(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,
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
|
1,052,956,387 Outstanding
at July 28, 2006
|
Page
No.
|
||
Item
1.
|
3
|
|
3
|
||
4
|
||
5
|
||
6-18
|
||
19
|
||
Item
2.
|
20-40
|
|
Item
3.
|
41
|
|
Item
4.
|
41
|
|
Item
1.
|
42
|
|
Item
1A.
|
42-54
|
|
Item
2.
|
54
|
|
Item
4.
|
55
|
|
Item
6.
|
56
|
|
57
|
Three
Months
Ended
June 30,
|
Six
Months
Ended
June 30,
|
||||||||||||
2006
|
2005
|
2006
|
2005
|
||||||||||
Revenues
|
|||||||||||||
Product
sales (including amounts from related parties:
three
months—2006-$75; 2005-$28;
six
months—2006-$133; 2005-$82)
|
$
|
1,810
|
$
|
1,274
|
$
|
3,454
|
$
|
2,460
|
|||||
Royalties
(including amounts from related parties:
three
months—2006-$207; 2005-$107;
six
months—2006-$373; 2005-$212)
|
316
|
200
|
602
|
432
|
|||||||||
Contract
revenue (including amounts from related parties:
three
months—2006-$34; 2005-$30;
six
months—2006-$63; 2005-$57)
|
73
|
53
|
129
|
96
|
|||||||||
Total
operating revenues
|
2,199
|
1,527
|
4,185
|
2,988
|
|||||||||
Costs
and expenses
|
|||||||||||||
Cost
of sales (including amounts for related parties:
three
months—2006-$65; 2005-$39;
six
months—2006-$115; 2005-$89)
|
284
|
274
|
546
|
530
|
|||||||||
Research
and development
(including
amounts for related parties:
three
months—2006-$77; 2005-$47;
six
months—2006-$146; 2005-$94)
(including
contract related:
three
months—2006-$51; 2005-$37;
six
months—2006-$87; 2005-$64)
|
390
|
278
|
764
|
521
|
|||||||||
Marketing,
general and administrative
|
471
|
352
|
912
|
663
|
|||||||||
Collaboration
profit sharing (including amounts for a related party:
three
months—2006-$48; 2005-$29;
six
months—2006-$91; 2005-$52)
|
259
|
199
|
485
|
375
|
|||||||||
Recurring
charges related to redemption
|
26
|
34
|
52
|
69
|
|||||||||
Special
items: litigation-related
|
14
|
20
|
27
|
31
|
|||||||||
Total
costs and expenses
|
1,444
|
1,157
|
2,786
|
2,189
|
|||||||||
Operating
income
|
755
|
370
|
1,399
|
799
|
|||||||||
Other
income (expense):
|
|||||||||||||
Interest
and other income, net
|
121
|
35
|
174
|
55
|
|||||||||
Interest
expense
|
(18
|
)
|
(4
|
)
|
(37
|
)
|
(7
|
)
|
|||||
Total
other income, net
|
103
|
31
|
137
|
48
|
|||||||||
Income
before taxes
|
858
|
401
|
1,536
|
847
|
|||||||||
Income
tax provision
|
327
|
105
|
584
|
267
|
|||||||||
Net
income
|
$
|
531
|
$
|
296
|
$
|
952
|
$
|
580
|
|||||
Earnings
per share
|
|||||||||||||
Basic
|
$
|
0.50
|
$
|
0.28
|
$
|
0.90
|
$
|
0.55
|
|||||
Diluted
|
$
|
0.49
|
$
|
0.27
|
$
|
0.89
|
$
|
0.54
|
|||||
Shares
used to compute basic earnings per share
|
1,053
|
1,058
|
1,054
|
1,052
|
|||||||||
Shares
used to compute diluted earnings per share
|
1,073
|
1,084
|
1,074
|
1,077
|
Six
Months
Ended
June 30,
|
|||||||
2006
|
2005
|
||||||
Cash
flows from operating activities
|
|||||||
Net
income
|
$
|
952
|
$
|
580
|
|||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|||||||
Depreciation
and amortization
|
199
|
181
|
|||||
Employee
stock-based compensation
|
149
|
-
|
|||||
Deferred
income taxes
|
(85
|
)
|
(54
|
)
|
|||
Deferred
revenue
|
2
|
(22
|
)
|
||||
Litigation-related
liabilities
|
26
|
26
|
|||||
Tax
benefit from employee stock options
|
-
|
327
|
|||||
Excess
tax benefit from stock-based compensation arrangements
|
(90
|
)
|
-
|
||||
Gain
on sales of securities available-for-sale and other
|
(69
|
)
|
(2
|
)
|
|||
Write-down
of securities available-for-sale and other
|
-
|
4
|
|||||
Changes
in assets and liabilities:
|
|||||||
Receivables
and other current assets
|
(184
|
)
|
(117
|
)
|
|||
Inventories
|
(174
|
)
