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In this Annual Report, "Genentech," "we," "us" and "our" refer to Genentech, Inc. "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 and "Redeemable Common Stock" refers to Genentech's redeemable common stock, par value $0.02 per share. All numbers related to the number of shares, price per share and per share amounts of Common Stock, Special Common Stock and Redeemable Common Stock give effect to the two-for-one splits of our Common Stock that were effected in October 2000 and November 1999.
On June 30, 1999, we redeemed all of our outstanding Special Common Stock held by stockholders other than Roche Holdings, Inc., commonly known as Roche, with funds deposited by Roche for that purpose. This event, referred to as the "Redemption" in this report, caused Roche to own 100% of the outstanding common stock of Genentech on that date. The Redemption of our Special Common Stock on June 30, 1999 was reflected as a purchase of a business which, under U.S. generally accepted accounting principles, required push-down accounting to reflect in our financial statements the amounts paid for our stock in excess of our net book value. The Redemption created our New Basis of accounting as discussed further below. The Redemption was effective as of June 30, 1999, however, the transaction was reflected as of the end of the day on June 30, 1999 in the financial statements. We previously issued consolidated financial statements that presented limited information related to the results of operations for the period January 1, 1999 through June 30, 1999 immediately prior to the Redemption ("Old Basis"), and the period June 30, 1999 (including and subsequent to the Redemption) to December 31, 1999 ("New Basis"). We did not present separate statements of operations, stockholders' equity or cash flows reflecting the New Basis of accounting. Upon further review and based on discussions with the Securities and Exchange Commission, our statements of operations, cash flows and stockholders' equity have been revised and presented on the New Basis of accounting that resulted from the Redemption transaction. As such, a vertical black line is inserted to separate the "Old Basis" and "New Basis" presentation in the financial statements. Accordingly, the Old Basis reflects the period January 1 through June 30, 1999, and all periods prior to the Redemption, and the New Basis reflects the period from June 30 through December 31, 1999, and all subsequent periods. As a result of the accounting change, we reclassified $941.5 million from accumulated deficit to additional paid-in capital.
We also restated our financial statements to correct the accounting related to the write up of the valuation allowance pertaining to unrealized gains on certain marketable equity securities, resulting from the Redemption. As a result of this accounting change, the aggregate amount of contract and other income in 1999 decreased by $20.3 million, and net income decreased by $13.6 million ($0.03 per share) for the quarter and six month periods ended June 30, 1999. In addition, amortization expense decreased by $0.6 million (less than $0.01 per share) during the six month period ended December 31, 1999, and goodwill, net of accumulated amortization, decreased by $19.7 million, other accrued liabilities decreased by $6.8 million and accumulated deficit increased by $12.9 million at December 31, 1999.
Genentech is a leading biotechnology company using human genetic information to discover, develop, manufacture and market human pharmaceuticals that address significant unmet medical needs. Fourteen of the approved products of biotechnology stem from our science. We manufacture and market nine protein-based pharmaceuticals, and license several additional products to other companies.
On July 23, 1999, October 26, 1999, and March 29, 2000, Roche completed public offerings of our Common Stock. We did not receive any of the net proceeds from these offerings. On January 19, 2000, Roche completed an offering of zero-coupon notes that are exchangeable for an aggregate of 13,034,618 shares of our Common Stock held by Roche. Roche's percentage ownership of our outstanding Common Stock is approximately 58.4% at December 31, 2000.
Principles of Consolidation
The consolidated financial statements include the accounts of Genentech and all subsidiaries. Material intercompany balances and transactions are eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Change in Accounting Principle
We previously recognized non-refundable, upfront product license fees as revenue when the technology was transferred and when all of our significant contractual obligations relating to the fees had been fulfilled. Effective January 1, 2000, we changed our method of accounting for non-refundable upfront product license fees and certain guaranteed payments to recognize such fees over the term of the related development collaboration when, at the execution of the agreement, the development period involves significant risk due to the incomplete stage of the product's development, or over the period of the manufacturing obligation when, at the execution of the agreement, the product is approved for marketing, or nearly approvable, and development risk has been substantially eliminated. Deferred revenue related to manufacturing obligations will be recognized on a straight-line basis over the longer of the contractual term of the manufacturing obligation or the expected period over which we will supply the product. We believe the change in accounting principle is preferable based on guidance provided in the Securities and Exchange Commission's, or SEC, Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements."
