreme Court heard our appeal on the COH matter on February 5, 2008,
and on April 24, 2008 overturned the award of $200 million in punitive damages
to COH but upheld the award of $300 million in compensatory damages. As a
result of the California Supreme Court decision, we reversed a $300 million net
litigation accrual related to the punitive damages and accrued interest,
which we recorded as “Special items: litigation related” in our Condensed
Consolidated Statements of Income for the first quarter and first six months of
2008. In the second quarter and first six months of 2007, we recorded
accrued interest and bond costs on both the compensatory and punitive damages
totaling $13 million and $26 million, respectively. See Note 5, “Contingencies,”
in the Notes to the Condensed Consolidated Financial Statements in Part I, Item
1 of this Quarterly Report on Form 10-Q for more information regarding the COH
litigation.
Operating
Income
Operating
income was $1,229 million in the second quarter of 2008, a 9% increase from the
second quarter of 2007, and $2,748 million in the first six months of 2008, a
26% increase from the comparable period in 2007. Our operating income as a
percentage of operating revenue (pretax operating margin) was 38% in the second
quarter of 2008 and 37% in the second quarter of 2007, and was 44% in the first
six months of 2008 and 37% in the first six months of 2007.
Other
Income (Expense)
The
components of “Other income (expense)” were as follows (in millions):
|
|
|
Three
Months
Ended
June 30,
|
|
|
|
|
|
Six
Months
Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains
on sales of biotechnology equity securities, net
|
|
$ |
43 |
|
|
$ |
4 |
|
|
|
975
|
% |
|
$ |
45 |
|
|
$ |
12 |
|
|
|
275
|
% |
|
Write-downs
of biotechnology debt and equity securities
|
|
|
(1 |
) |
|
|
– |
|
|
|
– |
|
|
|
(1 |
) |
|
|
(4 |
) |
|
|
(75 |
) |
|
Interest
income(1)
|
|
|
51 |
|
|
|
70 |
|
|
|
(27 |
) |
|
|
118 |
|
|
|
140 |
|
|
|
(16 |
) |
|
Interest
expense
|
|
|
(15 |
) |
|
|
(17 |
) |
|
|
(12 |
) |
|
|
(32 |
) |
|
|
(35 |
) |
|
|
(9 |
) |
|
Other
miscellaneous income
|
|
|
– |
|
|
|
1 |
|
|
|
(100 |
) |
|
|
4 |
|
|
|
1 |
|
|
|
300 |
|
|
Total
other income, net
|
|
$ |
78 |
|
|
$ |
58 |
|
|
|
34 |
|
|
$ |
134 |
|
|
$ |
114 |
|
|
|
18 |
|
______________________
|
(1)
|
Interest
income includes interest and dividend income, bond-related amortization,
realized gains and losses on available-for-sale securities and trading
securities, and changes in unrealized gains and losses on trading
securities.
|
Other
income, net for the second quarter of 2008 increased 34% to $78 million
from the second
quarter of 2007 and increased 18% to $134 million in the first six months
of 2008 compared to the same period in 2007. Gains on sales of biotechnology
equity securities increased due to gains recognized as a result of the
acquisitions of Millennium Pharmaceuticals, Inc. by Takeda Pharmaceutical, and
Agensys, Inc. by Astellas Pharma, Inc. These gains were offset by lower interest
income, mainly due to lower interest rates in the second quarter and first six
months of 2008 compared to the same periods in 2007.
For
2008, we forecast “Other income, net” to be generally flat relative to
2007.
Income
Tax Provision
Our
effective income tax rate was 40% in the second quarter of 2008 compared to 37%
in the second quarter of 2007, mainly due to a $33 million settlement with
the IRS for an item related to prior years. Our effective income tax rate was
39% in the first six months of 2008 compared to 37% in the first six months of
2007, mainly due to the IRS settlement.
Financial
Assets and Liabilities
On January
1, 2008, we adopted FAS 157, which established a framework for measuring fair
value in GAAP and clarified the definition of fair value within that framework.
FAS 157 does not require assets and liabilities that were previously recorded at
cost to be recorded at fair value. For assets and liabilities that are already
required to be disclosed at fair value, FAS 157 introduced, or reiterated, a
number of key concepts that form the foundation of the fair value measurement
approach to be used for financial reporting purposes. The fair value of our
financial instruments reflects the amounts that would be received in connection
with the sale of an asset or paid in connection with the transfer of a liability
in an orderly transaction between market participants at the measurement date
(exit price). FAS 157 also established a fair value hierarchy that prioritizes
the use of inputs used in valuation techniques into the following three
levels:
Level
1—quoted prices in active markets for identical assets and
liabilities
Level
2—observable inputs other than quoted prices in active markets for identical
assets and liabilities
Level
3—unobservable inputs
The
adoption of FAS 157 did not have an effect on our financial condition or results
of operations, but FAS 157 introduced new disclosures about how we value certain
assets and liabilities. Much of the disclosure focuses on the inputs used to
measure fair value, particularly for instances in which the measurement uses
significant unobservable (Level 3) inputs. A substantial majority of our
financial instruments are valued using quoted prices in active markets or are
based on other observable inputs. Our Level 1 assets include cash, money market
instruments, U.S. Treasury securities, marketable equity securities, and equity
forwards. Level 2 assets include other government and agency
securities,
commercial paper, corporate bonds, asset-backed securities, municipal bonds,
preferred securities, and other derivatives. Our Level 3 assets include
student loan auction-rate securities and structured investment vehicle
securities. As of June 30, 2008, we held $157 million of investments which were
measured using Level 3 inputs, representing approximately 2% of our total fair
value investment portfolio. Student loan auction-rate securities of $155 million
and structured investment vehicle securities of $2 million were valued based on
broker-provided valuations, which approximate fair value. In February 2008, the
auction-rate securities market experienced a number of failed auctions for
student loan-backed securities, such as those held by us, which severely
limited the liquidity of those securities. Due to market liquidity constraints
related to the failed auctions, we classified the auction-rate securities as
non-current assets, consistent with the long-term maturity dates of the
underlying student loans. As of June 30, 2008, we believed that the unrealized
losses in the auction rate securities are temporary and that we have the ability
to hold the assets to maturity. All of our auction-rate securities are
AAA/Aaa-rated and are collateralized by student loans guaranteed by the U.S.
government to be repaid at no less than 95% of par value. We held no auction
rate securities as of December 31, 2007.
The
following table sets forth the fair value of our financial assets and
liabilities reported on a recurring basis, including those pledged as
collateral, or restricted (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,891 |
|
|
$ |
– |
|
|
$ |
2,514 |
|
|
$ |
– |
|
|
Restricted
cash
|
|
|
788 |
|
|
|
– |
|
|
|
788 |
|
|
|
– |
|
|
Short-term
investments
|
|
|
1,614 |
|
|
|
– |
|
|
|
1,461 |
|
|
|
– |
|
|
Long-term
marketable debt securities
|
|
|
1,458 |
|
|
|
– |
|
|
|
1,674 |
|
|
|
– |
|
|
Total
fixed income investment portfolio
|
|
|
6,751 |
|
|
|
– |
|
|
|
6,437 |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
marketable equity securities
|
|
|
374 |
|
|
|
– |
|
|
|
416 |
|
|
|
– |
|
|
Total
derivative financial instruments
|
|
|
28 |
|
|
|
82 |
|
|
|
30 |
|
|
|
19 |
|
|
Total
|
|
$ |
7,153 |
|
|
$ |
82 |
|
|
$ |
6,883 |
|
|
$ |
19 |
|
Liquidity
and Capital Resources
(In
millions)
|
|
|
|
|
|
|
|
|
Unrestricted
cash, cash equivalents, short-term investments, and long-term marketable
debt and equity securities
|
|
$ |
6,337 |
|
|
$ |
6,065 |
|
|
Net
receivable—equity hedge instruments
|
|
|
17 |
|
|
|
24 |
|
|
Total
unrestricted cash, cash equivalents, short-term investments, long-term
marketable debt and equity securities, and equity hedge
instruments
|
|
$ |
6,354 |
|
|
$ |
6,089 |
|
|
Working
capital
|
|
$ |
6,348 |
|
|
$ |
4,835 |
|
|
Current
ratio
|
|
3.3:1
|
|
|
2.2:1
|
|
Total
unrestricted cash, cash equivalents, short-term investments, and long-term
marketable securities, including the fair value of the equity hedge instruments,
was $6,354 million as of June 30, 2008, an increase of $265 million from
December 31, 2007. This increase primarily reflects cash generated from
operations and increases from stock option exercises, partially offset by cash
used for tax payments, the COH litigation settlement payment, capital
expenditures, and share repurchases. To mitigate the risk of market value
fluctuations, one of our most significant biotechnology equity security holdings
is hedged with forward contracts, which are carried at estimated fair value. See
Note 4, “Investment Securities and Financial Instruments,” in the Notes to the
Consolidated Financial Statements in Part II, Item 8 of our Annual Report on
Form 10-K for the year ended December 31, 2007 for further information regarding
activity in our marketable investment portfolio and derivative
instruments.
In
conjunction with the COH judgment in 2002, we posted a surety bond and were
required to pledge cash and investments of $788 million to secure the bond, and
this balance was reflected in “Restricted cash and investments” in the
accompanying Condensed Consolidated Balance Sheets. Subsequent to June 30,
2008, the court completed certain administrative procedures to dismiss the case.
As a result, the restrictions were lifted from the restricted cash and
investments accounts, and the funds became available for use in our
operations.
Cash
Provided by Operating Activities
Cash
provided by operating activities is primarily driven by increases in our net
income. However, operating cash flows differ from net income as a result of
non-cash charges or differences in the timing of cash flows and earnings
recognition. Significant components of cash provided by operating activities are
as follows:
Accounts
payable, other accrued liabilities, and other long-term liabilities decreased
$455 million in the first six months of 2008, mainly due to payments to
third-party vendors, tax authorities, and employees for accrued bonus
costs.
Inventories
decreased $83 million in the first six months of 2008, as more products were
sold than produced during the period.
Receivables
and other current assets increased $59 million in the first six months of 2008.
Accounts receivable—product sales increased $42 million from December 31, 2007,
primarily due to increased product sales and a decrease in outstanding credit
notes against accounts receivable balances as of June 30, 2008 compared to
December 31, 2007, mainly due to the timing of their application. The average
collection period of our accounts receivable—product sales as measured in days’
sales outstanding (DSO) was 32 days as of June 30, 2008, compared to 33 days as
of December 31, 2007 and 40 days as of June 30, 2007. The decrease in DSO from
the second quarter of 2007 was primarily due to the reduction in the extended
payment terms that we offered to certain wholesalers in conjunction with the
launch of Lucentis on June 30, 2006.
As
a result of the April 24, 2008 California Supreme Court ruling on the COH
matter, we reversed a $300 million net litigation accrual related to the
punitive damages and accrued interest in the first six months of 2008, and we
paid COH $476 million in the second quarter of 2008 for compensatory damages
awarded plus interest, which reduced our cash from operations.