|
(11
|
)
|
|||
Investments
in trading securities
|
(15
|
)
|
(8
|
)
|
|||
Accounts
payable, other accrued liabilities, and other long-term
liabilities
|
205
|
(82
|
)
|
||||
Net
cash provided by operating activities
|
916
|
822
|
|||||
Cash
flows from investing activities
|
|||||||
Purchases
of securities available-for-sale
|
(898
|
)
|
(313
|
)
|
|||
Proceeds
from sales and maturities of securities available-for-sale
|
545
|
399
|
|||||
Capital
expenditures
|
(538
|
)
|
(730
|
)
|
|||
Change
in other assets
|
17
|
(35
|
)
|
||||
Net
cash used in investing activities
|
(874
|
)
|
(679
|
)
|
|||
Cash
flows from financing activities
|
|||||||
Stock
issuances under employee stock plans
|
187
|
465
|
|||||
Stock
repurchases
|
(540
|
)
|
(161
|
)
|
|||
Excess
tax benefit from stock-based compensation arrangements
|
90
|
-
|
|||||
Net
cash (used in) provided by financing activities
|
(263
|
)
|
304
|
||||
Net
(decrease) increase in cash and cash equivalents
|
(221
|
)
|
447
|
||||
Cash
and cash equivalents at beginning of period
|
1,225
|
270
|
|||||
Cash
and cash equivalents at end of period
|
$
|
1,004
|
$
|
717
|
|||
Supplemental
cash flow data
|
|||||||
Cash
paid during the year for:
|
|||||||
Interest
|
$
|
47
|
$
|
6
|
|||
Income
taxes
|
498
|
290
|
|||||
Non-cash
investing and financing activities
|
|||||||
Capitalization
of construction in progress related to financing lease
transaction
|
61
|
73
|
|||||
Exchange
of note receivable for a prepaid royalty and other long-term
asset
|
-
|
29
|
June
30,
2006
|
December
31,
2005
|
||||||
Assets
|
|||||||
Current
assets
|
|||||||
Cash
and cash equivalents
|
$
|
1,004
|
$
|
1,225
|
|||
Short-term
investments
|
1,189
|
1,140
|
|||||
Accounts
receivable—product sales (net of allowances:
2006-$76;
2005-$83; including amounts from related parties:
2006-$29;
2005-$4)
|
663
|
554
|
|||||
Accounts
receivable—royalties (including amounts from related
parties:
2006-$251;
2005-$173)
|
386
|
297
|
|||||
Accounts
receivable—other (net of allowances:
2006
and 2005-$1; including amounts from related parties:
2006-$116;
2005-$132)
|
177
|
199
|
|||||
Inventories
|
909
|
703
|
|||||
Prepaid
expenses and other current assets
|
283
|
268
|
|||||
Total
current assets
|
4,611
|
4,386
|
|||||
Long-term
marketable debt and equity securities
|
1,734
|
1,449
|
|||||
Property,
plant and equipment, net
|
3,760
|
3,349
|
|||||
Goodwill
|
1,315
|
1,315
|
|||||
Other
intangible assets
|
523
|
574
|
|||||
Restricted
cash and investments
|
735
|
735
|
|||||
Other
long-term assets
|
506
|
339
|
|||||
Total
assets
|
$
|
13,184
|
$
|
12,147
|
|||
Liabilities
and stockholders’ equity
|
|||||||
Current
liabilities
|
|||||||
Accounts
payable (including amounts to related parties:
2006-$23;
2005-$1)
|
279
|
$
|
339
|
||||
Deferred
revenue
|
47
|
44
|
|||||
Taxes
payable
|
150
|
62
|
|||||
Other
accrued liabilities (including amounts to related
parties:
2006-$191;
2005-$132)
|
1,303
|
1,215
|
|||||
Total
current liabilities
|
1,779
|
1,660
|
|||||
Long-term
debt
|
2,132
|
2,083
|
|||||
Deferred
revenue
|
219
|
220
|
|||||
Litigation-related
and other long-term liabilities
|
774
|
714
|
|||||
Total
liabilities
|
4,904
|
4,677
|
|||||
Commitments
and contingencies
|
|||||||
Stockholders’
equity
|
|||||||
Common
stock
|
21
|
21
|
|||||
Additional
paid-in capital
|
9,663
|
9,263
|
|||||
Accumulated
other comprehensive income
|
193
|
253
|
|||||
Accumulated
deficit, since June 30, 1999
|
(1,597
|
)
|
(2,067
|
)
|
|||
Total
stockholders’ equity
|
8,280
|
7,470
|
|||||
Total
liabilities and stockholders’ equity
|
$
|
13,184
|
$
|
12,147
|
Note
1.