The cumulative effect of the change in accounting principle was reported as a charge in the year ended December 31, 2000. The cumulative effect was initially recorded as deferred revenue that will be recognized as revenue over the remaining term of the research and development collaboration or distribution agreements, as appropriate. For the year ended December 31, 2000, the impact of the change in accounting was to increase net loss by $52.6 million, or $0.10 per share, comprised of the $57.8 million cumulative effect of the change (net of tax impact) as described above ($0.11 per share), net of $5.2 million of the related deferred revenue (less related tax impact of $3.4 million) that was recognized as revenue during the year ($0.01 per share). The remainder of the related deferred revenue of $90.7 million will be recognized in 2001 through 2019. Pro forma amounts of net income (loss) and related per share amounts, assuming retroactive application of the accounting change for all periods presented, are as follows (in thousands, except per share amounts):
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Cash and Cash Equivalents
We consider all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
Short-Term Investments and Long-Term Marketable Securities
We invest our excess cash balances in short-term and long-term marketable securities, primarily corporate notes, certificates of deposit, preferred stock, asset-backed securities and municipal bonds. As part of our strategic alliance efforts, we also invest in equity securities, dividend bearing convertible preferred stock and interest bearing convertible debt of other biotechnology companies. All of our equity investments represent less than a 20% ownership position. Marketable equity securities are accounted for as available-for-sale investment securities as described below. Nonmarketable equity securities and convertible debt are carried at cost. We periodically monitor the liquidity progress and financing activities of these entities to determine if impairment write downs are required. We had investments of $48.5 million at December 31, 2000, and $53.3 million at December 31, 1999, in convertible debt of various biotechnology companies.
Investment securities are classified into one of three categories: held-to-maturity, available-for-sale or trading. Securities are considered held-to-maturity when we have the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost, including adjustments for amortization of premiums and accretion of discounts. Securities are considered trading when bought principally for the purpose of selling in the near term. These securities are recorded as short-term investments and are carried at market value. Unrealized holding gains and losses on trading securities are included in interest income. Securities not classified as held-to-maturity or as trading are considered available-for-sale. These securities are recorded as either short-term investments or long-term marketable securities and are carried at market value with unrealized gains and losses included in accumulated other comprehensive income in stockholders' equity. If a decline in fair value below cost is considered other than temporary, marketable equity securities are written down to estimated fair value with a charge to marketing, general and administrative expenses. Other than temporary declines in fair value on short-term and long-term investments are charged against interest income. The cost of all securities sold is based on the specific identification method.
Long-Lived Assets
The carrying value of our long-lived assets is reviewed for impairment whenever events or changes in circumstances indicate that the asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Long-lived assets include property, plant and equipment, goodwill and other intangible assets.
FDA Validation Costs
U.S. Food and Drug Administration, or FDA, validation costs are capitalized as part of the effort required to acquire and construct long-lived assets, including readying them for their intended use, and are amortized over the estimated useful life of the asset or the term of the lease, whichever is shorter.
Property, Plant and Equipment
The costs of buildings and equipment are depreciated using the straight-line method over the following estimated useful lives of the assets:
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The costs of repairs and maintenance are expensed as incurred. Capitalized interest on construction-in-progress is included in property, plant and equipment. The repairs and maintenance expenses and capitalized interest were as follows (in millions):
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Property, plant and equipment balances at December 31 are summarized below (in thousands):
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Goodwill
Goodwill represents the difference between the purchase price and the fair value of the net assets when accounted for by the purchase method of accounting arising from Roche's purchase of our Special Common Stock and push-down accounting. Goodwill is amortized on a straight-line basis over 15 years.
Other Intangible Assets
Other intangible assets arising from Roche's purchases of our Special Common Stock and push-down accounting are amortized over their estimated useful lives ranging from five to 15 years. Costs of patents and patent applications related to products and processes of significant importance to us are capitalized and amortized on a straight-line basis over their estimated useful lives of approximately 12 years. Other intangible assets are generally amortized on a straight-line basis over their estimated useful lives.
Other Assets
Under certain lease agreements, we may be required from time to time to set aside cash as collateral. At December 31, 2000 and 1999, other assets included $56.6 million of restricted cash related to such a lease agreement.
