(Mark
One)
|
|
þ
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
For
the quarterly period ended March 31, 2006
|
or
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
Delaware
(State
or other jurisdiction of incorporation or organization)
|
94-2347624
(I.R.S.
Employer Identification Number)
|
Large
accelerated filer þ
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Class
|
Number
of Shares Outstanding
|
Common
Stock $0.02 par value
|
1,053,627,146 Outstanding
at April 26, 2006
|
Page
No.
|
||
Item
1.
|
||
3
|
||
4
|
||
5
|
||
6-15
|
||
16
|
||
Item
2.
|
17-36
|
|
Item
3.
|
37
|
|
Item
4.
|
37
|
|
Item
1.
|
38
|
|
Item
1A.
|
38-49
|
|
Item
2.
|
50
|
|
Item
6.
|
50
|
|
51
|
Three
Months
Ended
March 31,
|
|||||||
2006
|
2005
|
||||||
Revenues
|
|||||||
Product
sales (including amounts from related parties:
2006-$59;
2005-$54)
|
$
|
1,644
|
$
|
1,186
|
|||
Royalties
(including amounts from a related party:
2006-$167;
2005-$104)
|
286
|
232
|
|||||
Contract
revenue (including amounts from related parties:
2006-$28;
2005-$26)
|
56
|
44
|
|||||
Total
operating revenues
|
1,986
|
1,462
|
|||||
Costs
and expenses
|
|||||||
Cost
of sales (including amounts for related parties:
2006
and 2005-$50)
|
262
|
256
|
|||||
Research
and development
(including
amounts for related parties: 2006-$53; 2005-$44)
(including
contract related: 2006-$36; 2005-$27)
|
374
|
243
|
|||||
Marketing,
general and administrative
|
441
|
310
|
|||||
Collaboration
profit sharing (including amounts for a related party:
2006-$43;
2005-$24)
|
226
|
176
|
|||||
Recurring
charges related to redemption
|
26
|
35
|
|||||
Special
items: litigation-related
|
13
|
11
|
|||||
Total
costs and expenses
|
1,342
|
1,031
|
|||||
Operating
income
|
644
|
431
|
|||||
Other
income (expense):
|
|||||||
Interest
and other income, net
|
53
|
18
|
|||||
Interest
expense
|
(19
|
)
|
(3
|
)
|
|||
Total
other income, net
|
34
|
15
|
|||||
Income
before taxes
|
678
|
446
|
|||||
Income
tax provision
|
257
|
162
|
|||||
Net
income
|
$
|
421
|
$
|
284
|
|||
Earnings
per share
|
|||||||
Basic
|
$
|
0.40
|
$
|
0.27
|
|||
Diluted
|
$
|
0.39
|
$
|
0.27
|
|||
Shares
used to compute basic earnings per share
|
1,054
|
1,047
|
|||||
Shares
used to compute diluted earnings per share
|
1,075
|
1,067
|
Three
Months
Ended
March 31,
|
|||||||
2006
|
2005
|
||||||
Cash
flows from operating activities
|
|||||||
Net
income
|
$
|
421
|
$
|
284
|
|||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|||||||
Depreciation
and amortization
|
96
|
88
|
|||||
Employee
stock-based compensation
|
74
|
-
|
|||||
Deferred
income taxes
|
(50
|
)
|
(21
|
)
|
|||
Deferred
revenue
|
10
|
(9
|
)
|
||||
Litigation-related
liabilities
|
13
|
13
|
|||||
Tax
benefit from employee stock options
|
-
|
51
|
|||||
Excess
tax benefit from stock-based compensation arrangements
|
(49
|
)
|
-
|
||||
Gain
on sales of securities available-for-sale and other
|
(3
|
)
|
(1
|
)
|
|||
Write-down
of securities available-for-sale and other
|
-
|
4
|
|||||
Changes
in assets and liabilities:
|
|||||||
Receivables
and other current assets
|
(96
|
)
|
(103
|
)
|
|||
Inventories
|
(86
|
)
|
25
|
||||
Investments
in trading securities
|
(7
|
)
|
(1
|
)
|
|||
Accounts
payable, other accrued liabilities, and other long-term
liabilities
|
139
|
55
|
|||||
Net