Cash
Used in Investing Activities
Cash
used in investing activities was primarily due to capital expenditures. Capital
expenditures were $398 million during the first six months of 2008 compared to
$475 million during the first six months of 2007. During the first six months of
2008, capital expenditures were related to construction of our fill-finish
facility in Hillsboro, Oregon and our E. coli production facility in Singapore;
leasehold improvements for newly constructed buildings on our South San
Francisco, California campus; and purchases of equipment and information
systems.
We
forecast that our 2008 capital expenditures will be approximately $850 million,
excluding capitalized costs related to construction costs for which we are
considered to be the owner during the construction period.
In
November 2006, we entered into a series of agreements with Lonza, including a
supply agreement to purchase product produced by Lonza at their Singapore
manufacturing facility, which is currently under construction, and a loan
agreement to advance Lonza $290 million for the construction of that facility.
The facility is expected to reach mechanical completion in the fourth quarter of
2008, at which time we expect to advance Lonza in excess of $200 million
pursuant to the loan agreement, subject to certain conditions that are included
in the loan agreement.
Cash
Used in Financing Activities
Cash
used in financing activities includes activity under our stock repurchase
program and our employee stock plans. We used cash for stock repurchases of $256
million during the first six months of 2008 and $666 million during the first
six months of 2007 pursuant to our stock repurchase program approved by our
Board of Directors. We also received $228 million during the first six months of
2008 and $276 million during the first six months of 2007 related to stock
option exercises and stock issuances under our employee stock purchase plan. The
excess tax benefits from stock-based compensation arrangements were $32 million
in the first six months of 2008 and $127 million in the first six months of
2007.
Under
a stock repurchase program approved by our Board of Directors in December 2003
and most recently extended in April 2008, we are authorized to repurchase up to
150 million shares of our Common Stock for an
aggregate
amount of up to $10.0 billion through June 30, 2009. In this program, as in
previous stock repurchase programs, purchases may be made in the open market or
in privately negotiated transactions from time to time at management’s
discretion. We also may engage in transactions in other Genentech securities in
conjunction with the repurchase program, including certain derivative
securities, although as of June 30, 2008, we had not engaged in any such
transactions. We use the repurchased stock to offset dilution caused by the
issuance of shares in connection with our employee stock purchase plan. Although
there are currently no specific plans for the shares that may be purchased under
the program, our goals for the program are: (1) to address provisions of
our Affiliation Agreement with RHI related to maintaining RHI’s minimum
ownership percentage, (2) to make prudent investments of our cash resources, and
(3) to allow for an effective mechanism to provide stock for our employee stock
purchase plans. See “Relationship with Roche Holdings, Inc.” below for more
information on RHI’s minimum ownership percentage.
We
enter into Rule 10b5-1 trading plans to repurchase shares in the open market
during periods when trading in our stock is restricted under our insider trading
policy.
In
November 2007, we entered into a prepaid share repurchase arrangement with an
investment bank pursuant to which we delivered $300 million to the investment
bank. The prepaid amount was reflected as a reduction of our stockholders’
equity as of December 31, 2007. Under this arrangement, the investment bank
delivered approximately four million shares to us on March 31,
2008.
In
May 2008, we entered into a prepaid share repurchase arrangement with an
investment bank pursuant to which we delivered $500 million to the investment
bank. The investment bank is obligated to deliver to us, by September 30, 2008,
not fewer than five million shares of our Common Stock based upon a
pre-determined formula, subject to a possible reduction in the number of shares
received, an extension of the date on which shares are to be delivered, or
other modifications or cancellation of the plan in certain circumstances. The
prepaid amount has been reflected as a reduction of our stockholders’ equity as
of June 30, 2008. There was no effect on EPS for the three or six months ended
June 30, 2008 as a result of entering into this agreement.
Our
shares repurchased during the second quarter of 2008 were as follows (shares in
millions):
|
|
|
Total
Number of Shares Purchased
|
|
|
Average
Price Paid per Share
|
|
|
April
1–30, 2008
|
|
|
0.9 |
|
|
$ |
74.76 |
|
|
May
1–31, 2008
|
|
|
1.5 |
|
|
|
68.77 |
|
|
June
1–30, 2008
|
|
|
1.2 |
|
|
|
73.68 |
|
|
Total
|
|
|
3.6 |
|
|
$ |
71.91 |
|
As
of June 30, 2008, 83 million cumulative shares had been purchased under our
stock repurchase program for $6.0 billion, and a maximum of 67 million
additional shares for amounts totaling up to $4.0 billion may be purchased under
the program through June 30, 2009.
The
par value method of accounting is used for our Common Stock repurchases. The
excess of the cost of shares acquired over the par value is allocated to
additional paid-in capital, with the amounts in excess of the estimated original
sales price charged to retained earnings.
Off-Balance
Sheet Arrangements
We
have certain contractual arrangements that create potential risk for us and are
not recognized in our Condensed Consolidated Balance Sheets. We believe that
there have been no significant changes in the off-balance sheet arrangements
disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007
that have, or are reasonably likely to have, a material current or future effect
on our financial condition, changes in financial condition, revenue or expenses,
results of operations, liquidity, capital expenditures, or capital
resources.
Contractual
Obligations
During
the first six months of 2008, we believe that there were no significant changes
in our payments due under contractual obligations, as disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2007, except as noted in
“Cash Used in Investing Activities” above.
Contingencies
We
are party to various legal proceedings, including licensing and contract
disputes, and other matters. See Note 5, “Contingencies,” in the Notes to
Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly
Report on Form 10-Q for more information.
Relationship
with Roche Holdings, Inc.
We
issue shares of Common Stock in connection with our stock option and stock
purchase plans, and we may issue additional shares for other purposes. Our
Affiliation Agreement with RHI provides, among other things, that with respect
to any issuance of our Common Stock in the future, we will repurchase a
sufficient number of shares so that immediately after such issuance, the
percentage of our Common Stock owned by RHI will be no lower than 2% below the
“Minimum Percentage” (subject to certain conditions). The Minimum Percentage
equals the lowest number of shares of Genentech Common Stock owned by RHI since
its July 1999 offering of our Common Stock (to be adjusted in the future for
dispositions of shares of Genentech Common Stock by RHI as well as for stock
splits or stock combinations) divided by 1,018,388,704 (to be adjusted in the
future for stock splits or stock combinations), which is the number of shares of
Genentech Common Stock outstanding at the time of the July 1999 offering, as
adjusted for stock splits. We have repurchased shares of our Common Stock since
2001 (see discussion above in “Liquidity and Capital Resources”). The
Affiliation Agreement also provides that, upon RHI’s request, we will repurchase
shares of our Common Stock to increase RHI’s ownership to the Minimum
Percentage. In addition, RHI will have a continuing option to buy stock from us
at prevailing market prices to maintain its percentage ownership interest. Under
the terms of the Affiliation Agreement, RHI’s Minimum Percentage is 57.7% and
RHI’s ownership percentage is to be no lower than 55.7%. RHI’s ownership
percentage of our outstanding shares was 55.9% as of June 30, 2008 and
55.6% as of July 31, 2008. Future share repurchases under our share repurchase
program, including the May 2008 prepaid share repurchase arrangement (see also
Note 8, “Capital Stock,” in the Notes to Condensed Consolidated Financial
Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q), may
increase Roche’s ownership percentage. However, significant option exercises and
stock purchases by employees could result in further dilution, and limitations
in the number of shares we receive under, or modification or cancellation of,
our existing prepaid share repurchase arrangement could negatively affect our
ability to offset dilution.
See
also Note 8, “Capital Stock,” and Note 9, “Subsequent Event,” in the Notes to
Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly
Report on Form 10-Q for information regarding our prepaid share repurchase
arrangement and Roche’s proposal to acquire all outstanding shares of our stock
not owned by Roche.
Related
Party Transactions
We
enter into transactions with related parties, Roche and Novartis. The accounting
policies that we apply to our transactions with our related parties are
consistent with those applied in transactions with independent third parties,
and all related party agreements are negotiated on an arm’s-length
basis.
In
our royalty and supply arrangements with related parties, we are the principal,
as defined under EITF 99-19, because we bear the manufacturing risk, general
inventory risk, and the risk to defend our intellectual property. For
circumstances in which we are the principal in the transaction, we record the
transaction on a gross basis in accordance with EITF 99-19; otherwise our
transactions are recorded on a net basis.
Roche
We
signed two product supply agreements with Roche in July 2006, each of which was
amended in November 2007. The Umbrella Agreement supersedes our previous product
supply agreements with Roche. The Short-Term Agreement supplements the terms of
the Umbrella Agreement. Under the Short-Term Agreement, Roche has agreed to
purchase specified amounts of Herceptin, Avastin, and Rituxan through 2008.
Under the Umbrella Agreement, Roche has agreed to purchase specified amounts of
Herceptin and Avastin through 2012, and on a perpetual basis, either party may
order other collaboration products from the other party, including Herceptin and
Avastin after 2012, pursuant to certain forecast terms. The Umbrella Agreement
also provides that either party may terminate its
obligation
to purchase and/or supply Avastin and/or Herceptin with six years notice on or
after December 31, 2007. To date, we have not received such notice of
termination from Roche.
Under
the July 1999 amended and restated licensing and marketing agreement and the
July 1998 licensing and marketing agreement related to anti-HER2 antibodies
(including Herceptin and pertuzumab), Roche has the right to opt in to
development programs we undertake on our products at certain pre-defined stages
of development. When Roche opts in to a program, we record the opt-in payments
received from Roche as deferred revenue, which we recognize over the expected
development periods or product life, as appropriate. As of June 30,
2008, the amounts in short-term and long-term deferred revenue related to opt-in
payments received from Roche were $48 million and $193 million, respectively.
For the second quarter and first six months of 2008, we recognized $13 million
and $24 million, respectively, as contract revenue related to opt-in payments
previously received from Roche. For the second quarter and first six months of
2007, we recognized $11 million and $23 million, respectively, as contract
revenue related to opt-in payments previously received from Roche.
In
February 2008, Roche acquired Ventana, and as a result of the acquisition,
Ventana is considered a related party. We have engaged in transactions with
Ventana prior to and since the acquisition, but these transactions have not been
material to our results of operations.
In
May 2008, Roche acquired Piramed, a privately held entity based in the United
Kingdom, and as a result of the transaction, Piramed is considered a related
party. We have a previously existing licensing agreement with Piramed related to
a molecule in our development pipeline.
In
June 2008, we entered into a licensing agreement with Roche under which we
obtained rights to a preclinical small molecule drug development program. We
recorded $35 million in R&D expense in the second quarter of 2008 related to
this agreement. The future R&D costs incurred under the agreement and any
profit and loss from global commercialization will be shared equally with
Roche.
In
July 2008, we signed an agreement with Chugai, a Japan-based entity and a member
of Roche, under which we agreed to manufacture Actemra, a product of Chugai, at
our Vacaville, California facility. After an initial term of five years, the
agreement may be terminated subject to certain terms and conditions under the
contract.
