|
 Arthur D. Levinson, Ph.D., Chairman and Chief Executive Officer |
As we enter the year 2001 and celebrate biotechnology's first quarter century, I continue to be amazed by the magnitude and pace of biotech discovery, and I marvel at the remarkable impact our "young" industry has already had on the world of human health. As Chairman and CEO of Genentech, I am particularly proud of the role our company has played in inciting the "revolution in biology" back in 1976 and in remaining at the forefront of the biotech industry ever since.
From its humble beginnings, this industry — founded on a vision and a promise — has grown today to include over 1,500 U.S.-based biotech companies. Nearly 100 biotech drugs and vaccines have been approved in the United States and around the world, enhancing or extending the lives of hundreds of millions of people. And, more than 350 new biotech drugs and vaccines are currently being evaluated in clinical trials, with hundreds more in development. Today, scientists worldwide are closer than ever to discovering new therapies and cures for our most serious and life-threatening diseases, including cancer, heart disease and neurodegenerative diseases such as Alzheimer's and Parkinson's. All this, while we are on the verge of a terrific expansion of the knowledge and understanding of the human genetic and biologic function. Never has there been a time when so much has converged to enable even more significant advances in the not-too-distant future.
This year's report documents not only Genentech's performance for the year 2000, but also reflects on how far we've come in 25 years in our ability to discover, develop, manufacture and market innovative biotech therapies that fill significant unmet medical needs, while delivering strong financial returns to our stockholders.
In 2000, our total revenues were $1.73 billion — a 23 percent increase over 1999 revenues.1,2 Our prime productivity measure of net income as a percent of revenues was 19 percent for 2000, up from 18 percent in 1999 and making progress toward our 5 x 5 goal of 25 percent of revenues reaching the bottom line by 2005.1,2 Earnings-per-share growth in 2000 increased 28 percent over 1999, in line with our goal for 2005 of an on-average annual 25-percent earnings-per-share growth.2-4 Also, for the second year in a row, product sales exceeded $1 billion, and in 2000 reflected a 23 percent increase over 1999 product sales.1,2 A strong commercialization effort throughout the year drove sales growth, primarily through our biooncology products, Herceptin and Rituxan.
In June of 2000, we successfully introduced two new products, TNKase, the first thrombolytic agent able to be administered as a five-second injection, and Nutropin Depot, the first long-acting dosage form of recombinant growth hormone (indicated for the treatment of growth failure due to inadequate endogenous growth hormone secretion in children). Together with Novartis Pharmaceuticals Corporation and Tanox, Inc., we also submitted a Biologics License Application to the U.S. Food and Drug Administration (FDA) for anti-IgE, or Xolair, the first humanized monoclonal antibody for the potential treatment of asthma and seasonal allergic rhinitis.
Going forward, the majority of our research and development efforts will remain focused on the areas of oncology and cardiovascular medicine — areas that today represent the top two leading causes of death by disease in the United States — as well as other areas where we see opportunities and possess strong biological insights and a deep understanding of the basis of disease. We will continue to maximize our strategic advantage in cancer as the primary driver of growth for the company. This strategy is reflected in our current development pipeline, which has grown to include 20 active projects — many of which are monoclonal antibodies being evaluated in oncology indications or in opportunistic areas such as respiratory disease, inflammation and immunology. The progress we are making in the development area puts us on course to meet another of our 5 x 5 goals — to gain approval of five new products or indications by 2005.
Our capacity and expertise in large-scale manufacturing of complex proteins are unmatched in the industry and provide us with a unique and powerful competitive advantage. In 2000, we received FDA licensure for our Vacaville, Calif., facility, one of the world's largest biotechnology manufacturing plants for the production of pharmaceutical proteins, and acquired a third facility in Porriño, Spain.
During a year of growth and progress in manufacturing, we have also had to address several observations resulting from an FDA-sponsored Team Biologics inspection of our South San Francisco facility. At no time did these observations cause any safety issues for patients nor did they have any negative impact on product quality or on the availability of products to patients. We communicated our plans for improvements in our quality and manufacturing processes to the FDA and, in February 2001, we were officially informed by the FDA that our responses to their observations were acceptable.
Last year's sequencing of the human genome began a whole new era in medicine — one that holds unprecedented potential for improving and saving millions of lives. Genentech's 25 years of experience in genetic engineering, expertise in molecular biology, and integrated multidisciplinary research foundation uniquely position us to capitalize on the tools of genomics to accelerate the drug discovery process. Over the past several years, we have filed more than 1,000 patent applications on full-length DNA sequences that encode novel human proteins with therapeutic potential — many the result of our own highly successful Secreted Protein Discovery Initiative (SPDI). From the start, our strategy has been to include in our patent applications data from actual biologic assays that disclose the function and utility of these sequences. We believe that this is a responsible approach, which is consistent with the U.S. Patent and Trademark Office's new guidelines on utility, and places us in an excellent position to have new patents granted in the United States and internationally. To date, we hold more than 3,600 patents worldwide, with more than 2,600 patent applications pending. Our strong research and development organization and advantage in genomics-enabled discovery continue to fuel our pipeline and will help us meet our 5 x 5 goal of having five significant products in late-stage clinical trials by 2005. Toward this end, we established an internal goal last year of adding four new projects per year to our pipeline starting in the year 2000, and I am pleased to report that we have exceeded that goal.