cash provided by operating activities
|
462
|
385
|
|||||
Cash
flows from investing activities
|
|||||||
Purchases
of securities available-for-sale
|
(454
|
)
|
(72
|
)
|
|||
Proceeds
from sales and maturities of securities available-for-sale
|
193
|
162
|
|||||
Capital
expenditures
|
(253
|
)
|
(144
|
)
|
|||
Change
in other assets
|
(13
|
)
|
(8
|
)
|
|||
Net
cash used in investing activities
|
(527
|
)
|
(62
|
)
|
|||
Cash
flows from financing activities
|
|||||||
Stock
issuances under employee stock plans
|
89
|
106
|
|||||
Stock
repurchases
|
(227
|
)
|
(156
|
)
|
|||
Excess
tax benefit from stock-based compensation arrangements
|
49
|
-
|
|||||
Net
cash used in financing activities
|
(89
|
)
|
(50
|
)
|
|||
Net
(decrease) increase in cash and cash equivalents
|
(154
|
)
|
273
|
||||
Cash
and cash equivalents at beginning of period
|
1,225
|
270
|
|||||
Cash
and cash equivalents at end of period
|
$
|
1,071
|
$
|
543
|
|||
Supplemental
cash flow data
|
|||||||
Non-cash
investing and financing activities
|
|||||||
Capitalization
of construction in progress related to financing lease
transaction
|
$
|
27
|
$
|
44
|
|||
Exchange
of note receivable for a prepaid royalty and other long-term
asset
|
-
|
29
|
March
31,
2006
|
December
31,
2005
|
||||||
Assets
|
|||||||
Current
assets
|
|||||||
Cash
and cash equivalents
|
$
|
1,071
|
$
|
1,225
|
|||
Short-term
investments
|
1,213
|
1,140
|
|||||
Accounts
receivable—product sales (net of allowances:
2006-$93;
2005-$83; including amounts from related parties:
2006-$24;
2005-$4)
|
615
|
554
|
|||||
Accounts
receivable—royalties (including amounts from related
party:
2006-$199;
2005-$173)
|
332
|
297
|
|||||
Accounts
receivable—other (net of allowances:
2006-$1;
2005-$1; including amounts from related parties:
2006-$129;
2005-$132)
|
187
|
199
|
|||||
Inventories
|
804
|
703
|
|||||
Prepaid
expenses and other current assets
|
311
|
268
|
|||||
Total
current assets
|
4,533
|
4,386
|
|||||
Long-term
marketable debt and equity securities
|
1,658
|
1,449
|
|||||
Property,
plant and equipment, net
|
3,565
|
3,349
|
|||||
Goodwill
|
1,315
|
1,315
|
|||||
Other
intangible assets
|
548
|
574
|
|||||
Restricted
cash and investments
|
735
|
735
|
|||||
Other
long-term assets
|
358
|
339
|
|||||
Total
assets
|
$
|
12,712
|
$
|
12,147
|
|||
Liabilities
and stockholders’ equity
|
|||||||
Current
liabilities
|
|||||||
Accounts
payable (including amounts to related parties:
2006-$3;
2005-$1)
|
$
|
328
|
$
|
339
|
|||
Deferred
revenue
|
45
|
44
|
|||||
Taxes
payable
|
318
|
62
|
|||||
Other
accrued liabilities (including amounts to related
parties:
2006-$148;
2005-$132)
|
1,059
|
1,215
|
|||||
Total
current liabilities
|
1,750
|
1,660
|
|||||
Long-term
debt
|
2,103
|
2,083
|
|||||
Deferred
revenue
|
229
|
220
|
|||||
Litigation-related
and other long-term liabilities
|
736
|
714
|
|||||
Total
liabilities
|
4,818
|
4,677
|
|||||
Commitments
and contingencies
|
|||||||
Stockholders’
equity
|
|||||||
Common
stock
|
21
|
21
|
|||||
Additional
paid-in capital
|
9,468
|
9,263
|
|||||
Accumulated
other comprehensive income
|
255
|
253
|
|||||
Accumulated
deficit, since June 30, 1999
|
(1,850
|
)
|
(2,067
|
)
|
|||
Total
stockholders’ equity
|
7,894
|
7,470
|
|||||
Total
liabilities and stockholders’ equity
|
$
|
12,712
|
$
|
12,147
|
Note
1.