Product Sales and Royalty Revenue
We recognize revenue from product sales when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed and determinable and collectibility is reasonably assured. Allowances are established for estimated product returns and discounts. Royalties from licensees are based on third-party sales and recorded as earned in accordance with contract terms, when third-party results are reliably measured and collectibility is reasonably assured.
We receive royalties on sales of rituximab, outside of the U.S. (excluding Japan), on sales of Pulmozyme and Herceptin outside of the U.S. and on sales of certain of our products in Canada from F. Hoffmann-La Roche Ltd, a subsidiary of Roche that is commonly known as Hoffmann-La Roche. See "Relationship With Roche" note below for further discussion.
We receive royalties on sales of growth hormone products and tissue-plasminogen activator outside of the U.S. and Canada, and on sales of rituximab in Japan through other licensees. We also receive worldwide royalties on seven additional licensed products that are marketed by other companies. Six of these products originated from our technology.
Contract Revenue
Contract revenue for research and development, or R&D, is recorded as earned based on the performance requirements of the contract. Non-refundable contract fees for which no further performance obligations exist, and there is no continuing involvement by Genentech, are recognized on the earlier of when the payments are received or when collection is assured.
Revenue from non-refundable upfront license fees and certain guaranteed payments where we continue involvement through development collaboration or an obligation to supply product is recognized ratably over the development period when, at the execution of the agreement, the development period involves significant risk due to the incomplete stage of the product's development, or over the period of the manufacturing obligation, when, at the execution of the agreement, the product is approved for marketing, or nearly approvable, and development risk has been substantially eliminated. Deferred revenues related to manufacturing obligations are recognized on a straight-line basis over the longer of the contractual term of the manufacturing obligation or the expected period over which we will supply the product.
Revenue associated with performance milestones is recognized based upon the achievement of the milestones, as defined in the respective agreements. Revenue under R&D cost reimbursement contracts is recognized as the related costs are incurred.
Advance payments received in excess of amounts earned are classified as deferred revenue.
Royalty Expenses
Royalty expenses directly related to product sales are classified in cost of sales. Other royalty expenses, relating to royalty revenue, totaled $34.4 million in 2000, $39.0 million in 1999, and $38.3 million in 1998 and are classified in marketing, general and administrative expenses.
Advertising Expenses
We expense the costs of advertising, which also includes promotional expenses, as incurred. Advertising expenses were $86.5 million in 2000, $80.0 million in 1999, and $47.7 million in 1998.
Income Taxes
We account for income taxes by the asset and liability approach for financial accounting and reporting of income taxes.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed based on the weighted-average number of shares of our Common Stock and Special Common Stock outstanding. Diluted earnings (loss) per share is computed based on the weighted-average number of shares of our Common Stock, Special Common Stock and other dilutive securities. See also "Earnings (Loss) Per Share" note below. All numbers relating to the number of shares, price per share and per share amounts of Common Stock, Special Common Stock and Redeemable Common Stock give effect to the two-for-one splits of our Common Stock that were effected on October 24, 2000 and November 2, 1999.
Financial Instruments
As part of our overall portfolio, we have contracted with two external money managers to manage part of our investment portfolio that is held for trading purposes and one external manager that manages our available-for-sale securities portfolio. The investment portfolios consist entirely of debt securities. When the money managers purchase securities denominated in a foreign currency, they enter into derivative instruments such as foreign currency forward contracts, or forward contracts, which are recorded at fair value with the related gain or loss recorded in interest income.
We also enter into derivative forward contracts as hedging instruments of our foreign denominated available-for-sale debt securities. These forward contracts are not recorded on our balance sheet. Any gains and losses from these forward contracts are recorded in interest income with the related hedged revenues.
We purchase derivative instruments such as simple foreign currency put options, or options, with expiration dates and amounts of currency that are based on a portion of probable nondollar revenues so that the potential adverse impact of movements in currency exchange rates on the nondollar denominated revenues will be at least partially offset by an associated increase in the value of the options. See "Financial Instruments" note below for further information on these options. At the time the options are purchased they have little or no intrinsic value. Realized and unrealized gains related to the options are deferred until the designated hedged revenues are recorded. The associated costs, which are deferred and classified as other current assets, are amortized over the term of the options and recorded as a reduction of the hedged revenues. Realized gains, if any, are recorded in the income statement with the related hedged revenues. Options are generally terminated, or offsetting contracts are entered into, upon determination that purchased options no longer qualify as a hedge or are determined to exceed probable anticipated net foreign revenues. The realized gains and losses are recorded as a component of other revenues. For early termination of options that qualify as hedges, the gain or loss on termination will be deferred through the original term of the option and then recognized as a component of the hedged revenues. Changes in the fair value of hedging instruments that qualify as a hedge are not recognized and changes in the fair value of instruments that do not qualify as a hedge would be recognized in other revenues.