We
currently have no commercialized products subject to profit sharing arrangements
with Roche.
Under
our existing arrangements with Roche, including our licensing and marketing
agreement, we recognized the following amounts (in millions):
|
|
|
Three
Months
Ended
June 30,
|
|
|
Six
Months
Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales to Roche
|
|
$ |
144 |
|
|
$ |
253 |
|
|
$ |
281 |
|
|
$ |
516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalties
earned from Roche
|
|
$ |
391 |
|
|
$ |
283 |
|
|
$ |
762 |
|
|
$ |
538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
revenue from Roche
|
|
$ |
20 |
|
|
$ |
30 |
|
|
$ |
40 |
|
|
$ |
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales on product sales to Roche
|
|
$ |
89 |
|
|
$ |
137 |
|
|
$ |
152 |
|
|
$ |
258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expenses incurred on joint development projects with
Roche
|
|
$ |
77 |
|
|
$ |
70 |
|
|
$ |
148 |
|
|
$ |
128 |
|
Certain
R&D expenses are partially reimbursable to us by Roche. Amounts that Roche
owes us, net of amounts reimbursable to Roche by us on these projects, are
recorded as contract revenue. Conversely, R&D expenses may include the net
settlement of amounts that we owe Roche for R&D expenses that Roche incurred
on joint development projects, less amounts reimbursable to us by Roche on these
projects.
Novartis
Based
on information available to us at the time of filing this Quarterly Report on
Form 10-Q, we believe that the Novartis Group holds approximately 33.3% of the
outstanding voting shares of Roche. As a result of this ownership, the Novartis
Group is deemed to have an indirect beneficial ownership interest under FAS 57
of more than 10% of our voting stock.
We
have an agreement with Novartis Pharma AG under which Novartis Pharma AG has the
exclusive right to develop and market Lucentis outside the U.S. for indications
related to diseases or disorders of the eye. As part of this agreement, the
parties share the cost of certain of our ongoing development expenses for
Lucentis.
We
and Novartis are co-developing and co-promoting Xolair in the U.S. We record all
sales, COS, and marketing and sales expenses in the U.S.; Novartis markets the
product in and records all sales, COS, and marketing and sales expenses in
Europe. We and Novartis share the resulting U.S. and European operating profits
according to prescribed profit sharing percentages. Generally, we evaluate
whether we are a net recipient or payor of funds on an annual basis in our cost
and profit sharing arrangements. Net amounts received on an annual basis under
such arrangements are classified as contract revenue, and net amounts paid on an
annual basis are classified as profit sharing expense. With respect to the U.S.
operating results, for the full year in 2007 we were a net payor to Novartis,
and for the full year in 2008 we similarly anticipate being a net payor to
Novartis. As a result, for the second quarters and first six months of 2008 and
2007, the portion of the U.S. operating results that we owed to Novartis was
recorded as collaboration profit sharing expense. With respect to the European
operating results, for the full year in 2007 we were a net payor to Novartis,
and for the full year in 2008 we anticipate being a net recipient from Novartis.
As a result, for the second quarter and first six months of 2008, the portion of
the European operating results that Novartis owed us was recorded as contract
revenue. For the same periods in 2007, however, our portion of the European
operating results was recorded as collaboration profit sharing expense.
Effective with our acquisition of Tanox on August 2, 2007, Novartis also
makes: (1) additional profit sharing payments to us on U.S. sales of
Xolair, which reduces our profit sharing expense; (2) royalty payments to
us on sales of Xolair worldwide, which we record as royalty revenue; and (3)
manufacturing service payments related to Xolair, which we record as contract
revenue.
Under
our existing arrangements with Novartis, we recognized the following amounts
(in
millions):
|
|
|
Three
Months
Ended
June 30,
|
|
|
Six
Months
Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales to Novartis
|
|
$ |
2 |
|
|
$ |
3 |
|
|
$ |
5 |
|
|
$ |
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalties
earned from Novartis
|
|
$ |
60 |
|
|
$ |
13 |
|
|
$ |
112 |
|
|
$ |
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
revenue from Novartis
|
|
$ |
15 |
|
|
$ |
4 |
|
|
$ |
26 |
|
|
$ |
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales on product sales to Novartis
|
|
$ |
1 |
|
|
$ |
3 |
|
|
$ |
4 |
|
|
$ |
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expenses incurred on joint development projects with
Novartis
|
|
$ |
12 |
|
|
$ |
9 |
|
|
$ |
20 |
|
|
$ |
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaboration
profit sharing expense to Novartis
|
|
$ |
48 |
|
|
$ |
49 |
|
|
$ |
89 |
|
|
$ |
96 |
|
Contract
revenue in the first six months of 2007 included a $30 million milestone payment
from Novartis for European Union approval of Lucentis for the treatment of
AMD.
Certain
R&D expenses are partially reimbursable to us by Novartis. The amounts that
Novartis owes us, net of amounts reimbursable to Novartis by us on those
projects, are recorded as contract revenue. Conversely, R&D expenses may
include the net settlement of amounts that we owe Novartis for R&D expenses
that Novartis incurred on joint development projects, less amounts reimbursable
to us by Novartis on those projects.
Stock
Options
Option
Program Description
Our
employee stock option program is a broad-based, long-term retention program that
is intended to attract and retain talented employees and to align stockholder
and employee interests. Our program primarily consists of our 2004 Equity
Incentive Plan (the Plan), a broad-based plan under which stock options,
restricted stock, stock appreciation rights, and performance shares and units
may be granted to employees, directors, and other service providers.
Substantially all of our employees participate in our stock option program. In
the past, we granted options under our amended and restated 1999 Stock Plan,
1996 Stock Option/Stock Incentive Plan, our amended and restated 1994 Stock
Option Plan, and our amended and restated 1990 Stock Option/Stock Incentive
Plan. Although we no longer grant options under these plans, exercisable options
granted under almost all of these plans are still outstanding.
All
stock option grants are made with the approval of the Compensation Committee of
the Board of Directors or an authorized delegate. See “Compensation
Discussion and Analysis” in our 2008 Proxy Statement for further information
concerning the policies and procedures of the Compensation Committee regarding
the use of stock options.
General
Option Information
Summary
of Option Activity
(Shares
in millions)
|
|
|
|
|
|
|
|
|
|
|
Shares
Available
for
Grant
|
|
|
|
|
|
Weighted-Average
Exercise
Price
|
|
|
December
31, 2006
|
|
|
68.7 |
|
|
|
88.3 |
|
|
$ |
54.43 |
|
|
Grants
|
|
|
(17.8 |
) |
|
|
17.8 |
|
|
|
79.40 |
|
|
Exercises
|
|
|
– |
|
|
|
(10.4 |
) |
|
|
32.76 |
|
|
Cancellations
|
|
|
3.5 |
|
|
|
(3.5 |
) |
|
|
76.45 |
|
|
December
31, 2007
|
|
|
54.4 |
|
|
|
92.2 |
|
|
$ |
60.94 |
|
|
Grants
|
|
|
(0.7 |
) |
|
|
0.7 |
|
|
|
72.86 |
|
|
Exercises
|
|
|
– |
|
|
|
(4.6 |
) |
|
|
35.64 |
|
|
Cancellations
|
|
|
2.4 |
|
|
|
(2.4 |
) |
|
|
80.25 |
|
|
June
30, 2008 (Year to Date)
|
|
|
56.1 |
|
|
|
85.9 |
|
|
$ |
61.84 |
|
In-the-Money
and Out-of-the-Money Option Information
(Shares
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
As
of June 30, 2008
|
|
|
|
|
Weighted-Average
Exercise
Price
|
|
|
|
|
|
Weighted-Average
Exercise
Price
|
|
|
|
|
|
Weighted-Average
Exercise
Price
|
|
|
In-the-Money
|
|
|
37 |
|
|
$ |
36.41 |
|
|
|
2 |
|
|
$ |
63.45 |
|
|
|
39 |
|
|
$ |
37.96 |
|
|
Out-of-the-Money(1)
|
|
|
18 |
|
|
|
83.57 |
|
|
|
29 |
|
|
|
80.65 |
|
|
|
47 |
|
|
|
81.76 |
|
|
Total
Options Outstanding
|
|
|
55 |
|
|
|
|
|
|
|
31 |
|
|
|
|
|
|
|
86 |
|
|
|
|
|
___________
|
(1)
|
Out-of-the-money
options have an exercise price equal to or greater than the fair market
value of Genentech Common Stock, which was $75.90 at the close of business
on June 30, 2008.
|
Dilutive
Effect of Options
Grants,
net of cancellations, as a percentage of outstanding shares were
(0.16)% for the first six months of 2008, 1.36% for the year ended
December 31, 2007, and 1.43% for the year ended December 31,
2006.
Equity
Compensation Plan Information
Our
stockholders have approved all of our equity compensation plans under which
options are outstanding.
******
This
report contains forward-looking statements regarding our Horizon 2010 strategy
of bringing new molecules into clinical development, bringing major new products
or indications onto the market, becoming the number one U.S. oncology company in
sales, and achieving certain financial growth measures; our internal stretch
goal to add a total of 30 molecules into development; the availability,
evaluation or presentation of data from clinical studies for Avastin and
Rituxan; sales to collaborators; Herceptin pricing terms; foreign currency
option contracts and forwards; auction rate securities; royalty revenues;
contract revenues; profit sharing with Novartis; other income net; compensation
charges associated with voluntary severance; capital expenditures; share
repurchases; construction of manufacturing facilities; and payments to Lonza.
These forward-looking statements involve risks and uncertainties, and the
cautionary statements set forth below and those contained in “Risk Factors” in
this Quarterly Report on Form 10-Q identify important factors that could cause
actual results to differ materially from those predicted in any such
forward-looking statements. Such factors include, but are not limited to,
difficulty in enrolling patients in clinical trials; the need for additional
data, data analysis or clinical studies; biologic license application (BLA)
preparation and decision making; FDA actions or delays; failure to obtain or
maintain FDA approval; difficulty in obtaining materials from suppliers;
unexpected safety, efficacy or manufacturing issues for us or our
contract/collaborator manufacturers; increased capital expenditures including
greater than expected construction and validation costs; product withdrawals;
competition; efficacy data concerning any of our products which shows or is
perceived to show similar or improved treatment benefit at a lower dose or
shorter duration of therapy; pricing decisions by us or our competitors; our
ability to protect our proprietary rights; the outcome of, and expenses
associated with, litigation or legal settlements; increased R&D, MG&A,
stock-based compensation, environmental and other expenses, and increased COS;
variations in collaborator sales and expenses; our indebtedness and ability to
pay our indebtedness; actions by Roche that are adverse to our interests; the
unsolicited proposal from Roche to acquire all outstanding shares of our stock
not owned by Roche; decreases in third party reimbursement rates; the
modification or cancellation of our prepaid share repurchase arrangement; and
greater than expected income tax rate. We disclaim and do not undertake any
obligation to update or revise any forward-looking statement in this Quarterly
Report on Form 10-Q.