|
Summary
of Significant Accounting
Policies
|
Three
Months
Ended
March 31,
|
|||||||
2006
|
2005
|
||||||
Numerator:
|
|||||||
Net
income
|
$
|
421
|
$
|
284
|
|||
Denominator:
|
|||||||
Weighted-average
shares outstanding used to compute basic EPS
|
1,054
|
1,047
|
|||||
Effect
of dilutive stock options
|
21
|
20
|
|||||
Weighted-average
shares outstanding and dilutive securities used to compute diluted
EPS
|
1,075
|
1,067
|
March
31, 2006
|
December
31, 2005
|
||||||
Net
unrealized gains on securities available-for-sale
|
$
|
233
|
$
|
230
|
|||
Net
unrealized gains on cash flow hedges
|
22
|
23
|
|||||
Accumulated
other comprehensive income
|
$
|
255
|
$
|
253
|
Three
Months
Ended
March 31,
|
|||||||
2006
|
2005
|
||||||
Net
income
|
$
|
421
|
$
|
284
|
|||
Change
in unrealized gains (losses) on securities
available-for-sale
|
3
|
(77
|
)
|
||||
Change
in unrealized gains (losses) on derivatives
|
(1
|
)
|
13
|
||||
Comprehensive
income
|
$
|
423
|
$
|
220
|
Note
2.
|
Employee
Stock-Based Compensation
|
Three
Months
Ended
March
31, 2006
|
||||
Research
and development
|
$
|
33
|
||
Marketing,
general and administrative
|
41
|
|||
Total
employee stock-based compensation expense
|
74
|
|||
Tax
benefit related to employee stock-based compensation
expense
|
(27
|
)
|
||
Net
effect on net income
|
$
|
47
|
||
Effect
on earnings per share:
|
||||
Basic
|
$
|
0.04
|
||
Diluted
|
$
|
0.04
|
Three
Months
Ended
March
31, 2006
|
||||
Net
income as reported
|
$
|
421
|
||
Deduct: Total
employee stock-based compensation expense includable in cost of sales,
net
of related tax effects
|
(8
|
)
|
||
Pro
forma net income
|
$
|
413
|
||
Earnings
per share:
|
||||
Basic-as
reported
|
$
|
0.40
|
||
Basic-pro
forma
|
$
|
0.39
|
||
Diluted-as
reported
|
$
|
0.39
|
||
Diluted-pro
forma
|
$
|
0.38
|
Three
Months
Ended
March
31, 2005
|
||||
Net
income as reported
|
$
|
284
|
||
Deduct: Total
employee stock-based compensation expense determined under the fair
value
based method for all awards, net of related tax effects
|
(40
|
)
|
||
Pro
forma net income
|
$
|
244
|
||
Earnings
per share:
|
||||
Basic-as
reported
|
$
|
0.27
|
||
Basic-pro
forma
|
$
|
0.23
|
||
Diluted-as
reported
|
$
|
0.27
|
||
Diluted-pro
forma
|
$
|
0.22
|
Three
Months
Ended
March 31,
|
|||||||
2006
|
2005
|
||||||
Risk-free
interest rate
|
4.6
|
%
|
4.0
|
%
|
|||
Dividend
yield
|
0.0
|
%
|
0.0
|
%
|
|||
Expected
volatility
|
29.0
|
%
|
32.0
|
%
|
|||
Expected
term (years)
|
4.2
|
4.2
|
Options
Outstanding
|
||||||||||
Shares
Available
for
Grant
|
Number
of
Shares
|
Weighted-
Average
Exercise
Price
|
||||||||
December 31,
2005
|
84
|
83
|
$
|
46.64
|
||||||
Grants
|
(1
|
)
|
1
|
88.10
|
||||||
Exercises
|
-
|
(2
|
)
|
30.38
|
||||||
Cancellations
|
1
|
(1
|
)
|
57.63
|
||||||
March
31, 2006
|
84
|
81
|
$
|
47.43
|
Options
Outstanding
|
Options
Exercisable
|
||||||||||||||||||
Range
of
Exercise
Prices
|
Number
of
Shares
Outstanding
|
Weighted-Average
Remaining
Contractual
Life
(in
years)
|
Weighted-Average
Exercise
Price
|
Number
of
Shares
Outstanding
|
Weighted-Average
Remaining
Contractual
Life
(in
years)
|
Weighted-Average
Exercise
Price
|
|||||||||||||
$6.27 - $8.89
|
0.5
|
5.61
|
$
|
7.71
|
0.5
|
5.61
|
$
|
7.71
|
|||||||||||
$10.00 - $14.35
|
13.7
|
5.68
|
$
|
13.73
|
11.2
|
5.51
|
$
|
13.61
|
|||||||||||
$15.04 - $22.39
|
9.0
|
5.09
|
$
|
20.82
|
8.7
|
5.04
|
$
|
20.91
|
|||||||||||
$22.88 - $33.00
|
0.3
|
5.07
|
$
|
27.53
|
0.3
|
5.07
|
$
|
27.53
|
|||||||||||
$35.63 - $53.23
|
36.9
|
7.53
|
$
|
46.79
|
18.0
|
6.93
|
$
|
44.71
|
|||||||||||
$53.95 - $75.90
|
1.5
|
8.53
|
$
|
59.26
|
0.5
|
8.34
|
$
|
56.09
|
|||||||||||
$81.15 - $98.80
|
18.9
|
9.49
|
$
|
86.12
|
-
|
9.54
|
$
|
86.04
|
|||||||||||
80.8
|
39.2
|
Note
3.