|
Summary
of Significant Accounting
Policies
|
· |
We
recognize revenue from product sales when there is persuasive evidence
that an arrangement exists, title passes, the price is fixed and
determinable, and collectibility is reasonably assured. Allowances
are
established for estimated
rebates, healthcare provider contractual chargebacks, prompt pay
sales
discounts, product returns, wholesaler inventory management incentives,
and bad debts.
In our domestic commercial collaboration agreements, we have primary
responsibility for the United States (or “U.S.”) product sales
commercialization efforts, including selling and marketing, customer
service, order entry, distribution, shipping and billing. We record
net
product sales and related production and selling cost in our income
statement line items on a gross basis since we have the manufacturing
risk
and/or inventory risk, and credit risk, and meet the criteria as
a
principal under Emerging Issues Task Force (or “EITF”)
Issue No. 99-19, “Reporting Revenue Gross as a Principal Versus Net as an
Agent” (or “EITF 99-19”).
|
· |
We
recognize revenue from royalties based on licensees’ sales of our products
or technologies. Royalties are recognized as earned in accordance
with the
contract terms when royalties from licensees can be reasonably estimated
and collectibility is reasonably assured. For the majority of our
royalty
revenues, estimates are made using historical and forecasted sales
trends
and used as a basis to record amounts in advance of amounts
collected.
|
· |
Contract
revenue generally includes upfront and continuing licensing fees,
manufacturing fees, milestone payments and net reimbursements from
collaborators on development, post-marketing and commercial costs.
Most of
our contract arrangements with up-front license fees were entered
into
prior to the effective date of July 1, 2003 for EITF Issue No. 00-21
“Revenue Arrangements with Multiple Deliverables” (or “EITF 00-21”).
Accordingly, our accounting policy on contract revenue, as described
below, is focused on describing transactions entered into prior to
the
effective date of EITF 00-21.
|
· |
Nonrefundable
upfront fees, including product opt-ins, for which no further performance
obligations exist, are recognized as revenue on the earlier of when
payments are received or collection is
assured.
|
· |
Nonrefundable
upfront licensing fees, including product opt-ins, and certain guaranteed,
time-based payments that require our continuing involvement in the
form of
development, manufacturing or other commercialization efforts by
us are
recognized as revenue:
|
· |
ratably
over the development period if development risk is significant,
or
|
· |
ratably
over the manufacturing period or estimated product useful life if
development risk has been substantially
eliminated.
|
· |
Upfront
manufacturing fees are recognized as revenue as the related manufacturing
services are rendered, generally on a straight-line basis over the
performance period of the longer of the manufacturing obligation
period or
the expected product life. Manufacturing profit is recognized when
the
product is shipped and title
passes.
|
· |
Fees
associated with substantive milestones, which are contingent upon
future
events for which there is reasonable uncertainty as to their achievement
at the time the agreement was entered into, are
recognized as revenue when these milestones, as defined in the contract,
are achieved.
|
· |
Fees
received on multiple element agreements, or amendments to such agreements,
entered into after the effective date of EITF 00-21, are evaluated
under
the provisions of EITF 00-21. We use objective evidence of fair value
to
allocate revenue to each element in multiple element agreements and
recognize revenue for each element when the criteria for revenue
recognition for that element have been met. If the revenue recognition
criteria have not been met, then revenue for that element is deferred
until such criteria are met or until the culmination of the period(s)
over
which the last undelivered element is delivered. In the absence of
objective evidence of fair value for each element, the multiple elements
are combined into a single unit of accounting and the revenue recognition
criteria are applied to the entire
agreement.
|
· |
Commercial
collaborations resulting in a net reimbursement of development,
post-marketing and commercial costs are recognized as revenue as
the
related costs are incurred. The corresponding development and
post-marketing expenses are included in research and development
expenses
and the corresponding commercial costs are included in marketing,
general
and administrative (or “MG&A”) expenses in the Condensed Consolidated
Statements of Income.
|
· |
Rebate
allowances and accruals are comprised of both direct and indirect
rebates.