Our
market risks as of June 30, 2008 had not changed materially from those
discussed in Item 7A of our Annual Report on Form 10-K for the year ended
December 31, 2007, on file with the U.S. Securities and Exchange
Commission.
See
also Note 1, “Summary of Significant Accounting Policies—Derivative
Instruments,” in the Notes to Condensed Consolidated Financial Statements in
Part I, Item 1 of this Quarterly Report on Form 10-Q.
Evaluation of Disclosure Controls
and Procedures: Our principal executive and financial officers
reviewed and evaluated our disclosure controls and procedures (as defined in
Exchange Act Rule 13a-15(e)) as of the end of the period covered by this
Quarterly Report on Form 10-Q. Based on that evaluation, our principal executive
and financial officers concluded that our disclosure controls and procedures are
effective in providing them with timely material information related to
Genentech, as required to be disclosed in the reports that we file under the
Exchange Act of 1934.
Changes in Internal Controls over
Financial Reporting: There were no changes in our internal control over
financial reporting that occurred during our last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
See
Note 5, “Contingencies,” in the Notes to Condensed Consolidated Financial
Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a
description of legal proceedings as well as certain other matters.
See
also Item 3, “Legal Proceedings,” in our Annual Report on Form 10-K for the
year ended December 31, 2007 and Part II, Item 1 of our Quarterly Report on Form
10-Q for the quarter ended March 31, 2008.
This
Quarterly Report on Form 10-Q contains forward-looking information based on our
current expectations. Because our actual results may differ materially from any
forward-looking statements that we make or that are made on our behalf, this
section includes a discussion of important factors that could affect our actual
future results, including, but not limited to, our product sales, royalties,
contract revenue, expenses, net income, and earnings per share.
The
successful development of pharmaceutical products is highly uncertain and
requires significant expenditures and time.
Successful
development of pharmaceutical products is highly uncertain. Products that appear
promising in research or development may be delayed or fail to reach later
stages of development or the market for several reasons, including:
|
Ÿ
|
Preclinical
tests may show the product to be toxic or lack efficacy in animal
models.
|
|
Ÿ
|
Clinical
trial results may show the product to be less effective than desired or to
have harmful or problematic side
effects.
|
|
Ÿ
|
Failure
to receive the necessary United States (U.S.) and international regulatory
approvals or a delay in receiving such approvals. Among other things, such
delays may be caused by slow enrollment in clinical studies; extended
length of time to achieve study endpoints; additional time requirements
for data analysis or biologic license application (BLA) or new drug
application (NDA) preparation; discussions with the U.S. Food and Drug
Administration (FDA); FDA requests for additional preclinical or clinical
data; FDA delays due to staffing or resource limitations at the agency;
analyses of or changes to study design; or unexpected safety, efficacy, or
manufacturing issues.
|
|
Ÿ
|
Difficulties
in formulating the product, scaling the manufacturing process, or getting
approval for manufacturing.
|
|
Ÿ
|
Manufacturing
costs, pricing, reimbursement issues, or other factors may make the
product uneconomical.
|
|
Ÿ
|
The
proprietary rights of others and their competing products and technologies
may prevent the product from being developed or
commercialized.
|
|
Ÿ
|
The
contractual rights of our collaborators or others may prevent the product
from being developed or
commercialized.
|
Success
in preclinical and early clinical trials does not ensure that large-scale
clinical trials will be successful. Clinical results are frequently susceptible
to varying interpretations that may delay, limit, or prevent regulatory
approvals. The length of time necessary to complete clinical trials and to
submit an application for marketing approval for a final decision by a
regulatory authority varies significantly and may be difficult to predict. If
our
large-scale
clinical trials for a product are not successful, we will not recover our
substantial investments in that product.
Factors
affecting our research and development (R&D) productivity and the amount of
our R&D expenses include, but are not limited to:
|
Ÿ
|
The
number of and the outcome of clinical trials currently being conducted by
us and/or our collaborators. For example, our R&D expenses may
increase based on the number of late-stage clinical trials being conducted
by us and/or our collaborators.
|
|
Ÿ
|
The
number of products entering into development from late-stage research. For
example, there is no guarantee that internal research efforts will succeed
in generating a sufficient number of product candidates that are ready to
move into development or that product candidates will be available for
in-licensing on terms acceptable to us and permitted under the anti-trust
laws.
|
|
Ÿ
|
Decisions
by Roche Holding AG and affiliates (Roche) whether to exercise its options
to develop and sell our future products in non-U.S. markets, and the
timing and amount of any related development cost
reimbursements.
|
|
Ÿ
|
Our
ability to in-license projects of interest to us, and the timing and
amount of related development funding or milestone payments for such
licenses. For example, we may enter into agreements requiring us to pay a
significant up-front fee for the purchase of in-process R&D, which we
may record as an R&D expense.
|
|
Ÿ
|
Participation
in a number of collaborative R&D arrangements. In many of these
collaborations, our share of expenses recorded in our financial statements
is subject to volatility based on our collaborators’ spending activities,
as well as the mix and timing of activities between the
parties.
|
|
Ÿ
|
Charges
incurred in connection with expanding our product manufacturing
capabilities, as described below in “Difficulties or delays in product
manufacturing or in obtaining materials from our suppliers, or
difficulties in accurately forecasting manufacturing capacity needs could
harm our business and/or negatively affect our financial
performance.”
|
|
Ÿ
|
Future
levels of revenue.
|
|
Ÿ
|
Our
ability to supply product for use in clinical
trials.
|
We
face competition.
We
face competition from pharmaceutical companies and biotechnology
companies.
The
introduction of new competitive products or follow-on biologics, new information
about existing products or pricing decisions by us or our competitors, rate of
market penetration by competitors’ products, and/or development and use of
alternate therapies may result in lost market share for us, reduced utilization
of our products, lower prices, and/or reduced product sales, even for products
protected by patents.
Avastin: Avastin
competes in metastatic colorectal cancer (CRC) with Erbitux®
(Imclone/Bristol-Myers Squibb), which is an epidermal growth factor receptor
(EGFR) inhibitor approved for the treatment of irinotecan refractory or
intolerant metastatic CRC patients; and with Vectibix™ (Amgen),
which is indicated for the treatment of patients with EGFR-expressing metastatic
CRC who have disease progression on or following fluoropyrimidine–,
oxaliplatin–, and irinotecan–containing regimens. Avastin could also face
competition from Erbitux® in
metastatic non-small cell lung cancer (NSCLC). At the American Society of
Clinical Oncology (ASCO) annual meeting in 2008, ImClone Systems Incorporated
and Bristol-Myers Squibb Company presented data from a Phase III study of
Erbitux® in
combination with vinorelbine plus cisplatin showing that this study met its
primary endpoint of increasing overall survival compared with chemotherapy
alone in patients with advanced NSCLC. Avastin could also face competition
in NSCLC from the chemotherapy Alimta (Eli Lilly) which, in a Phase III trial in
combination
with
cisplatin versus gemcitabine/cisplatin, demonstrated non-inferiority relative to
overall survival. In addition, Avastin competes with Nexavar®
(sorafenib, Bayer Corporation/Onyx Pharmaceuticals, Inc.), Sutent®
(sunitinib malate, Pfizer, Inc.), and Torisel® (Wyeth)
for the treatment of patients with advanced renal cell carcinoma (an unapproved
use of Avastin).
Avastin
could face competition from products in development that currently do not have
regulatory approval. Sanofi-Aventis is developing a vascular endothelial growth
factor (VEGF) inhibitor, VEGF-Trap, in multiple indications, including
metastatic CRC and metastatic NSCLC. Avastin could also face competition from
the VEGF receptor-2 inhibitor (IMC-1121b) under development by ImClone in
several indications including breast cancer (BC). There
are also ongoing head-to-head clinical trials comparing both Sutent®
and AZD2171 (AstraZeneca) to Avastin. Likewise, Amgen is conducting
head-to-head clinical trials comparing AMG 706 to Avastin in NSCLC and
metastatic BC; Pfizer has initiated a head-to-head trial comparing Sutent® to
Avastin in BC. Antisoma’s vascular disrupting agent, ASA404, has an ongoing
Phase III trial in first-line NSCLC (ATTRACT-1), and Antisoma has announced
plans to initiate a second-line NSCLC study (ATTRACT-2). Overall,
there are more than 65 molecules in clinical development that target VEGF
inhibition, and over 130 companies are developing molecules that, if successful
in clinical trials, may compete with Avastin.
Rituxan: Rituxan’s
current competitors in hematology-oncology include Bexxar®
(GlaxoSmithKline [GSK]) and Zevalin® (Cell
Therapeutics), both of which are radioimmunotherapies indicated for the
treatment of patients with relapsed or refractory low-grade, follicular, or
transformed B-cell non-Hodgkin’s lymphoma (NHL). Other potential competitors
include Campath® (Bayer
Corporation/Genzyme) in previously untreated and relapsed chronic lymphocytic
leukemia (CLL) (an unapproved use of Rituxan); Velcade®
(Millennium Pharmaceuticals, Inc.), which is indicated for multiple myeloma and
more recently mantle cell lymphoma (both unapproved uses of Rituxan);
Revlimid®
(Celgene), which is indicated for multiple myeloma and myelodysplastic syndromes
(both unapproved uses of Rituxan); and Treanda®
(Cephalon), which was recently approved for the treatment of CLL (an unapproved
use of Rituxan).
Rituxan’s
current competitors in rheumatoid arthritis (RA) include Enbrel®
(Amgen/Wyeth), Humira® (Abbott
Laboratories), Remicade® (Johnson
& Johnson), Orencia®
(Bristol-Myers Squibb), and Kineret® (Amgen).
These products are approved for use in an RA patient population that is broader
than the approved population for Rituxan. In addition, molecules in development
that, if approved by the FDA, may compete with Rituxan in RA
include: Actemra™, an
anti-interleukin-6 receptor being developed by Chugai Pharmaceutical Co.
Ltd. and Roche; Cimzia™
(certolizumab pegol), an anti-tumor necrosis factor (TNF) antibody being
developed by UCB; and CNTO 148 (golimumab), an anti-TNF antibody being developed
by Centocor, Inc. (a wholly owned subsidiary of Johnson & Johnson) and
Schering-Plough.
Rituxan
may face future competition in both hematology-oncology and RA from
HuMax-CD20®
(ofatumumab), an anti-CD20 antibody being co-developed by Genmab and
GSK. Genmab and GSK announced their plans to file for approval of
HuMax-CD20® in
2008 for monotherapy use in refractory CLL and to complete a monotherapy trial
for refractory indolent NHL. In addition, we are aware of other anti-CD20
molecules in development that, if successful in clinical trials, may compete
with Rituxan. Rituxan could also face competition from Treanda®
(Cephalon, Inc.), in NHL by the end of 2008 based on an FDA submission in
December 2007 in refractory indolent NHL. Finally BioVaxID (Accentia
Biopharmaceuticals) is currently in development and Accentia is planning to seek
approval for it in indolent NHL.