|
Condensed
Consolidated Financial Statement
Detail
|
March
31, 2006
|
December
31, 2005
|
||||||
Raw
materials and supplies
|
$
|
89
|
$
|
79
|
|||
Work
in process
|
463
|
438
|
|||||
Finished
goods
|
252
|
186
|
|||||
Total
|
$
|
804
|
$
|
703
|
Note
4.
|
Contingencies
|
Note
5.
|
Relationship
with Roche and Related Party
Transactions
|
Note
6.
|
Income
Taxes
|
Note
7.
|
Subsequent
Event
|
/s/ ERNST
& YOUNG LLP
|
· |
Rituxan
- for use in first-line treatment of patients with diffuse large
B-cell,
CD20-positive, non-Hodgkin’s
lymphoma (or “DLBCL”);
and
|
· |
Rituxan
- to treat patients with active rheumatoid arthritis (or “RA”) who have
had an inadequate response to tumor necrosis factor antagonist therapy.
|
· |
a
Supplemental Biologics License Application (or “sBLA”) for use of
Herceptin to treat early-stage, HER2-positive breast
cancer;
|
· |
with
Biogen Idec, an sBLA for use of Rituxan to treat indolent front-line
non-Hodgkin’s lymphoma (or “NHL”);
and
|
· |
on
April 11, 2006, an sBLA for use of Avastin in first-line treatment
of
advanced, non-squamous, non-small cell lung
cancer.
|
· |
To
bring at least 20 new molecules into clinical
development.
|
· |
To
bring at least 15 major new products or indications onto the
market.
|
· |
To
become the number one U.S. oncology company in
sales.
|
· |
To
achieve compound annual non-GAAP earnings per share(1)
growth of 25 percent.
|
· |
To
achieve cumulative free cash flow(2)
of $12 billion.
|
Non-GAAP
financial goals are included because our management uses non-GAAP
financial measures to monitor and evaluate Genentech’s operating results
and trends on an ongoing basis and to facilitate internal comparison
to
historical operating results. Excluding the effects of charges related
to
employee stock-based compensation expense, Roche’s redemption of our
special common stock, litigation, and changes in accounting principles
from our operating results provides users of our financial statements
an
important insight into our operating results and related trends that
affect our business. In addition, our management uses non-GAAP financial
information and measures internally for operating, budgeting and
financial
planning purposes, including the establishment of corporate, functional,
departmental and individual performance goals.
|
|
(1)
|
The
non-GAAP EPS goal for 2006 through 2010 excludes the after-tax effect
of
the following items: employee stock-based compensation expense associated
with our adoption of FAS 123R, recurring charges related to the redemption
of our special common stock by Roche, litigation-related special
charges
for accrued interest and associated bond costs on the City of Hope
judgment and other potential special charges related to existing
or future
litigation or its resolution, and changes in accounting principles,
all of
which may be significant. GAAP EPS for 2006 through 2010 will include
the
items described above.
|
(2)
|
Our
free cash flow measure is defined as cash from ongoing operations
less
gross capital expenditures. Cash from ongoing operations is derived
from
the “net cash provided by operating activities” line in our consolidated
statements of cash flows, but this number may be adjusted for items
that
would allow the measure to better reflect our operational performance.
These adjustments include, for example, cash receipts or payments
related
to litigation settlements, investments in trading securities and
other
potential items, any of which may be
significant.
|
· |
Successful
development of biotherapeutics is highly difficult and uncertain.
Our
long-term business growth depends upon our ability to commercialize
important new therapeutics to treat unmet medical needs such as cancer.
Since the underlying biology of these diseases is not completely
understood, it is very challenging to discover and develop safe and
effective treatments, and the majority of potential new therapeutics
fail
to generate the safety and efficacy data required to obtain regulatory
approval. In addition, we face tremendous competition in the diseases
of
interest to us. Our business requires significant investments in
research
and development (or “R&D”)
over many years, often for products that fail during the R&D process.