Direct rebates are contractual price adjustments payable 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 and group
purchasing organizations that do not purchase products directly from
us.
Both types of allowances are based upon definitive contractual agreements
or legal requirements (such as Medicaid) after the final dispensing
of the
product by a pharmacy, clinic or hospital to a benefit plan participant.
Rebate accruals are recorded in the same period the related revenue
is
recognized resulting in a reduction to product sales revenue and
the
establishment of a contra asset (if due to a wholesaler or specialty
pharmacy) or a liability (if due to a third party, such as a healthcare
provider) as appropriate, which are included in sales allowances
or other
accrued liabilities, respectively. Rebates are primarily estimated
using
historical data, including patient usage, customer buying patterns,
applicable contractual rebate rates and contract performance by the
benefit providers. Rebate estimates are evaluated quarterly and may
require adjustments to better align our estimates with actual results.
As
part of this evaluation, we review changes to Medicaid legislation,
changes to state rebate contracts, changes in the level of discounts,
and
changes in product sales trends. Although rebates are accrued at
the time
of sale, rebates are typically paid out, on average, up to 4 to 5
months
after the sale.
|
· |
Healthcare
provider contractual chargebacks are the result of contractual commitments
by us to provide products to healthcare providers at specified prices
or
discounts. These contracted health care providers include (i) hospitals
that service a disproportionately high share of economically indigent
and
Medicaid patients for which they receive little or no reimbursement
(i.e.
Disproportionate Share Hospitals or “DSH”), (ii) government-owned
hospitals that receive discounts, and (iii) hospitals that have contract
pricing for certain products usually by way of a group purchasing
agreement. Chargebacks occur when a contracted health care provider
purchases our products through an intermediary wholesaler at fixed
contract prices that are lower than the list prices we charge the
wholesalers. The wholesaler, in turn, charges us back for the difference
between the price initially paid by the wholesaler and the contract
price
paid to the wholesaler by the healthcare providers. Chargebacks are
accrued at the time of sale and are estimated based on historical
trends,
which closely approximate actual results as we generally issue credits
within a few weeks of the time of
sale.
|
· |
Prompt
pay sales discounts are credits granted to wholesalers for remitting
payment on their purchases within contractually defined cash repayment
incentive periods. The contractually defined cash repayment periods
are
generally 30 days (plus 4 grace days for a total of 34 days). Based
upon
our experience that it is rare that a wholesaler does not comply
with the
contractual terms to earn the prompt pay sales discount, we accrue,
at the
time of original sale 100% of the prompt pay discounts related to
the
sale.
|
· |
Wholesaler
inventory management allowances are credits granted to wholesalers
for
compliance with various contractually-defined inventory management
programs. These programs provide monetary incentives in the form
of a
credit for wholesalers to maintain consistent inventory levels at
approximately 2 to 3 weeks of sales depending on the product. These
wholesaler inventory management credits are calculated based on quarterly
product purchases multiplied by a factor to determine the maximum
possible
credit for a product for the preceding quarter. Adjustments to reduce
the
maximum credit are made if the wholesaler does not meet and/or comply
with
the negotiated metrics. These metrics include data timeliness,
completeness and accuracy and deviations outside of the contracted
inventory days on hand for each product. The maximum credits are
accrued
at the time of sale, and are typically granted to wholesaler accounts
within 90 days after the sale.
|
· |
Product
returns allowances are established in accordance with our returns
policy,
which allows buyers to return our products within two months prior
to six
months following product expiration. Most products are sold to our
wholesalers with at least six months of dating prior to expiration.
As
part of our estimating process, we compare historical return data
to their
related sales on a production lot basis. Historical rates of return
are
determined by product and are adjusted for known or expected changes
in
the marketplace specific to each product. In addition, we review
expiration dates to determine the remaining shelf life of each product
not
yet returned. Although product return allowances are accrued at the
time
of sale, the majority of returns take place up to two years after
the
sale.
|
· |
Bad
debt allowances are based on our estimated uncollectible accounts
receivable. Given our historical experience with bad debts, combined
with
our credit management policies and practices, we do not presently
maintain
significant bad debt allowances.