Herceptin: Herceptin
faces competition in the relapsed metastatic setting from Tykerb®
(lapatinib ditosylate) which is manufactured by GSK. Tykerb® is
approved in combination with capecitabine, for the treatment of patients with
advanced or metastatic BC whose tumors overexpress HER2 and who have received
prior therapy, including an anthracycline, a taxane, and Herceptin. We will
continue to monitor the clinical development of lapatinib in early lines of
metastatic and adjuvant BC.
Lucentis: We are aware
that retinal specialists are currently using Avastin to treat the wet form of
age-related macular degeneration (AMD), an unapproved use for Avastin, which
results in significantly less revenue to us per treatment compared to Lucentis.
As of January 1, 2008, we no longer directly supply Avastin to compounding
pharmacies. We expect ocular use of Avastin to continue as physicians can
purchase Avastin from authorized distributors and have it shipped to the
destination of the physicians’ choice. Additionally, an independent
head-to-head
trial
of Avastin and Lucentis in wet AMD is being partially funded by the National Eye
Institute, which announced that enrollment had commenced in February 2008.
Lucentis also competes with Macugen®
(Pfizer/OSI Pharmaceuticals), and with Visudyne®
(Novartis) alone, in combination with Lucentis, in combination with Avastin, or
in combination with the off-label steroid triamcinolone in wet AMD. In addition,
VEGF-Trap-Eye, a vascular endothelial growth factor blocker being developed by
Bayer Corporation and Regeneron Pharmaceuticals, Inc., is in Phase III clinical
trials for the treatment of wet AMD.
Xolair: Xolair faces
competition from other asthma therapies, including inhaled corticosteroids,
long-acting beta agonists, combination products such as fixed-dose inhaled
corticosteroids/long-acting beta agonists and leukotriene inhibitors, as well as
oral corticosteroids and immunotherapy.
Tarceva: Tarceva
competes with the chemotherapy agents Taxotere®
(Sanofi-Aventis) and Alimta® (Eli
Lilly and Company), both of which are indicated for the treatment of relapsed
NSCLC. Tarceva may face future competition in relapsed NSCLC from Zactima™
(AstraZeneca), Erbitux®
(ImClone/Bristol-Myers Squibb), and from a potential re-filing of Iressa®
(AstraZeneca) in the U.S. In first-line NSCLC (an unapproved use of Tarceva),
positive results from pivotal studies have been announced for Alimta® (Eli
Lilly) and Erbitux®
(ImClone/Bristol-Myers Squibb). Alimta® received
approval for this indication in the European Union. In front-line pancreatic
cancer, Tarceva primarily competes with Gemzar® (Eli
Lilly) monotherapy and Gemzar® in
combination with other chemotherapeutic agents. Tarceva could face competition
in the future from products in late-phase development, such as Axitinib
(Pfizer), in the treatment of pancreatic cancer.
Nutropin: Nutropin faces
competition in the growth hormone market from five (5) branded
competitors:
|
Ÿ
|
Norditropin®
(Novo Nordisk)
|
Nutropin
also faces competition from one (1) follow-on biologic:
Two
(2) additional follow-on biologics have been approved and are pending
launch:
|
Ÿ
|
Valtropin®
(LG Life Sciences)
|
As
a result of this competition, we have experienced and may continue to experience
a loss of patient share and increased competition for managed care product
placement. Obtaining placement on the preferred product lists of managed care
companies may require that we further discount the price of Nutropin. In
addition to managed care placement, patient and healthcare provider services
provided by growth hormone manufacturers are increasingly important to creating
brand preference.
Thrombolytics: Our
thrombolytic products face competition in the acute myocardial infarction
market, with sales of TNKase and Activase affected by the adoption by physicians
of mechanical reperfusion strategies. We expect that the use of mechanical
reperfusion, in lieu of thrombolytic therapy for the treatment of acute
myocardial infarction, will continue to grow. TNKase for acute myocardial
infarction also faces competition from Retavase® (EKR
Therapeutics).
Pulmozyme: Pulmozyme
currently faces competition from the use of hypertonic saline, an inexpensive
approach to clearing sputum from the lungs of cystic fibrosis patients.
Approximately 25% of cystic fibrosis patients receive hypertonic saline, and it
is estimated that in a small percentage of patients (less than 5%), this use
will impact how a physician may prescribe or a patient may use
Pulmozyme.
Raptiva: Raptiva
competes with established therapies for moderate-to-severe psoriasis, including
oral systemics such as methotrexate and cyclosporin as well as ultraviolet light
therapies. In addition, Raptiva competes with biologic agents Amevive®
(Astellas), Enbrel® (Amgen),
and Remicade®
(Centocor). Raptiva also competes with the biologic agent Humira®
(Abbott), which was approved by the FDA for use in moderate-to-severe psoriasis
on January 18, 2008, and was used off-label in psoriasis prior to FDA
approval. Raptiva may face future competition
from
the biologic Ustekinumab/CNTO-1275 (Centocor), for which a filing was made with
the FDA for approval in the treatment of psoriasis on December 4,
2007.
In
addition to the commercial and late-stage development products listed above,
numerous products are in earlier stages of development at other biotechnology
and pharmaceutical companies that, if successful in clinical trials, may compete
with our products.
Decreases
in third-party reimbursement rates may affect our product sales, results of
operations, and financial condition.
Sales
of our products will depend significantly on the extent to which reimbursement
for the cost of our products and related treatments will be available to
physicians and patients from U.S. and international government health
administration authorities, private health insurers, and other organizations.
Third-party payers and government health administration authorities increasingly
attempt to limit and/or regulate the reimbursement of medical products and
services, including branded prescription drugs. Changes in government
legislation or regulation, such as the Medicare Prescription Drug Improvement
and Modernization Act of 2003, the Deficit Reduction Act of 2005, and the
Medicare, Medicaid and SCHIP (State Children’s Health Insurance Program)
Extension Act of 2007; changes in formulary or compendia listings; or
changes in private third-party payers’ policies toward reimbursement for our
products may reduce reimbursement of our products’ costs to physicians,
pharmacies, and distributors. Decreases in third-party reimbursement for our
products could reduce usage of the products, sales to collaborators, and
royalties, and may have a material adverse effect on our product sales, results
of operations, and financial condition. The pricing and reimbursement
environment for our products may change in the future and become more
challenging due to, among other reasons, new policies of the next presidential
administration or new healthcare legislation passed by congress.
We
may be unable to obtain or maintain regulatory approvals for our
products.
We
are subject to stringent regulations with respect to product safety and efficacy
by various international, federal, state, and local authorities. Of particular
significance are the FDA’s requirements covering R&D, testing,
manufacturing, quality control, labeling, and promotion of drugs for human use.
As a result of these requirements, the length of time, the level of
expenditures, and the laboratory and clinical information required for approval
of a BLA or NDA are substantial and can require a number of years. In addition,
even if our products receive regulatory approval, they remain subject to ongoing
FDA regulations, including, for example, obligations to conduct additional
clinical trials or other testing, changes to the product label, new or revised
regulatory requirements for manufacturing practices, written advisements to
physicians, and/or a product recall or withdrawal.
We
may not obtain necessary regulatory approvals on a timely basis, if at all, for
any of the products we are developing or manufacturing, or we may not maintain
necessary regulatory approvals for our existing products, and all of the
following could have a material adverse effect on our business:
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Significant
delays in obtaining or failing to obtain approvals, as described above in
“The successful development of pharmaceutical products is highly uncertain
and requires significant expenditures and
time.”
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Loss
of, or changes to, previously obtained approvals or accelerated approvals,
including those resulting from post-approval safety or efficacy issues.
For example, with respect to the FDA’s accelerated approval of Avastin in
combination with paclitaxel chemotherapy for the treatment of patients who
have not received prior chemotherapy for metastatic HER2-negative BC, the
FDA may withdraw or modify such approval, or request additional
post-marketing studies.
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Failure
to comply with existing or future regulatory
requirements.
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A
determination by the FDA that any study endpoints used in clinical trials
for our products are not sufficient for product
approval.
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Changes
to manufacturing processes, manufacturing process standards, or current
Good Manufacturing Practices (GMP) following approval, or changing
interpretations of these factors.
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In
addition, the current regulatory framework could change or additional
regulations could arise at any stage during our product development or marketing
that may affect our ability to obtain or maintain approval of our products or
require us to make significant expenditures to obtain or maintain such
approvals.
Difficulties
or delays in product manufacturing or in obtaining materials from our suppliers,
or difficulties in accurately forecasting manufacturing capacity needs, could
harm our business and/or negatively affect our financial
performance.
Manufacturing
pharmaceutical products is difficult and complex, and requires facilities
specifically designed and validated for this purpose. It can take more than five
years to design, construct, validate, and license a new biotechnology
manufacturing facility. We currently produce our products at our manufacturing
facilities located in South San Francisco, Vacaville, and Oceanside, California
and through various contract-manufacturing arrangements. Maintaining an adequate
supply to meet demand for our products depends on our ability to execute on our
production plan. Any significant problem in the operations of our or our
contractors’ manufacturing facilities could result in cancellation of shipments;
loss of product in the process of being manufactured; a shortfall, stock-out, or
recall of available product inventory; or unplanned increases in production
costs—any of which could have a material adverse effect on our business. A
number of factors could cause significant production problems or interruptions,
including:
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The
inability of a supplier to provide raw materials used to manufacture our
products.
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Equipment
obsolescence, malfunctions, or
failures.
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Product
quality or contamination problems, due to a number of factors including,
but not limited to, human error.
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Damage
to a facility, including our warehouses and distribution facilities, due
to events such as fires or earthquakes, as our South San Francisco,
Vacaville, and Oceanside facilities are located in areas where earthquakes
and/or fires have occurred.
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Changes
in FDA regulatory requirements or standards that require modifications to
our manufacturing processes.
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Action
by the FDA or by us that results in the halting or slowdown of production
of one or more of our products or products that we make for
others.
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A
contract manufacturer going out of business or failing to produce product
as contractually required.
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Failure
to maintain an adequate state of current GMP
compliance.
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Problems
in integrating our new enterprise resource planning system, including the
portions related to manufacturing and
distribution.
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In
addition, there are inherent uncertainties associated with forecasting future
demand or actual demand for our products or products that we produce for others,
and as a consequence we may have inadequate capacity or inventory to meet actual
demand. Alternatively, as a result of these inherent uncertainties, we may have
excess capacity or inventory, which could lead to an idling of a portion of our
manufacturing facilities during which time we would incur unabsorbed or idle
plant charges, costs associated with the termination of existing contract
manufacturing relationships, costs associated with a reduction in workforce,
costs associated with unsalable inventory or other excess capacity charges,
resulting in an increase in our cost of sales (COS).
Furthermore,
certain of our raw materials and supplies required for the production of our
principal products, or products that we make for others, are available only
through sole-source suppliers (the only recognized supplier available to us) or
single-source suppliers (the only approved supplier for us among other sources).
If such sole-source or single-source suppliers were to limit or terminate
production or otherwise fail to supply these materials for any reason, we may
not be able to obtain such raw materials and supplies without significant delay
or at all, and such failures could have a material adverse effect on our product
sales and our business.