In addition, after our products receive FDA approval, they remain
subject
to ongoing FDA regulation, including changes to the product label,
new or
revised regulatory requirements for manufacturing practices, written
advisement to physicians, and/or product
recalls.
|
· |
Intellectual
property protection of our products is crucial to our business. Loss
of
effective intellectual property protection on one or more products
could
result in lost sales to competing products and may negatively affect
our
sales, royalty revenues 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.
|
· |
Manufacturing
biotherapeutics is difficult and complex, and requires facilities
specifically designed and validated to run biotechnology production
processes. The manufacture of a biotherapeutic requires developing
and
maintaining a process to reliably manufacture and formulate the product
at
an appropriate scale, obtaining regulatory approval to manufacture
the
product, and is subject to changes in regulatory requirements or
standards
that may require modifications to the manufacturing process or FDA
action
(see “Difficulties or delays in product manufacturing or in obtaining
materials from our suppliers could harm our business and/or negatively
affect our financial performance” of “Risk Factors” in Part II, Item 1A of
this Form 10-Q).
|
· |
The
Medicare
Prescription Drug Improvement and Modernization Act
(or “Medicare Act”) was enacted into law in December 2003 and on November
3, 2004, the 2005 Physician Fee Schedule and Hospital Outpatient
Prospective Payment System Final Rules were announced. As
Centers
for Medicare and Medicaid Services (or “CMS”)
is our single largest payer, the new rules continue to represent
an
important area of focus. To
date, we have not seen any detectable effects of the new rules on
our
product sales, and we anticipate minimal effects on our revenues
in 2006.
On November 2, 2005, CMS released its Final Rule with comment on
the
Medicare Part B Competitive Acquisition Program (or “CAP”). The CAP
option, which the CMS expects to begin in July 2006, required under
the
Medicare Act, will be available to physicians providing services
under
Part B of Medicare. Under the CAP, physicians could choose to either
obtain drugs directly from qualified CAP vendors, or continue to
purchase
drugs directly and be reimbursed by CMS at the Average Selling Price
+ 6%
rate. Although CMS is still finalizing details of the program, we
anticipate that the impact of the program on our sales will be
minimal.
|
· |
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. In the first quarter
of
2006 we grew to over 10,000 employees. 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.
|
· |
Herceptin,
Pulmozyme, and Avastin outside of the U.S.,
|
· |
Rituxan
outside of the U.S., excluding Japan,
and
|
· |
Nutropin
products, Activase and TNKase in Canada.
|
· |
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
reasonably practicable after such material is electronically filed
with
the Securities and Exchange Commission;
|
· |
our
policies related to corporate governance, including Genentech’s
Principles
of Corporate Governance, Good
Operating Principles (Genentech’s code of ethics applying to Genentech’s
directors, officers and employees) as well as Genentech’s Code of Ethics
applying to our CEO, CFO and senior financial officials
and;
|
· |
the
charter of the Audit Committee of our Board of Directors.
|
Three
Months
Ended
March 31,
|
||||||||||
2006
|
2005
|
%
Change
|
||||||||
Product
sales
|
$
|
1,644
|
$
|
1,186
|
39
|
%
|
||||
Royalties
|
286
|
232
|
23
|
|||||||
Contract
revenue
|
56
|
44
|
27
|
|||||||
Total
operating revenues
|
1,986
|
1,462
|
36
|
|||||||
Cost
of sales
|
262
|
256
|
2
|
|||||||
Research
and development
|
374
|
243
|
54
|
|||||||
Marketing,
general and administrative
|
441
|
310
|
42
|
|||||||
Collaboration
profit sharing
|
226
|
176
|
28
|
|||||||
Recurring
charges related to redemption
|
26
|
35
|
(26
|
)
|
||||||
Special
items: litigation-related
|
13
|
11
|
18
|
|||||||
Total
costs and expenses
|
1,342
|
1,031
|
30
|
|||||||
Operating
income
|
644
|
431
|
49
|
|||||||
Other
income (expense):
|
||||||||||
Interest
and other income, net
|
53
|
18
|
194
|
|||||||
Interest
expense
|
(19
|
)
|
(3
|
)
|
533
|
|||||
Total
other income, net
|
34
|
15
|
127
|
|||||||
Income
before taxes
|
678
|
446
|
52
|
|||||||
Income
tax provision
|
257
|
162
|
59
|
|||||||
Net
income
|
$
|
421
|
$
|
284
|
48
|
|||||
Earnings
per share:
|
||||||||||
Basic
|
$
|
0.40
|
$
|
0.27
|
48
|
|||||
Diluted
|
$
|
0.39
|
$
|
0.27
|
44
|
|||||
Pretax
operating margin
|
32
|
%
|
29
|
%
|
||||||
Cost
of sales as a % of product sales
|
16
|
22
|
||||||||
Research
and development as a % of operating revenues
|
19
|
17
|
||||||||
Marketing,
general and administrative as a % of operating revenues
|
22
|
21
|
||||||||
Net
income as a % of operating revenues
|
21
|
19
|
Percentages
in this table and throughout management’s discussion and analysis of
financial condition and results of operations may reflect rounding
adjustments.