|
Three
Months
Ended
June 30,
|
Six
Months
Ended
June 30,
|
||||||||||||
2006
|
2005
|
2006
|
2005
|
||||||||||
Numerator:
|
|||||||||||||
Net
income
|
$
|
531
|
$
|
296
|
$
|
952
|
$
|
580
|
|||||
Denominator:
|
|||||||||||||
Weighted-average
shares outstanding used to compute basic EPS
|
1,053
|
1,058
|
1,054
|
1,052
|
|||||||||
Effect
of dilutive stock options
|
20
|
26
|
20
|
25
|
|||||||||
Weighted-average
shares outstanding and dilutive securities used to compute diluted
EPS
|
1,073
|
1,084
|
1,074
|
1,077
|
June
30, 2006
|
December
31, 2005
|
||||||
Net
unrealized gains on securities available-for-sale
|
$
|
190
|
$
|
230
|
|||
Net
unrealized gains on cash flow hedges
|
3
|
23
|
|||||
Accumulated
other comprehensive income
|
$
|
193
|
$
|
253
|
Three
Months
Ended
June 30,
|
Six
Months
Ended
June 30,
|
||||||||||||
2006
|
2005
|
2006
|
2005
|
||||||||||
Net
income
|
$
|
531
|
$
|
296
|
$
|
952
|
$
|
580
|
|||||
Change
in unrealized gains (losses) on securities
available-for-sale
|
(43
|
)
|
22
|
(40
|
)
|
(55
|
)
|
||||||
Change
in unrealized gains (losses) on cash flow hedges
|
(19
|
)
|
24
|
(20
|
)
|
37
|
|||||||
Comprehensive
income
|
$
|
469
|
$
|
342
|
$
|
892
|
$
|
562
|
Note
2.
|
Employee
Stock-Based Compensation
|
Three
Months
Ended
June
30, 2006
|
Six
Months
Ended
June
30, 2006
|
||||||
Research
and development
|
$
|
34
|
$
|
67
|
|||
Marketing,
general and administrative
|
41
|
82
|
|||||
Total
employee stock-based compensation expense
|
75
|
149
|
|||||
Tax
benefit related to employee stock-based compensation
expense
|
(28
|
)
|
(54
|
)
|
|||
Net
effect on net income
|
$
|
47
|
$
|
95
|
|||
Effect
on earnings per share:
|
|||||||
Basic
|
$
|
0.05
|
$
|
0.09
|
|||
Diluted
|
$
|
0.04
|
$
|
0.09
|
Three
Months
Ended
June
30, 2006
|
Six
Months
Ended
June
30, 2006
|
||||||
Net
income as reported
|
$
|
531
|
$
|
952
|
|||
Deduct: Total
employee stock-based compensation expense includable in cost of sales,
net
of related tax effects
|
(8
|
)
|
(16
|
)
|
|||
Pro
forma net income
|
$
|
523
|
$
|
936
|
|||
Earnings
per share:
|
|||||||
Basic-as
reported
|
$
|
0.50
|
$
|
0.90
|
|||
Basic-pro
forma
|
$
|
0.50
|
$
|
0.89
|
|||
Diluted-as
reported
|
$
|
0.49
|
$
|
0.89
|
|||
Diluted-pro
forma
|
$
|
0.49
|
$
|
0.87
|
Three
Months
Ended
June
30, 2005
|
Six
Months
Ended
June
30, 2005
|
||||||
Net
income as reported
|
$
|
296
|
$
|
580
|
|||
Deduct: Total
employee stock-based compensation expense determined under the fair
value
based method for all awards, net of related tax effects
|
(41
|
)
|
(81
|
)
|
|||
Pro
forma net income
|
$
|
255
|
$
|
499
|
|||
Earnings
per share:
|
|||||||
Basic-as
reported
|
$
|
0.28
|
$
|
0.55
|
|||
Basic-pro
forma
|
$
|
0.24
|
$
|
0.47
|
|||
Diluted-as
reported
|
$
|
0.27
|
$
|
0.54
|
|||
Diluted-pro
forma
|
$
|
0.23
|
$
|
0.45
|
Three
Months
Ended
June 30,
|
Six
Months
Ended
June 30,
|
||||||
2006
|
2005
|
2006
|
2005
|
||||
Risk-free
interest rate
|
4.9%
|
3.7%
|
4.8%
|
3.8%
|
|||
Dividend
yield
|
0.0%
|
0.0%
|
0.0%
|
0.0%
|
|||
Expected
volatility
|
29.0%
|
32.0%
|
29.0%
|
32.0%
|
|||
Expected
term (years)
|
4.2
|
4.2
|
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
|
84.59
|
||||||
Exercises
|
-
|
(4
|
)
|
30.28
|
||||||
Cancellations
|
1
|
(1
|
)
|
60.10
|
||||||
June
30, 2006
|
84
|
79
|
$
|
48.09
|
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
|
5.41
|
$
|
7.69
|
0.5
|
5.41
|
$
|
7.69
|
|||||||||||
$10.00
- $14.35
|
12.9
|
5.41
|
$
|
13.71
|
11.7
|
5.33
|
$
|
13.66
|
|||||||||||
$15.04
- $22.39
|
8.6
|
4.84
|
$
|
20.83
|
8.5
|
4.81
|
$
|
20.89
|
|||||||||||
$22.88
- $33.00
|
0.3
|
4.81
|
$
|
27.55
|
0.3
|
4.82
|
$
|
27.55
|
|||||||||||
$35.63
- $53.23
|
35.7
|
7.29
|
$
|
46.83
|
19.3
|
6.95
|
$
|
45.01
|
|||||||||||
$53.95
- $75.90
|
1.5
|
8.28
|
$
|
59.23
|
0.6
|
8.21
|
$
|
58.25
|
|||||||||||
$79.10
- $98.80
|
19.4
|
9.26
|
$
|
85.93
|
0.1
|
8.99
|
$
|
81.82
|
|||||||||||
78.9
|
41.0
|
Note
3.