Because
our manufacturing processes and those of our contractors are highly complex and
are subject to a lengthy FDA approval process, alternative qualified production
capacity may not be available on a timely basis or at all. Difficulties or
delays in our or our contractors’ manufacturing and supply of existing or new
products could increase our costs, cause us to lose revenue or market share,
damage our reputation, and result in a material adverse effect on our product
sales, financial condition, and results of operations.
Protecting
our proprietary rights is difficult and costly.
The
patent positions of pharmaceutical and biotechnology companies can be highly
uncertain and involve complex legal and factual questions. Accordingly, we
cannot predict with certainty the breadth of claims that will be allowed in
companies’ patents. Patent disputes are frequent and may ultimately preclude the
commercialization of products. We have in the past been, are currently, and may
in the future be involved in material litigation and other legal proceedings
related to our proprietary rights, such as the Cabilly patent litigation and
re-examination (discussed in Note 5, “Contingencies,” in the Notes to
Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly
Report on Form 10-Q), and disputes in connection with licenses granted to or
obtained from third parties. Such litigation and other legal proceedings are
costly in their own right and could subject us to significant liabilities with
third parties, including the payment of significant royalty expenses, the loss
of significant royalty income, or other expenses or losses. Furthermore, an
adverse decision or ruling could force us to either obtain third-party licenses
at a material cost or cease using the technology or commercializing the product
in dispute. An adverse decision or ruling with respect to one or more of our
patents or other intellectual property rights could cause us to incur a material
loss of sales and/or royalties and other revenue from licensing arrangements
that we have with third parties, and could significantly interfere with our
ability to negotiate future licensing arrangements.
The
presence of patents or other proprietary rights belonging to other parties may
lead to our termination of the R&D of a particular product, or to a loss of
our entire investment in the product, and subject us to infringement
claims.
If
there is an adverse outcome in our pending litigation or other legal actions,
our business may be harmed.
Litigation
and other legal actions to which we are currently or have been subjected to
relate to, among other things, our patent and other intellectual property
rights, licensing arrangements and other contracts with third parties, and
product liability. We cannot predict with certainty the eventual outcome of
pending proceedings, which may include an injunction against the development,
manufacture, or sale of a product or potential product; a judgment with a
significant monetary award, including the possibility of punitive damages; or a
judgment that certain of our patent or other intellectual property rights are
invalid or unenforceable. Furthermore, we may have to incur substantial expense
in these proceedings, and such matters could divert management’s attention from
ongoing business concerns.
Our
activities related to the sale and marketing of our products are subject to
regulation under the U.S. Federal Food, Drug, and Cosmetic Act and other federal
statutes. Violations of these laws may be punishable by criminal and/or civil
sanctions, including fines and civil monetary penalties, as well as the
possibility of exclusion from federal healthcare programs (including Medicare
and Medicaid). In 1999, we agreed to pay $50 million to settle a federal
investigation related to our past clinical, sales, and marketing activities
associated with human growth hormone. We are currently being investigated by the
Department of Justice with respect to our promotional practices and may in the
future be investigated for our promotional practices related to any of our
products. If the government were to bring charges against us or if we were
convicted of violating federal statutes, or if we were subject to third-party
litigation related to the same promotional practices, there could be a
material adverse effect on our business, including our financial condition and
results of operations.
We
are subject to various U.S. federal and state laws pertaining to healthcare
fraud and abuse, including anti-kickback and false claims laws. Anti-kickback
laws make it illegal for a prescription drug manufacturer to solicit, offer,
receive, or pay any remuneration in exchange for, or to induce, the referral of
business, including the purchase or prescription of a particular drug. Due in
part to the breadth of the statutory provisions and the absence of guidance in
the form of regulations or court decisions addressing some of our practices, it
is possible that our practices might be challenged under anti-kickback or
similar laws. False claims laws prohibit anyone from knowingly and willingly
presenting, or causing to be presented for payment to third-party payers
(including Medicare and Medicaid), claims for reimbursed drugs or services that
are false or fraudulent, claims for items or services not provided as claimed,
or claims for medically unnecessary items or services. Violations of fraud and
abuse laws may be punishable by criminal and/or civil sanctions, including fines
and civil monetary penalties, as well as the possibility of exclusion from
federal healthcare programs (including Medicare and Medicaid). If a court were
to find us liable for violating these laws, or if the government were to allege
against us or convict us of violating these laws, there could be a material
adverse effect on our business, including our stock price.
Potential
distraction and uncertainty resulting from Roche’s recent unsolicited proposal
and related matters may adversely affect our business.
On
July 21, 2008, we announced that we received an unsolicited proposal from
Roche to acquire all of the outstanding shares of Common Stock of the company
not owned by Roche. A special committee of our Board of Directors, composed
of the independent directors has been formed to review, evaluate, and,
in the special committee’s discretion, negotiate and recommend or not recommend
the proposal. The review and consideration of the Roche proposal and related
matters requires the expenditure of significant time and resources by us and may
be a significant distraction for our management and employees. The Roche
proposal may create uncertainty for our management, employees, current and
potential collaborators and other third parties. This uncertainty could
adversely affect our ability to retain key employees and to hire new talent,
cause collaborators to terminate, or not to renew or enter into, arrangements
with us and negatively impact our business during the special committee review
of the proposal or anytime thereafter. Additionally, we, members of our Board of
Directors and Roche entities have been named in a number of purported
stockholder class action complaints relating to the Roche proposal as more fully
described in Note 5, “Contingencies,” in the Notes to Condensed Consolidated
Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
These lawsuits or any future lawsuits may become burdensome and result in
significant costs of defense, indemnification and liability. These consequences,
alone or in combination, may harm our business and have a material adverse
effect on our results of operations.
RHI,
our controlling stockholder, may seek to influence our business in a manner that
is adverse to us or adverse to other stockholders who may be unable to prevent
actions by RHI.
As
our majority stockholder, RHI controls the outcome of most actions requiring the
approval of our stockholders. Our bylaws provide, among other things, that the
composition of our Board of Directors shall consist of at least three directors
designated by RHI, three independent directors nominated by the Nominations
Committee, and one Genentech executive officer nominated by the Nominations
Committee. Our bylaws also provide that RHI will have the right to obtain
proportional representation on our Board of Directors until such time that RHI
owns less than five percent of our stock. Currently, three of our directors—Mr.
William Burns, Dr. Erich Hunziker, and Dr. Jonathan K. C. Knowles—also serve as
officers and employees of Roche. As long as RHI owns more than 50 percent of our
Common Stock, RHI directors will be two of the three members of the Nominations
Committee. Our certificate of incorporation includes provisions related to
competition by RHI affiliates with Genentech, offering of corporate
opportunities, transactions with interested parties, intercompany agreements,
and provisions limiting the liability of specified employees. We cannot assure
that RHI will not seek to influence our business in a manner that is contrary to
our goals or strategies, or the interests of other stockholders. Moreover,
persons who are directors of Genentech and who are also directors and/or
officers of RHI may decline to take action in a manner that might be favorable
to us but adverse to RHI.
Additionally,
our certificate of incorporation provides that any person purchasing or
acquiring an interest in shares of our capital stock shall be deemed to have
consented to the provisions in the certificate of incorporation related to
competition with RHI, conflicts of interest with RHI, the offer of corporate
opportunities to RHI, and intercompany agreements with RHI. This deemed consent
might restrict our ability to challenge transactions carried out in compliance
with these provisions.
Our
Affiliation Agreement with Roche Holdings, Inc. (RHI) could adversely affect our
cash position.
Under
our July 1999 Affiliation Agreement with RHI (Affiliation Agreement), we have
established a stock repurchase program designed to maintain RHI’s percentage
ownership interest in our Common Stock based on an established Minimum
Percentage. A request by RHI to increase RHI’s percentage ownership to the
Minimum Percentage may adversely affect our cash position. Based on the trading
price of our Common Stock and RHI’s approximate ownership percentage as of July
31, 2008, to raise RHI’S percentage ownership to the Minimum Percentage would
require us to spend approximately $3 billion for share repurchases, in addition
to $500 million we have already paid in connection with our May 2008 prepaid
share repurchase arrangement. For more information on our stock repurchase
program, see “Liquidity and Capital Resources—Cash Used in Financing
Activities,” in Management’s Discussion and Analysis of Financial Condition
and Results of Operations in Part I, Item 2 of this Quarterly Report on Form
10-Q and Note 8, “Capital Stock,” in the Notes to Condensed Consolidated
Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
For information on the Minimum Percentage, see Note 6, “Relationship with Roche
Holdings, Inc. and Related Party Transactions,” in the Notes to Condensed
Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on
Form 10-Q.
RHI’s
ownership percentage is diluted by the exercise of stock options to purchase
shares of our Common Stock by our employees and the purchase of shares of our
Common Stock through our employee stock purchase plan. See Note 2, “Employee
Stock-Based Compensation,” in the Notes to Condensed Consolidated Financial
Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for
information regarding employee stock plans. In order to maintain RHI’s Minimum
Percentage, we repurchase shares of our Common Stock under the stock repurchase
program. In the first quarter of 2008, we received approximately four million
shares under a $300 million prepaid share repurchase arrangement that we entered
into and funded in 2007. In the second quarter of 2008, we entered into another
prepaid share repurchase arrangement with an investment bank pursuant to which
we delivered $500 million to the investment bank. Under this arrangement, the
investment bank is obligated to deliver to us, by September 30, 2008, not fewer
than five million shares of our Common Stock based on a pre-determined formula,
subject to a possible reduction in the number of shares received, an
extension of the date on which shares are to be delivered, or other
modifications or cancellation of the plan in certain circumstances. As of June
30, 2008, there were 37 million in-the-money exercisable options. While the U.S.
dollar amounts associated with future stock repurchase programs cannot currently
be determined, future stock repurchases could have a material adverse effect on
our liquidity, credit rating, and ability to access additional capital in the
financial markets.
Our
Affiliation Agreement with RHI could limit our ability to make acquisitions or
divestitures.
Our
Affiliation Agreement with RHI contains provisions that:
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Require
the approval of the directors designated by RHI to make any acquisition
that represents 10 percent or more of our assets, net income or revenue:
or any sale or disposal of all or a portion of our business representing
10 percent or more of our assets, net income, or
revenue.
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Enable
RHI to maintain its percentage ownership interest in our Common
Stock.
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Require
us to establish a stock repurchase program designed to maintain RHI’s
percentage ownership interest in our Common Stock based on an established
Minimum Percentage. For information regarding the Minimum Percentage, see
Note 6, “Relationship with Roche Holdings, Inc. and Related Party
Transactions,” in the Notes to Condensed Consolidated Financial Statements
in Part I, Item 1 of this Quarterly Report on Form
10-Q.
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Sales
of our Common Stock by RHI could cause the price of our Common Stock to
decline.