|
Three
Months
Ended
March 31,
|
||||||||||
2006
|
2005
|
%
Change
|
||||||||
Net
U.S. Product Sales
|
||||||||||
Rituxan
|
$
|
477
|
$
|
440
|
8
|
%
|
||||
Avastin
|
398
|
203
|
96
|
|||||||
Herceptin
|
290
|
130
|
123
|
|||||||
Tarceva
|
93
|
48
|
94
|
|||||||
Xolair
|
95
|
65
|
46
|
|||||||
Raptiva
|
21
|
17
|
24
|
|||||||
Nutropin
products
|
87
|
90
|
(3
|
)
|
||||||
Thrombolytics
|
59
|
50
|
18
|
|||||||
Pulmozyme
|
49
|
44
|
11
|
|||||||
Total
U.S. product sales
|
$
|
1,569
|
$
|
1,087
|
44
|
|||||
Net
product sales to collaborators
|
75
|
99
|
(24
|
)
|
||||||
Total
product sales
|
$
|
1,644
|
$
|
1,186
|
39
|
Three
Months
Ended
March 31,
|
||||||||||
Research
and Development
|
2006
|
2005
|
%
Change
|
|||||||
Product
development (including post marketing)
|
$
|
283
|
$
|
178
|
59
|
%
|
||||
Research
|
74
|
53
|
40
|
|||||||
In-licensing
|
17
|
12
|
42
|
|||||||
Total
R&D
|
$
|
374
|
$
|
243
|
54
|
Three
Months
Ended
March 31,
|
||||||||||
Other
Income, Net
|
2006
|
2005
|
%
Change
|
|||||||
(In
millions)
|
||||||||||
Gains
on sales of biotechnology equity securities and other
|
$
|
3
|
$
|
1
|
200
|
%
|
||||
Write-downs
of biotechnology debt, equity securities and other
|
-
|
(4
|
)
|
(100
|
)
|
|||||
Interest
income
|
49
|
21
|
133
|
|||||||
Interest
expense
|
(19
|
)
|
(3
|
)
|
533
|
|||||
Other
miscellaneous income
|
1
|
-
|
-
|
|||||||
Total
other income, net
|
$
|
34
|
$
|
15
|
127
|
Liquidity
and Capital Resources
|
March 31,
2006
|
December 31,
2005
|
|||||
(In
millions)
|
|||||||
Unrestricted
cash, cash equivalents, short-term investments and long-term marketable
debt and equity securities
|
$
|
3,942
|
$
|
3,814
|
|||
Net
receivable - equity hedge instruments
|
66
|
73
|
|||||
Total
unrestricted cash, cash equivalents, short-term investments, long-term
marketable debt and equity securities, and equity hedge
instruments
|
$
|
4,008
|
$
|
3,887
|
|||
Working
capital
|
$
|
2,783
|
$
|
2,726
|
|||
Current
ratio
|
2.6:1
|
2.6:1
|
Total
Number of
Shares
Purchased
in
2006
|
Average
Price Paid
per
Share
|
Total
Number of
Shares
Purchased as
Part
of Publicly
Announced
Plans or
Programs
|
Maximum
Number
of
Shares that May
Yet
Be Purchased
Under
the Plans or
Programs
|
||||||||||
January
1-31, 2006
|
0.9
|
$
|
88.37
|
||||||||||
February
1-28, 2006
|
0.7
|
85.31
|
|||||||||||
March
1-31, 2006
|
1.0
|
84.24
|
|||||||||||
Total
|
2.6
|
$
|
85.95
|
52
|
48
|
Options
Outstanding
|
||||||||||
Shares
Available
for
Grant
|
Number
of
Shares
|
Weighted-Average
Exercise
Price
|
||||||||
December 31,
2004
|
102
|
94
|
$
|
32.32
|
||||||
Grants
|
(20
|
)
|
20
|
84.01
|
||||||
Exercises
|
-
|
(29
|
)
|
25.88
|
||||||
Cancellations
|
2
|
(2
|
)
|
42.16
|
||||||
December 31,
2005
|
84
|
83
|
$
|
46.64
|
||||||
Grants
|
(1
|
)
|
1
|
88.10
|
||||||
Exercises
|
-
|
(2
|
)
|
30.38
|
||||||
Cancellations
|
1
|
(1
|
)
|
57.63
|
||||||
March 31,
2006 (Year to date)
|
84
|
81
|
$
|
47.43
|
Exercisable
|
Unexercisable
|
Total
|
|||||||||||||||||
As
of March 31, 2006
|
Shares
|
Weighted-Average
Exercise
Price
|
Shares
|
Weighted-Average
Exercise
Price
|
Shares
|
Weighted-Average
Exercise
Price
|
|||||||||||||
In-the-Money
|
39
|
$
|
30.06
|
24
|
$
|
46.60
|
63
|
$
|
36.28
|
||||||||||
Out-of-the-Money(1)
|
-
|
-
|
18
|
86.33
|
18
|
86.33
|
|||||||||||||
Total
Options Outstanding
|
39
|
42
|
81
|
(1)
|
Out-of-the-money
options are those options with an exercise price equal to or greater
than
the fair market value of Genentech Common Stock, $84.51, at the close
of
business on March 31, 2006.