|
Condensed
Consolidated Financial Statement
Detail
|
June
30, 2006
|
December
31, 2005
|
||||||
Raw
materials and supplies
|
$
|
97
|
$
|
79
|
|||
Work
in process
|
561
|
438
|
|||||
Finished
goods
|
251
|
186
|
|||||
Total
|
$
|
909
|
$
|
703
|
Note
4.
|
Contingencies
|
Note
5.
|
Relationship
with Roche and Related Party
Transactions
|
Note
6.
|
Income
Taxes
|
/s/ ERNST
& YOUNG LLP
|
· |
Lucentis
for the treatment of neovascular (wet) age-related macular degeneration
(or “AMD”); and
|
· |
Avastin
in combination with intravenous 5-fluorouracil (or “5-FU”)-based
chemotherapy for second-line metastatic colorectal
cancer.
|
· |
a
Supplemental Biologics License Application (or “sBLA”)
for use of Avastin in first-line treatment of advanced, non-small
cell
lung cancer other than predominant squamous histology, in combination
with
platinum based chemotherapy; and
|
· |
an
sBLA for use of Avastin in combination with taxane chemotherapy for
patients who have not previously received chemotherapy for their
locally
recurrent or metastatic breast cancer. We
requested, and the FDA granted, a Priority Review of the application
with
an action date no later than November 23, 2006.
However, the FDA has requested that we provide additional documentation
from the trial underlying the filing, and we believe the time required
to
respond to their requests will extend the review period beyond the
November 23, 2006 action date.
|
· |
Our
long-term business growth, commercial performance and clinical success
depend upon our ability to continue to develop and commercialize
important
novel therapeutics to treat unmet medical needs, such as cancer.
We
recognize that the successful development of biotherapeutics 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 research and development (or “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/or product recalls.
|
· |
We
face significant competition in the diseases of interest to us from
pharmaceutical companies, pharmaceutical divisions of chemical companies,
and biotechnology companies. The introduction of new competitive
products
or follow-on biologics or new information about existing products
may
result in lost market share for us, reduced utilization of our products,
and/or lower prices, even for products protected by
patents.
|
· |
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.
|
· |
As
the Medicare and Medicaid programs are
the largest payers for our products, rules relating to coverage and
reimbursement continue to represent an important area of focus. New
regulations relating to hospital and physician payment continue to
be
implemented annually. 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 July
1, 2006, the new Competition
Acquisition Program (or “CAP”) option
went into effect, as mandated
under the Medicare
Modernization Act of 2003 (or “MMA”),
and is now available to physicians providing services under Medicare
Part
B. Under the CAP, physicians can choose to either obtain drugs directly
from a designated CAP vendor, or continue to purchase drugs directly
and
be reimbursed by CMS at the Average Selling Price + 6% rate. We anticipate
that the effect of the CAP option on our sales will be
immaterial.
|
· |
We
believe our business model is only sustainable with appropriate pricing
and reimbursement for our products to offset the costs and risks
of drug
development. The pricing of our products has received negative press
coverage and public scrutiny. We will continue to meet with patient
groups, payers and other stakeholders in the healthcare system to
understand their issues and concerns. However, the future reimbursement
environment for our products is
uncertain.
|
· |
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.