As we continue to mine the information from the sequencing of the human genome for potential therapies, we must also work to preserve the potential market for those therapies. Therefore, this year, we have begun developing a set of principles for the Medicare Outpatient Drug benefit legislation currently before Congress. We feel strongly that the benefit must be market-based to ensure that beneficiaries have a choice of drug service providers. As such, we also recommend that the program be run by an entity with prior experience in administering market-based systems. We support a stop-loss benefit and a low-income subsidy, which will protect individuals with high drug spending from impoverishment and provide proportionately greater assistance to those who cannot afford to buy their drugs. Finally, it is our recommendation that the program be voluntary and open to all who wish to participate. By taking this position, we hope to ensure that the benefits of our continuing discoveries will be translated into therapies that can be used by all Americans.
Strategic alliances, partnerships and acquisitions have become an increasingly important priority for Genentech over the past several years — and a key factor in our future growth. We are currently involved in 27 such collaborative arrangements — several of which represent innovative new business models. We have had much success recently in forming alliances that solidify or strengthen our biooncology and cardiovascular businesses. Our ongoing progress in these areas should help us achieve our 5 x 5 goal of generating $500 million in new revenues from alliances and acquisitions by the year 2005.
I invite you to read through this year's annual report and share in our very special anniversary celebration. The pages that follow highlight key areas of achievement that reflect Genentech's growth, strength and commitment: marketed products, partnerships, development pipeline, monoclonal antibodies, product operations, genomics, research and corporate responsibility. We enter the new millennium more capable than ever before of delivering consistently strong commercial, scientific and financial results. "Firing on all cylinders" — from basic research to commercialization — Genentech has the resources, talent and strategies in place to propel us to new levels of accomplishment in providing valuable therapies to an expanding patient base and increasingly strong financial returns to our stockholders.
In closing, I'd like to thank the thousands of employees and the stockholders who have contributed to our success, growth and ability to save or improve lives over the past 25 years. We have accomplished great things, but this is truly only the beginning. I would also like to pay tribute to the millions of patients who have put their trust in the power of biotechnology products, participated in clinical studies and shared their experiences with us — for they are truly the heroes and heroines of this story.
I look forward to your continued support.
Sincerely,
Arthur D. Levinson, Ph.D.
Chairman and Chief Executive Officer
1. Based on Pro Forma amounts, which exclude the special charges in 1999 related to the Redemption and legal settlements, recurring charges related to the Redemption in 2000 and 1999, costs in 2000 and 1999 related to the sale of inventory that was written up at the Redemption, and their related tax effects. In addition, Pro Forma excludes the cumulative effect of a change in accounting principle, net of tax, in 2000. See the "Special Charges," "Recurring Charges Related to Redemption," "Cost of Sales," "Income Tax," and "Staff Accounting Bulletin No. 101" discussions on pages 29-31 in the Financial Review section of this annual report for further information on these charges. 2. Percent change was calculated based on Pro Forma amounts and shares where applicable. 3. All share, price per share and per share amounts of Common Stock and Special Common Stock reflect the two-for-one splits of our Common Stock that were effected in October 2000 and November 1999. 4. The goals for 2005 in this letter are forward-looking statements. The Company's actual results may differ materially. For a discussion of the factors that may affect future revenues, see "Forward-Looking Information and Cautionary Factors That May Affect Future Results — Fluctuations in Our Operating Results Could Affect the Price of Our Common Stock," "Our Affiliation Agreement With Roche Could Limit Our Ability to Make Acquisitions and Could Have a Material Negative Impact on Our Liquidity," "We Face Growing and New Competition," "Other Competitive Factors Could Affect Our Product Sales," "Our Royalty and Contract Revenues Could Decline," "Difficulties or Delays in Product Manufacturing Could Harm Our Business," "We Are Exposed to Market Risk," and the factors discussed below that could affect the development and approval of products, on pages 37-44; future earnings per share and net income as a percent of revenues, see the foregoing factors, plus "In Connection With the Redemption of Our Special Common Stock, We Recorded Substantial Goodwill and Other Intangibles, the Amortization of Which May Adversely Affect Our Earnings," "Protecting Our Proprietary Rights Is Difficult and Costly," "We May Incur Material Litigation Costs," "We May Incur Material Product Liability Costs," "We Are Exposed to Market Risk," "Our Interest Income Is Subject to Fluctuations in Interest Rates," "Our Investments in Equity Securities Are Subject to Market Risks," "Recent Accounting Pronouncements Could Impact Our Financial Position and Results of Operations," and "We Are Exposed to Credit Risk of Counterparties," on pages 40-44; the development and approval of products, see "The Successful Development of Pharmaceutical Products Is Highly Uncertain," "We May Be Unable to Retain Skilled Personnel and Maintain Key Relationships," and "We May Be Unable to Obtain Regulatory Approvals for Our Products," on pages 37-41.