|
· |
Preclinical
tests may show the product to be toxic or lack efficacy in animal
models.
|
· |
Clinical
trial results may show the product to be less effective than desired
or to
have harmful or problematic side
effects.
|
· |
Failure
to receive the necessary 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
Licensing Application (or “BLA”) preparation, discussions with the U.S.
Food and Drug Administration (or “FDA”), an FDA request for additional
preclinical or clinical data, or unexpected safety, efficacy or
manufacturing issues.
|
· |
Difficulties
formulating the product, scaling the manufacturing process or in
getting
approval for manufacturing.
|
· |
Manufacturing
costs, pricing or reimbursement issues, or other factors that make
the
product uneconomical.
|
· |
The
proprietary rights of others and their competing products and technologies
that may prevent the product from being developed or
commercialized.
|
· |
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.
|
· |
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 sufficient data for us to make a positive development
decision or that an external candidate will be available on terms
acceptable to us.
|
· |
Decisions
by F. Hoffmann-La Roche
(or “Hoffmann-La 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.
|
· |
In-licensing
activities, including the timing and amount of related development
funding
or milestone payments. For example, we may enter into agreements
requiring
us to pay a significant upfront fee for the purchase of in-process
R&D, which we may record as an R&D
expense.
|
· |
Participation
in a number of collaborative research arrangements. On 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.
|
· |
Charges
incurred in connection with expanding our product manufacturing
capabilities, as described in “Difficulties or delays in product
manufacturing or in obtaining materials from our suppliers could
harm our
business and/or negatively affect our financial performance”
below.
|
· |
Future
levels of revenue.
|
· |
Significant
delays in obtaining or failing to obtain required approvals as described
in “The successful development of biotherapeutics is highly uncertain
and
requires significant expenditures”
above.
|
· |
Loss
of, or changes to, previously obtained approvals, including those
resulting from post-approval safety or efficacy
issues.
|
· |
Failure
to comply with existing or future regulatory
requirements.
|
· |
Changes
to manufacturing processes, manufacturing process standards or Good
Manufacturing Practices following approval or changing interpretations
of
these factors.
|
· |
the
inability of a supplier to provide raw materials used for manufacture
of
our products; equipment obsolescence, malfunctions or
failures;
|
· |
product
contamination problems;
|
· |
damage
to a facility, including our warehouses and distribution facilities,
due
to natural disasters, including, but not limited to, earthquakes
as our
South San Francisco, Oceanside and Vacaville facilities are located
in
areas where earthquakes could
occur;
|
· |
changes
in FDA regulatory requirements or standards that require modifications
to
our manufacturing processes;
|
· |
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 we make for others due
to
regulatory issues;
|
· |
a
contract manufacturer going out of business or failing to produce
product
as contractually required;
|
· |
other
similar factors.
|
· |
The
timing of FDA approval, if any, of competitive
products.
|
· |
Our
pricing decisions, including a decision to increase or decrease the
price
of a product, as well as the pricing decisions of our competitors,
any of
which could affect the utilization of our
products.
|
· |
Government
and third-party payer reimbursement and coverage decisions that
affect the
utilization of our products and competing
products.
|
· |
Negative
safety or efficacy data from new 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.