In
keeping with our desire to maintain and protect our culture, we have
made
a decision to continue our broad-based stock option program in 2006
consistent with the size of programs we have seen from other companies
in
the pharmaceutical/biotechnology industry with comparable market
capitalizations.
|
· |
The
treatment of patients with relapsed or refractory, low-grade or
follicular, CD20-positive, B-cell non-Hodgkin’s lymphoma, including
retreatment and bulky disease;
|
· |
The
first-line treatment of patients with diffuse large B-cell, CD20-positive,
non-Hodgkin’s lymphoma (or “DLBCL”) in combination with CHOP
(cyclophosphamide, doxorubicin, vincristine and prednisone) or other
anthracycline-based chemotherapy regimens;
and
|
· |
Use
in combination with methotrexate for reducing signs and symptoms
in adult
patients with moderately-to-severely active rheumatoid arthritis
(or “RA”)
who have had an inadequate response to one or more tumor necrosis
factor
(or “TNF”) antagonist therapies.
|
· |
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.
|
· |
Rebate
allowances and accruals are comprised of both direct and indirect
rebates.
Direct rebates are contractual price adjustments payable 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 and group
purchasing organizations that do not purchase products directly from
us;
|
· |
Prompt
pay sales discounts are credits granted to wholesalers for remitting
payment on their purchases within established cash repayment incentive
periods;
|
· |
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 expiration and ending six months following
product expiration;
|
· |
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 2 to 3 weeks of sales depending on the
product;
|
· |
Bad
debt allowances are based on our estimated uncollectible accounts
receivable; and
|
· |
Healthcare
provider contractual chargebacks are the result of contractual commitments
by us to provide products to healthcare providers at specified prices
or
discounts.
|
Three
Months
Ended
June 30,
|
Six
Months
Ended
June 30,
|
||||||||||||||||||
2006
|
2005
|
% Change
|
2006
|
2005
|
% Change
|
||||||||||||||
Product
sales
|
$
|
1,810
|
$
|
1,274
|
42
|
%
|
$
|
3,454
|
$
|
2,460
|
40
|
%
|
|||||||
Royalties
|
316
|
200
|
58
|
602
|
432
|
39
|
|||||||||||||
Contract
revenue
|
73
|
53
|
38
|
129
|
96
|
34
|
|||||||||||||
Total
operating revenues
|
2,199
|
1,527
|
44
|
4,185
|
2,988
|
40
|
|||||||||||||
Cost
of sales
|
284
|
274
|
4
|
546
|
530
|
3
|
|||||||||||||
Research
and development
|
390
|
278
|
40
|
764
|
521
|
47
|
|||||||||||||
Marketing,
general and administrative
|
471
|
352
|
34
|
912
|
663
|
38
|
|||||||||||||
Collaboration
profit sharing
|
259
|
199
|
30
|
485
|
375
|
29
|
|||||||||||||
Recurring
charges related to redemption
|
26
|
34
|
(24
|
)
|
52
|
69
|
(25
|
)
|
|||||||||||
Special
items: litigation-related
|
14
|
20
|
(30
|
)
|
27
|
31
|
(13
|
)
|
|||||||||||
Total
costs and expenses
|
1,444
|
1,157
|
25
|
2,786
|
2,189
|
27
|
|||||||||||||
Operating
income
|
755
|
370
|
104
|
1,399
|
799
|
75
|
|||||||||||||
Other
income (expense):
|
|||||||||||||||||||
Interest
and other income, net
|
121
|
35
|
246
|
174
|
55
|
216
|
|||||||||||||
Interest
expense
|
(18
|
)
|
(4
|
)
|
350
|
(37
|
)
|
(7
|
)
|
429
|
|||||||||
Total
other income, net
|
103
|
31
|
232
|
137
|
48
|
185
|
|||||||||||||
Income
before taxes
|
858
|
401
|
114
|
1,536
|
847
|
81
|
|||||||||||||
Income
tax provision
|
327
|
105
|
211
|
584
|
267
|
119
|
|||||||||||||
Net
income
|
$
|
531
|
$
|
296
|
79