Interest rate swaps are derivative instruments used to adjust the duration of the investment portfolio in order to meet duration targets. Interest rate swaps, or swaps, are contracts in which two parties agree to swap future streams of payments over a specified period. The accrued net settlement amounts on swaps are reflected on the balance sheet as a component of interest receivable. Net payments made or received on swaps are included in interest income as adjustments to the interest received on invested cash. Amounts deferred on terminated swaps are classified as other assets and are amortized to interest income over the original contractual term of the swaps by a method that approximates the level-yield method. For early termination of swaps where the underlying asset is not sold, the amount of the terminated swap is deferred and amortized over the remaining life of the original swap. For early termination of swaps with the corresponding termination or sale of the underlying asset, the amounts are recognized through interest income. As of December 31, 2000, we had not terminated any of our swap contracts prior to maturity. Changes in the fair value of swap hedging instruments that qualify as a hedge are not recognized and changes on the fair value of swap instruments that do not qualify as a hedge would be recognized in other income. As of December 31, 2000, our interest rate swap contracts qualified as a hedge and none were held for trading purposes.
Our marketable equity securities portfolio consists primarily of investments in biotechnology companies whose risk of market fluctuations is greater than the stock market in general. To manage a portion of this risk, we enter into derivative instruments such as costless collar instruments or equity swaps to hedge equity securities against changes in market value. See "Financial Instruments" note below for further discussion. Gains and losses on these instruments are recorded as an adjustment to unrealized gains and losses on marketable securities with a corresponding receivable or payable recorded in short-term or long-term other assets or liabilities. Equity collar or equity swap instruments that do not qualify for hedge accounting and early termination of these instruments with the sale of the underlying security would be recognized through earnings. For early termination of these instruments without the sale of the underlying security, the time value component would be recognized through earnings and the intrinsic value component would adjust the cost basis of the underlying security.
401(k) Plan
Our 401(k) Plan, or the Plan, covers substantially all of our employees. Under the Plan, eligible employees may contribute up to 15% of their eligible compensation, subject to certain Internal Revenue Service restrictions. We match a portion of employee contributions, up to a maximum of 4% of each employee's eligible compensation. The match is effective December 31 of each year and is fully vested when made. We provided $10.1 million in 2000, $8.5 million in 1999 and $7.3 million in 1998, for our match under the Plan.
Comprehensive Income
Comprehensive income is comprised of net income and other comprehensive income. Other comprehensive income includes certain changes in equity that are excluded from net income. Specifically, unrealized holding gains and losses on our available-for-sale securities, which were reported separately in stockholders' equity, are included in accumulated other comprehensive income. Comprehensive income for years ended December 31, 2000, 1999, and 1998 has been reflected in the Consolidated Statements of Stockholders' Equity.
New Accounting Standards
We will adopt Statement of Financial Accounting Standards 133, or FAS 133, "Accounting for Derivative Instruments and Hedging Activities," on January 1, 2001. FAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires companies to recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting under FAS 133. Based on our derivative positions at December 31, 2000, we estimate that upon adoption, we will record a charge from the cumulative effect of a change in accounting principle of approximately $9.0 million being recognized in the consolidated statement of operations and an increase of approximately $8.0 million in other comprehensive income.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using a weighted-average approach which approximates the first-in first-out method. Inventories in 2000 decreased from 1999 due primarily to the Redemption and push-down accounting offset by increases in inventory production. As a result of push-down accounting, we recorded $186.2 million related to the write up of inventory, of which $92.8 million of expense was recognized through the sale of inventory in 2000 and $93.4 million of expense was recognized through the sale of inventory in 1999. Inventories at December 31, 2000 and 1999 are summarized below (in thousands):
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Reclassifications
Certain reclassifications of prior year amounts have been made to conform with the current year presentation.