As
of June 30, 2008, RHI owned 587,189,380 shares of our Common Stock, or 55.9% of
our outstanding shares. All of our shares owned by RHI are eligible for sale in
the public market subject to compliance with the applicable securities laws. We
have agreed that, upon RHI’s request, we will file one or more registration
statements under the Securities Act of 1933 in order to permit RHI to offer and
sell shares of our Common Stock. Sales of a substantial number of shares of our
Common Stock by RHI in the public market could adversely affect the market price
of our Common Stock.
Other
factors could affect our product sales.
Other
factors that could affect our product sales include, but are not limited
to:
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Efficacy
data from clinical studies conducted by any party in the U.S. or
internationally showing, or perceived to show, a similar or improved
treatment benefit at a lower dose or shorter duration of therapy could
cause the sales of our products to
decrease.
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Our
pricing decisions, including a decision to increase or decrease the price
of a product; the pricing decisions of our competitors; as well as our
Avastin Patient Assistance Program, which is a voluntary program that
enables eligible patients who have received 10,000 milligrams (mg) of
Avastin in a 12-month period to receive free Avastin in excess of the
10,000 mg during the remainder of the 12-month
period.
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New
negative safety or efficacy data from clinical studies conducted either in
the U.S. or internationally by any party could cause the sales of our
products to decrease or a product to be recalled or
withdrawn.
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Negative
safety or efficacy data from post-approval marketing experience or
production-quality problems could cause sales of our products to decrease
or a product to be recalled or
withdrawn.
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The
outcome of litigation involving patents of other companies concerning our
products or processes related to production and formulation of those
products or uses of those products.
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Our
distribution strategy, including the termination of, or change in, an
existing arrangement with any major wholesalers that supply our
products.
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Our
decision to no longer allow compounding pharmacies to purchase Avastin
directly from wholesale distributors, which could have a negative impact
on Lucentis sales as a result of negative reaction by retinal specialists
to our decision.
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Product
returns and allowances greater than expected or historically
experienced.
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That
we have three major customers and the inability of one or more of them to
meet their payment obligations to
us.
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Any
of these additional factors could have a material adverse effect on our sales
and results of operations.
Our
results of operations are affected by our royalty and contract revenue, and
sales to collaborators.
Royalty
and contract revenue, and sales to collaborators in future periods, could vary
significantly. Major factors affecting this revenue include, but are not limited
to:
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Roche’s
decisions about whether to exercise its options and option extensions to
develop and sell our future products in non-U.S. markets, and the timing
and amount of any related development cost
reimbursements.
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The
expiration or termination of existing arrangements with other companies
and Roche, which may include development and marketing arrangements for
our products in the U.S., Europe, and other
countries.
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The
timing of non-U.S. approvals, if any, for products licensed to Roche and
other licensees.
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Government
and third-party payer reimbursement and coverage decisions that affect the
utilization of our products and competing
products.
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The
initiation of new contractual arrangements with other
companies.
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Whether
and when contract milestones are
achieved.
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The
failure or refusal of a licensee to pay royalties or to make other
contractual payments, the termination of a contract under which we receive
royalties or other revenue, or changes to the terms of such a
contract.
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The
expiration or invalidation of our patents or licensed intellectual
property. See “Protecting our proprietary rights is difficult and
costly.”
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Variations
in Roche’s or other licensees’ sales of our products due to competition,
manufacturing difficulties, licensees’ internal forecasts, or other
factors that affect the sales of
products.
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Variations
in the recognition of royalty revenue based on our estimates of our
licensees’ sales, which is difficult to forecast because of the number of
products involved, the availability of licensee sales data, potential
contractual and intellectual property disputes, and the volatility of
foreign exchange rates.
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Fluctuations
in foreign currency exchange rates and the effect of any hedging contracts
that we have entered into under our hedging
policy.
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We
may be unable to manufacture certain of our products if there is bovine
spongiform encephalopathy (BSE) contamination of our bovine source raw
material.
Most
biotechnology companies, including Genentech, have historically used, and
continue to use, bovine source raw materials to support cell growth in certain
production processes. Bovine source raw materials from within or outside the
U.S. are subject to public and regulatory scrutiny because of the perceived risk
of contamination with the infectious agent that causes BSE. Should such BSE
contamination occur, it would likely negatively affect our ability to
manufacture certain products for an indefinite period of time (or at least until
an alternative process is approved); negatively affect our reputation; and could
result in a material adverse effect on our product sales, financial condition,
and results of operations.
We
may be unable to attract and retain skilled personnel and maintain key
relationships.
The
success of our business depends, in large part, on our continued ability to (1)
attract and retain highly qualified management, scientific, manufacturing, and
sales and marketing personnel, (2) successfully integrate new employees into our
corporate culture, and (3) develop and maintain important relationships with
leading research and medical institutions and key distributors. Competition for
these types of personnel and relationships is intense. We cannot be sure that we
will be able to attract or retain skilled personnel or maintain key
relationships, or that the costs of retaining such personnel or maintaining such
relationships will not materially increase.
We
may incur material product liability costs.
The
testing and marketing of medical products entails an inherent risk of product
liability. Liability exposures for pharmaceutical products can be extremely
large and pose a material risk. Our business may be materially and adversely
affected by a successful product liability claim or claims in excess of any
insurance coverage that we may have.
Insurance
coverage may be more difficult and costly to obtain or maintain.
We
currently have a limited amount of insurance to minimize our direct exposure to
certain business risks. In the future, we may be exposed to an increase in
premiums and a narrowing scope of coverage. As a result, we may be required to
assume more risk or make significant expenditures to maintain our current levels
of insurance. If we are subject to third-party claims or suffer a loss or
damages in excess of our insurance coverage, we will incur the cost of the
portion of the retained risk. Furthermore, any claims made on our insurance
policies may affect our ability to obtain or maintain insurance coverage at
reasonable costs.
We
are subject to environmental and other risks.
We
use certain hazardous materials in connection with our research and
manufacturing activities. In the event that such hazardous materials are stored,
handled, or released into the environment in violation of law or any permit, we
could be subject to loss of our permits, government fines or penalties, and/or
other adverse governmental or private actions. The levy of a substantial fine or
penalty, the payment of significant environmental remediation costs, or the loss
of a permit or other authorization to operate or engage in our ordinary course
of business could materially adversely affect our business.
We
also have acquired, and may continue to acquire in the future, land and
buildings as we expand our operations. Some of these properties are
“brownfields” for which redevelopment or use is complicated by the presence or
potential presence of a hazardous substance, pollutant, or contaminant. Certain
events that could occur may require us to pay significant clean-up or other
costs in order to maintain our operations on those properties. Such events
include, but are not limited to, changes in environmental laws, discovery of new
contamination, or unintended exacerbation of existing contamination. The
occurrence of any such event could materially affect our ability to continue our
business operations on those properties.
Fluctuations
in our operating results could affect the price of our Common
Stock.
Our
operating results may vary from period to period for several reasons, including,
but not limited to, the following:
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The
overall competitive environment for our products, as described in “We face
competition” above.
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The
amount and timing of sales to customers in the U.S. For example, sales of
a product may increase or decrease due to pricing changes, fluctuations in
distributor buying patterns, or sales initiatives that we may undertake
from time to time.
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Increased
COS; R&D and marketing, general and administrative expenses;
stock-based compensation expenses; litigation-related expenses; asset
impairments; and equity securities
write-downs.
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Changes
in interest rates, credit ratings, and the liquidity of our
interest-bearing investments, and the effects that such changes may have
on the value of those investments.
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Changes
in foreign currency exchange rates, the effect of any hedging contracts
that we have entered into under our policy and the effects that they may
have on our royalty revenue, contract revenue, R&D expenses and
foreign-currency-denominated
investments.
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The
amount and timing of our sales to Roche and our other collaborators of
products for sale outside the U.S., and the amount and timing of sales to
their respective customers, which directly affect both our product sales
and royalty revenue.
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The
timing and volume of bulk shipments to
licensees.
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The
availability and extent of government and private third-party
reimbursements for the cost of our
products.
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The
extent of product discounts extended to
customers.
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The
efficacy and safety of our various products as determined both in clinical
testing and by the accumulation of additional information on each product
after the FDA approves it for sale.
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The
rate of adoption by physicians and the use of our products for approved
indications and additional indications. Among other things, the rate of
adoption by physicians and the use of our products may be affected by the
results of clinical studies reporting on the benefits or risks of a
product.
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The
potential introduction of new products and additional indications for
existing products.
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The
ability to successfully manufacture sufficient quantities of any
particular marketed product.
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Pricing
decisions that we or our competitors have adopted or may adopt, as well as
our Avastin Patient Assistance
Program.
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Our
distribution strategy, including the termination of, or any change in, an
existing arrangement with any major wholesalers that supply our
products.
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Fluctuation
in our operating results due to factors described above or for any other reason
could affect the price of our Common Stock.
Our
integration of new information systems could disrupt our internal operations,
which could decrease revenue and increase expenses.
Portions
of our information technology infrastructure may experience interruptions,
delays, or cessations of service, or produce errors. As part of our enterprise
resource planning efforts, we have implemented new information systems, but we
may not be successful in integrating the new systems into our operations. Any
disruptions that may occur as a result of the implementation of new systems, or
any future systems, could adversely affect our ability to report in an accurate
and timely manner the results of our consolidated operations, financial
position, and cash flows. Disruptions to these systems also could adversely
affect our ability to fulfill orders and interrupt other operational processes.
Delayed sales, lower margins, or lost customers resulting from these disruptions
could adversely affect our financial results.
Our
stock price, like that of many biotechnology companies, is
volatile.
The
market prices for securities of biotechnology companies in general have been
highly volatile and may continue to be highly volatile in the future. In
addition, the market price of our Common Stock has been and may continue to be
volatile. Among other factors, the following may have a significant effect on
the market price of our Common Stock:
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On
July 21, 2008 the announcement of the unsolicited proposal by Roche to
acquire all of the outstanding shares of our stock not owned by Roche
preceded a substantial increase in the closing price of our stock. Future
developments related to the Roche proposal may result in further
volatility in the price of our
stock.
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Announcements
of technological innovations or new commercial products by us or our
competitors.
|
|
Ÿ
|
Publicity
regarding actual or potential medical results related to products under
development or being commercialized by us or our
competitors.
|
|
Ÿ
|
Concerns
about our pricing initiatives and distribution strategy, and the potential
effect of such initiatives and strategy on the utilization of our products
or our product sales.
|
|
Ÿ
|
Developments
or outcomes of litigation, including litigation regarding proprietary and
patent rights (including, for example, the Cabilly patent discussed
in Note 5, “Contingencies,” in the Notes to Condensed Consolidated
Financial Statements in Part I, Item 1 of this Quarterly Report on Form
10-Q), and governmental
investigations.
|
|
Ÿ
|
Regulatory
developments or delays affecting our products in the U.S. and other
countries.
|
|
Ÿ
|
Issues
concerning the efficacy or safety of our products, or of biotechnology
products generally.
|
|
Ÿ
|
Economic
and other external factors or a disaster or
crisis.
|
|
Ÿ
|
New
proposals to change or reform the U.S. healthcare system, including, but
not limited to, new regulations concerning reimbursement or follow-on
biologics.
|
Our
effective income tax rate may vary significantly.