|
· |
Negative
safety or efficacy data from post-approval marketing experience
could
cause sales of our products to decrease or a product to be
recalled.
|
· |
The
degree of patent protection afforded our products by patents granted
to us
and by the outcome of litigation involving our
patents.
|
· |
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.
|
· |
The
increasing use and development of alternate
therapies.
|
· |
The
rate of market penetration by competing
products.
|
· |
Our
distribution strategy, including the termination of, or change
in, an
existing arrangement with any major wholesalers who supply our
products.
|
· |
Hoffmann-La
Roche’s decisions 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.
|
· |
Variations
in Hoffmann-La Roche’s sales and other licensees’ sales of licensed
products.
|
· |
The
expiration or termination of existing arrangements with other companies
and Hoffmann-La Roche, which may include development and marketing
arrangements for our products in the U.S., Europe and other countries
outside the U.S.
|
· |
The
timing of non-U.S. approvals, if any, for products licensed to
Hoffmann-La
Roche and to other licensees.
|
· |
Fluctuations
in foreign currency exchange rates.
|
· |
The
initiation of new contractual arrangements with other
companies.
|
· |
Whether
and when contract milestones are
achieved.
|
· |
The
failure of or refusal of a licensee to pay
royalties.
|
· |
The
expiration or invalidation of our patents or licensed intellectual
property. For example, patent litigations, interferences, oppositions,
and
other proceedings involving our patents often include claims by
third-parties that such patents are invalid or unenforceable. If
a court,
patent office, or other authority were to determine that a patent
under
which we receive royalties and/or other revenues is invalid or
unenforceable, that determination could cause us to suffer a loss
of such
royalties and/or revenues, and could cause us to incur other monetary
damages.
|
· |
Decreases
in licensees’ sales of product due to competition, manufacturing
difficulties or other factors that affect the sales of
product.
|
· |
Require
the approval of the directors designated by Roche to make any acquisition
or any sale or disposal of all or a portion of our business representing
10% or more of our assets, net income or
revenues.
|
· |
Enable
Roche to maintain its percentage ownership interest in our Common
Stock.
|
· |
Require
us to establish a stock repurchase program designed to maintain
Roche’s
percentage ownership interest in our Common Stock based on an established
Minimum Percentage. For information regarding Minimum Percentage,
see Note
5, “Relationship with Roche and Related Party Transactions,” in the Notes
to Condensed Consolidated Financial Statements in Part I, Item
1 of this
Form 10-Q.
|
· |
The
overall competitive environment for our products as described in
“We face
competition” above.
|
· |
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.
|
· |
The
amount and timing of our sales to Hoffmann-La Roche and our other
collaborators of products for sale outside of the U.S. and the
amount and
timing of sales to their respective customers, which directly impacts
both
our product sales and royalty revenues.
|
· |
The
timing and volume of bulk shipments to
licensees.
|
· |
The
availability and extent of government and private third-party
reimbursements for the cost of therapy.
|
· |
The
extent of product discounts extended to
customers.
|
· |
The
effectiveness 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.
|
· |
The
rate of adoption by physicians and use of our products for approved
indications and additional indications. Among other things, the
rate of
adoption by physicians and use of our products may be affected
by results
of clinical studies reporting on the benefits or risks of a
product.
|
· |
The
potential introduction of new products and additional indications
for
existing products.
|
· |
The
ability to successfully manufacture sufficient quantities of any
particular marketed product.
|
· |
Pricing
decisions we may adopt.
|
· |
Announcements
of technological innovations or new commercial products by
us or our
competitors.
|
· |
Publicity
regarding actual or potential medical results relating to products
under
development or being commercialized by us or our competitors.
|
· |
Concerns
about the pricing of our products and the potential impact
of such on
their utilization.
|
· |
Developments
or outcome of litigation, including litigation regarding proprietary
and
patent rights.
|
· |
Regulatory
developments or delays concerning our products in the U.S.
and foreign
countries.
|
· |
Issues
concerning the safety of our products or of biotechnology products
generally.
|
· |
Economic
and other external factors or a disaster or
crisis.
|
· |
Period
to period fluctuations in our financial
results.
|
Total
Number of
Shares
Purchased
in
2006
|
Average
Price Paid
per
Share
|
Total
Number of
Shares
Purchased as
Part
of Publicly
Announced
Plans or
Programs
|
Maximum
Number
of
Shares that May
Yet
Be Purchased
Under
the Plans or
Programs
|
||||||||||
January
1-31, 2006
|
0.9
|
$
|
88.37
|
||||||||||
February
1-28, 2006
|
0.7
|