Roche accounted for the Redemption as a purchase of a business. As a result, we were required to push down the effect of the Redemption and Roche's 1990 through 1997 purchases of our Common and Special Common Stock into our consolidated financial statements at the date of the Redemption, which results in our New Basis presentation. Under this method of accounting, our assets and liabilities, including other intangible assets, were recorded at their fair values not to exceed the aggregate purchase price plus Roche's transaction costs at June 30, 1999. In 1990 and 1991 through 1997 Roche purchased 60% and 5%, respectively, of the outstanding stock of Genentech. In June 1999, we redeemed all of our Special Common Stock held by stockholders other than Roche resulting in Roche owning 100% of our Common Stock. The push-down effect of Roche's aggregate purchase price and the Redemption price in our consolidated balance sheet as of June 30, 1999 was allocated based on Roche's ownership percentages as if the purchases occurred at the original purchase dates for the 1990 and 1991 through 1997 purchases, and at June 30, 1999 for the Redemption. Management of Genentech determined the values of tangible and intangible assets, including in-process research and development, or IPR&D, used in allocating the purchase prices. The aggregate purchase prices for the acquisition of all of Genentech's outstanding shares, including Roche's estimated transaction costs of $10.0 million, was $6,604.9 million, consisting of approximately $2,843.5 million for the 1990 and 1991 through 1997 purchases and approximately $3,761.4 million for the Redemption.
The following table shows details of the excess of purchase price over net book value (in millions):
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The following table shows the allocation of the excess of the purchase price over net book value (in millions):
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Push-Down Accounting Adjustments
The following is a description of accounting adjustments and related useful lives that reflect pushdown accounting in our financial statements. These adjustments were based on management's estimates of the value of the tangible and intangible assets acquired
- We recorded charges of $1,207.7 million in 1999. These charges primarily included: a non-cash charge of $752.5 million for IPR&D; $284.5 million of compensation expense related to early cash settlement of certain employee stock options; and an aggregate of approximately $160.1 million of non-cash compensation expense in connection with the modification and remeasurement, for accounting purposes, of continuing employee stock options, which represents the difference between each applicable option exercise price and the redemption price of the Special Common Stock. (You should read the "Capital Stock" note below for further information on these charges.)
- We recorded an income tax benefit of $177.8 million related to the above early cash settlement and non-cash compensation related to certain employee stock options. The income tax benefit reduced the current tax payable in other accrued liabilities by $56.9 million and reduced long-term deferred income taxes by $120.9 million.
- The estimated useful life of the inventory adjustment to fair value resulting from the Redemption was approximately one year based upon the expected time to sell inventories on hand at June 30, 1999. As the fair-valued inventory is sold, the related write up amount is charged to cost of sales. In 2000, we recognized $92.8 million of expense related to the inventory write up adjustment. In 1999, we recognized $93.4 million of expense related to the inventory write up adjustment. All inventory written up as a result of the Redemption has been sold as of December 31, 2000. The entire inventory adjustment related to Roche's 1990 through 1997 purchases was reflected as an adjustment to additional paid-in capital.
- An adjustment was made to record the fair value of land as a result of the Redemption. There were no such adjustments for the purchase periods from 1990 through 1997.
- Recorded $1,091.2 million of goodwill, which reflects Roche's 1990 through 1997 purchases, net of related accumulated amortization of $613.6 million through June 30, 1999. The accumulated amortization was recorded as an adjustment to additional paid-in capital at June 30, 1999. Included in goodwill was $456.8 million related to the recording of deferred tax liabilities. Deferred taxes were recorded for the adjustment to fair value for other intangible assets and inventories as a result of Roche's 1990 through 1997 purchases. The deferred tax liability was calculated based on a marginal tax rate of 40%. The goodwill related to the 1990 through 1997 purchases was amortized over 15 years.
- $1,208.1 million of goodwill was recorded as a result of the Redemption. Included in goodwill was $629.2 million related to the recording of deferred tax liabilities. Deferred taxes were recorded for the adjustment to fair value for other intangible assets, inventories and land. The deferred tax liability was calculated based on a marginal tax rate of 40% and was allocated between short- and long-term classifications to match the asset classifications. The goodwill related to the Redemption is being amortized over 15 years.
- We recorded a write up of our valuation allowance related to marketable securities of $20.3 million related to Roche's percentage ownership purchased, at the time of Redemption, of the net unrealized gains on investments.