Various
internal and external factors may have favorable or unfavorable effects on our
future effective income tax rate. These factors include, but are not limited to,
changes in tax laws, regulations, and/or rates; the results of any tax
examinations; changing interpretations of existing tax laws or regulations;
changes in estimates of prior years’ items; past and future levels of R&D
spending; acquisitions; changes in our corporate structure; and changes in
overall levels of income before taxes, all of which may result in periodic
revisions to our effective income tax rate.
To
pay our indebtedness will require a significant amount of cash and may adversely
affect our operations and financial results.
As
of June 30, 2008, we had approximately $2.0 billion of long-term debt and $600
million of commercial paper notes payable. Our ability to make payments on or to
refinance our indebtedness, and to fund planned capital expenditures and
R&D, as well as stock repurchases and expansion efforts, will depend on our
ability to generate cash in the future. This ability, to a certain extent, is
subject to general economic, financial, competitive, legislative, regulatory,
and other factors that are and will remain beyond our control. Additionally, our
indebtedness may increase our vulnerability to general adverse economic and
industry conditions, and require us to dedicate a substantial portion of our
cash flow from operations to payments on our indebtedness, which would reduce
the availability of our cash flow to fund working capital, capital expenditures,
R&D, expansion efforts, and other general corporate purposes; and limit our
flexibility in planning for, or reacting to, changes in our business and the
industry in which we operate.
Accounting
pronouncements may affect our future financial position and results of
operations.
Under
Financial Accounting Standards Board Interpretation No. 46R (FIN 46R), a
revision to FIN 46, “Consolidation of Variable Interest
Entities,” we are required to assess
new business development collaborations as well as reassess, upon certain
events, some of which are outside our control, the accounting treatment of our
existing business development collaborations based on the nature and extent of
our variable interests in the entities, as well as the extent of our ability to
exercise influence over the entities with which we have such collaborations. Our
continuing compliance with FIN 46R may result in our consolidation of companies
or related entities with which we have a collaborative arrangement, and this may
have a material effect on our financial condition and/or results of operations
in future periods.
Under
a stock repurchase program approved by our Board of Directors in December 2003
and most recently extended in April 2008, we are authorized to repurchase up to
150 million shares of our Common Stock for an aggregate amount of up to $10.0
billion through June 30, 2009. In this program, as in previous stock repurchase
programs, purchases may be made in the open market or in privately negotiated
transactions from time to time at management’s discretion. We also may engage in
transactions in other Genentech securities in conjunction with the repurchase
program, including certain derivative securities. As of June 30, 2008, we had
not engaged in any such transactions. We use the repurchased stock to offset
dilution caused by the issuance of shares in connection with our employee stock
purchase plan. Although there are currently no specific plans for the shares
that may be purchased under the program, our goals for the program are (1) to
address provisions of our Affiliation Agreement with RHI related to maintaining
RHI’s minimum ownership percentage, (2) to make prudent investments of our cash
resources, and (3) to allow for an effective mechanism to provide stock for our
employee stock purchase plan. See Note 6, “Relationship with Roche Holdings,
Inc. and Related Party Transactions,” in the Notes to Condensed Consolidated
Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for
more information on RHI’s minimum ownership percentage.
We
enter into Rule 10b5-1 trading plans to repurchase shares in the open market
during those periods when trading in our stock is restricted under our insider
trading policy.
Our
shares repurchased for the second quarter of 2008 were as follows (shares in
millions):
|
|
|
Total
Number of
Shares
Purchased
|
|
|
Average
Price Paid
per
Share
|
|
|
Total
Number of
Shares
Purchased as
Part
of Publicly
Announced
Plans or
Programs(2)
|
|
|
Maximum
Number
of
Shares that May
Yet
Be Purchased
Under
the Plans or
Programs(2)
|
|
|
April
1–30, 2008
|
|
|
0.9 |
|
|
$ |
74.76 |
|
|
|
|
|
|
|
|
May
1–31, 2008(1)
|
|
|
1.5 |
|
|
|
68.77 |
|
|
|
|
|
|
|
|
June
1–30, 2008
|
|
|
1.2 |
|
|
|
73.68 |
|
|
|
|
|
|
|
|
Total
|
|
|
3.6 |
|
|
$ |
71.91 |
|
|
|
83 |
|
|
|
67 |
|
___________
|
(1)
|
In
May 2008, we entered into a prepaid share repurchase arrangement with an
investment bank pursuant to which we delivered $500 million to the
investment bank. Under this arrangement, the investment bank is obligated
to deliver to us, by September 30, 2008, not fewer than five million
shares of our Common Stock based on a pre-determined formula, subject to a
possible reduction in the number of shares received, an extension of the
date on which shares are to be delivered, or other modifications or
cancellation of the plan in certain circumstances. The prepaid amount has
been reflected as a reduction of our stockholders’ equity as of June 30,
2008. There was no effect on EPS for the three or six months ended June
30, 2008.
|
|
(2)
|
As
of June 30, 2008, 83 million cumulative shares have been purchased under
our stock repurchase program for $6.0 billion, and a maximum of 67 million
additional shares for amounts totaling up to $4.0 billion may be purchased
under the program through June 30,
2009.
|
The
par value method of accounting is used for common stock repurchases. The excess
of the cost of shares acquired over the par value is allocated to additional
paid-in capital with the amounts in excess of the estimated original sales price
charged to retained earnings.
Item
4. Submission of Matters to a Vote of Security Holders
At
our Annual Meeting of Stockholders held on April 15, 2008, three matters were
voted upon. A description of each matter, and a tabulation of the votes for each
matter, follows:
|
1.
|
To
elect seven director nominees to hold office until the 2009 Annual Meeting
of Stockholders, or until their successors are duly elected and
qualified:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Herbert
W. Boyer, Ph.D.
|
|
|
900,580,722 |
|
|
|
101,943,391 |
|
|
William
M. Burns
|
|
|
866,809,800 |
|
|
|
135,714,313 |
|
|
Erich
Hunziker, Ph.D.
|
|
|
875,795,801 |
|
|
|
126,728,312 |
|
|
Jonathan
K. C. Knowles, Ph.D.
|
|
|
866,935,277 |
|
|
|
135,588,836 |
|
|
Arthur
D. Levinson, Ph.D.
|
|
|
903,609,002 |
|
|
|
98,915,111 |
|
|
Debra
L. Reed
|
|
|
974,146,725 |
|
|
|
28,377,388 |
|
|
Charles
A. Sanders, M.D.
|
|
|
974,209,367 |
|
|
|
28,314,746 |
|
|
2.
|
To
approve an amendment of our 1991 Employee Stock Plan to authorize the sale
of an additional 10,000,000 shares.
|
|
|
|
|
|
|
|
|
|
|
|
945,324,346
|
|
1,844,074
|
|
310,675
|
|
55,045,018
|
|
3.
|
To
ratify Ernst & Young LLP as our independent registered public
accounting firm for 2008.
|
|
|
|
|
|
|
|
|
|
996,550,783
|
|
5,673,634
|
|
299,696
|
|
Exhibit
No.
|
Description
|
Location
|
|
3.1
|
Amended
and Restated Certificate of Incorporation
|
Filed
as an exhibit to our Current Report on Form 8-K filed with the U. S.
Securities and Exchange Commission (Commission) on July 28, 1999 and
incorporated herein by reference.
|
|
3.2
|
Certificate
of Amendment of Amended and Restated Certificate of
Incorporation
|
Filed
as an exhibit to our Annual Report on Form 10-K for the year ended
December 31, 2000 filed with
the Commission and incorporated herein by
reference.
|
|
3.3
|
Certificate
of Amendment of Amended and Restated Certificate of
Incorporation
|
Filed
as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001 filed with the Commission and incorporated herein by
reference.
|
|
3.4
|
Certificate
of Third Amendment of Amended and Restated Certificate of
Incorporation
|
Filed
as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended
June 30, 2004 filed with the Commission and incorporated herein by
reference.
|
|
3.5
|
Bylaws
|
Filed
as an exhibit to our Annual Report on Form 10-K for the year ended
December 31, 2005 filed with
the Commission and incorporated herein by
reference.
|
|
4.1
|
Form
of Common Stock Certificate
|
Filed
as an exhibit to Amendment No. 3 to our Registration Statement (No.
333-80601) on Form S-3 filed with the Commission on July 16, 1999 and
incorporated herein by reference.
|
|
4.2
|
Indenture,
dated as of July 18, 2005, between the Company and Bank of New York,
as trustee
|
Filed
on a Current Report on Form 8-K with the Commission on July 19, 2005 and
incorporated herein by reference.
|
|
4.3
|
Officers’
Certificate of Genentech, Inc. dated July 18, 2005, including forms
of the Company’s 4.40% Senior Notes due 2010, 4.75 Senior Notes due 2015
and 5.25% Senior Notes due 2035
|
Filed
on a Current Report on Form 8-K with the Commission on July 19, 2005 and
incorporated herein by reference.
|
|
4.4
|
Form
of 4.40% Senior Note due 2010
|
Filed
on a Current Report on Form 8-K with the Commission on July 19, 2005 and
incorporated herein by reference.
|
|
4.5
|
Form
of 4.75% Senior Note due 2015
|
Filed
on a Current Report on Form 8-K with the Commission on July 19, 2005 and
incorporated herein by reference.
|
|
4.6
|
Form
of 5.25% Senior Note due 2035
|
Filed
on a Current Report on Form 8-K with the Commission on July 19, 2005 and
incorporated herein by reference.
|
|
4.7
|
Registration
Rights Agreement, dated as of July 18, 2005, among Genentech, Inc.
and Citigroup Global Markets, Inc. and Goldman, Sachs & Co. as
representatives of the initial purchasers
|
Filed
on a Current Report on Form 8-K with the Commission on July 19, 2005 and
incorporated herein by reference.
|
|
10.1
|
Genentech,
Inc. 1991 Employee Stock Plan, as amended
|
Filed
herewith
|
|
10.2
|
Second
Amendment to Master Lease Agreement between Genentech and HCP SSF, LLC
(formerly Slough SSF, LLC) dated April 8, 2008
|
Filed
herewith
|
|
15.1
|
Letter
regarding Unaudited Interim Financial Information
|
Filed
herewith
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a)
promulgated under the Securities Exchange Act of 1934, as
amended
|
Filed
herewith
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a)
promulgated under the Securities Exchange Act of 1934, as
amended
|
Filed
herewith
|
|
32.1
|
Certifications
of Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
Furnished
herewith
|
Pursuant
to the requirements 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.
|
|
Date:
|
|
|
|
|
|
|
|
Arthur
D. Levinson, Ph.D.
Chairman
and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
Date:
|
|
|
|
|
|
|
|
David
A. Ebersman
Executive
Vice President and
Chief
Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
Date:
|
|
|
|
|
|
|
|
Robert
E. Andreatta
Controller
and Chief Accounting Officer
|