|
$
|
952
|
$
|
580
|
64
|
|||||||||
Earnings
per share:
|
|||||||||||||||||||
Basic
|
$
|
0.50
|
$
|
0.28
|
79
|
$
|
0.90
|
$
|
0.55
|
64
|
|||||||||
Diluted
|
$
|
0.49
|
$
|
0.27
|
81
|
$
|
0.89
|
$
|
0.54
|
65
|
|||||||||
Pretax
operating margin
|
34
|
%
|
24
|
%
|
33
|
%
|
27
|
%
|
|||||||||||
Cost
of sales as a % of product sales
|
16
|
22
|
16
|
22
|
|||||||||||||||
Research
and development as a % of operating revenues
|
18
|
18
|
18
|
17
|
|||||||||||||||
Marketing,
general and administrative as a % of operating revenues
|
21
|
23
|
22
|
22
|
|||||||||||||||
Net
income as a % of operating revenues
|
24
|
19
|
23
|
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
June 30,
|
Six
Months
Ended
June 30,
|
||||||||||||||||||
2006
|
2005
|
% Change
|
2006
|
2005
|
% Change
|
||||||||||||||
Net
U.S. Product Sales
|
|||||||||||||||||||
Avastin
|
$
|
423
|
$
|
246
|
72
|
%
|
$
|
821
|
$
|
449
|
83
|
%
|
|||||||
Rituxan
|
526
|
450
|
17
|
1,003
|
890
|
13
|
|||||||||||||
Herceptin
|
320
|
152
|
111
|
610
|
282
|
116
|
|||||||||||||
Tarceva
|
103
|
70
|
47
|
196
|
118
|
66
|
|||||||||||||
Xolair
|
105
|
80
|
31
|
200
|
145
|
38
|
|||||||||||||
Raptiva
|
22
|
21
|
5
|
43
|
38
|
13
|
|||||||||||||
Lucentis
|
10
|
-
|
-
|
10
|
-
|
-
|
|||||||||||||
Nutropin
products
|
98
|
97
|
1
|
185
|
187
|
(1
|
)
|
||||||||||||
Thrombolytics
|
62
|
52
|
19
|
121
|
102
|
19
|
|||||||||||||
Pulmozyme
|
47
|
48
|
(2
|
)
|
96
|
92
|
4
|
||||||||||||
Total
U.S. product sales
|
1,716
|
1,216
|
41
|
3,285
|
2,303
|
43
|
|||||||||||||
Net
product sales to collaborators
|
94
|
58
|
62
|
169
|
157
|
8
|
|||||||||||||
Total
product sales
|
$
|
1,810
|
$
|
1,274
|
42
|
$
|
3,454
|
$
|
2,460
|
40
|
Three
Months
Ended
June 30,
|
Six
Months
Ended
June 30,
|
||||||||||||||||||
Research
and Development
|
2006
|
2005
|
% Change
|
2006
|
2005
|
% Change
|
|||||||||||||
Product
development (including post marketing)
|
$
|
301
|
$
|
210
|
43
|
%
|
$
|
584
|
$
|
390
|
50
|
%
|
|||||||
Research
|
75
|
55
|
36
|
149
|
106
|
41
|
|||||||||||||
In-licensing
|
14
|
13
|
1
|
31
|
25
|
24
|
|||||||||||||
Total
R&D
|
$
|
390
|
$
|
278
|
40
|
$
|
764
|
$
|
521
|
47
|
Three
Months
Ended
June 30,
|
Six
Months
Ended
June 30,
|
||||||||||||||||||
Other
Income, Net
|
2006
|
2005
|
% Change
|
2006
|
2005
|
% Change
|
|||||||||||||
(In
millions)
|
|||||||||||||||||||
Gains
on sales of biotechnology equity securities and other
|
$
|
66
|
$
|
1
|
*
|
%
|
$
|
69
|
$
|
1
|
*
|
%
|
|||||||
Write-downs
of biotechnology debt, equity securities and other
|
-
|
-
|
-
|
-
|
(4
|
)
|
(100
|
)
|
|||||||||||
Interest
income
|
54
|
34
|
59
|
103
|
58
|
78
|
|||||||||||||
Interest
expense
|
(18
|
)
|
(4
|
)
|
350
|
(37
|
)
|
(7
|
)
|
429
|
|||||||||
Other
miscellaneous income
|
1
|
-
|
*
|
2
|
-
|
*
|
|||||||||||||
Total
other income, net
|
$
|
103
|
$
|
31
|
232
|
$
|
137
|
$
|
48
|
185
|
*
|
Calculation
not meaningful.
|
Liquidity
and Capital Resources
|
June
30,
2006
|
December 31,
2005
|
|||||
(In
millions)
|
|||||||
Unrestricted
cash, cash equivalents, short-term investments and long-term marketable
debt and equity securities
|
$
|
3,927
|
$
|
3,814
|
|||
Net
receivable - equity hedge instruments
|
68
|
73
|
|||||
Total
unrestricted cash, cash equivalents, short-term investments, long-term
marketable debt and equity securities, and equity hedge
instruments
|
$
|
3,995
|
$
|
3,887
|
|||
Working
capital
|
$
|
2,832
|
$
|
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
|
|||||||||||
April
1-30, 2006
|
0.7
|
80.31
|
|||||||||||
May
1-31, 2006
|