- In 2000, we recorded amortization expense of $153.3 million related to goodwill and $211.0 million related to other intangible assets. In 1999, we recorded amortization expense of $76.6 million related to goodwill and $113.8 million related to other intangible assets.
- The existing deferred tax asset valuation allowance of $62.8 million related to the tax benefits of stock option deductions which have been realized and credited to paid-in capital as a result of establishing deferred tax liabilities under pushdown accounting was eliminated at June 30, 1999.
- The redemption of our Special Common Stock and the issuance of new shares of Common Stock to Roche resulted in substantially the same number of total shares outstanding as prior to the Redemption.
- The balances of our Common Stock and additional paid-in capital at the Redemption include Roche's cost of acquiring our shares in 1990 and the cost of subsequent equity purchases, net of the amortization of the goodwill, IPR&D and other prior period charges related to the 1990 through 1997 purchases. The excess of purchase price over net book value of $2,276.9 million for 1990 through 1997 and $2,925.0 million in 1999, and $160.1 million for the remeasurement of continuing employee stock options at the remeasurement date was recorded in additional paid-in capital.
In addition, the following adjustments were made to additional paid-in capital for the 1990 through 1997 purchase period (in millions):
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- Our retained earnings prior to the Redemption was not carried forward. This resulted in an adjustment of $780.7 million to increase additional paid-in capital and eliminate the retained earnings balance immediately prior to the Redemption.
- The tax provision benefit of $203.1 million for 1999 consists of tax expense of $114.8 million on pretax income excluding the income and deductions attributable to pushdown accounting and legal settlements, and tax benefits of $317.9 million for 1999 related to the income and deductions attributable to pushdown accounting and legal settlements.
- Recorded $1,040.0 million of other intangible assets, which reflects Roche's 1990 through 1997 purchases, net of related accumulated amortization of $911.5 million of those assets through June 30, 1999. The accumulated amortization was recorded as an adjustment to additional paid-in capital at June 30, 1999. The components of other intangible assets related to these purchases and their estimated lives are as follows (in millions):
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- $1,370.5 million of other intangible assets was recorded as a result of the Redemption. The components of other intangible assets related to the Redemption and their estimated lives are as follows (in millions):
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- 500.5 million and $752.5 million of IPR&D was recorded as a result of Roche's 1990 through 1997 purchases and the Redemption, respectively. At the date of each purchase, Genentech concluded that technological feasibility of the acquired in-process technology was not established and that the in-process technology had no future alternative uses. The amount related to the 1990 through 1997 purchases was recorded as an adjustment to additional paid-in capital at June 30, 1999. The amount related to the Redemption was charged to operations at June 30, 1999.
The amounts of IPR&D were determined based on an analysis using the risk-adjusted cash flows expected to be generated by the products that result from the in-process projects. The analysis included forecasting future cash flows that were expected to result from the progress made on each of the in-process projects prior to the purchase dates. These cash flows were estimated by first forecasting, on a product-by-product basis, total revenues expected from sales of the first generation of each in-process product. A portion of the gross in-process product revenues was then removed to account for the contribution provided by any core technology, which was considered to benefit the in-process products. The net in-process revenue was then multiplied by the project's estimated percentage of completion as of the purchase dates to determine a forecast of net IPR&D revenues attributable to projects completed prior to the purchase dates. Appropriate operating expenses, cash flow adjustments and contributory asset returns were deducted from the forecast to establish a forecast of net returns on the completed portion of the in-process technology. Finally, these net returns were discounted to a present value at discount rates that incorporate both the weighted-average cost of capital (relative to the biotech industry and us) as well as the product-specific risk associated with the purchased IPR&D products. The product specific risk factors included each phase of development, type of molecule under development, likelihood of regulatory approval, manufacturing process capability, scientific rationale, pre-clinical safety and efficacy data, target product profile and development plan. The discount rates ranged from 16% to 19% for the 1999 valuation and 20% to 28% for the 1990 purchase valuation, all of which represent a significant risk premium to our weighted-average cost of capital.
The forecast data employed in the analysis was based on internal product level forecast information maintained by our management in the ordinary course of managing the business. The inputs used by us in analyzing IPR&D were based on assumptions, which we believed to be reasonable but which are inherently uncertain and unpredictable. These assumptions may be incomplete or inaccurate, and no assurance can be given that unanticipated events and circumstances will not occur.
The following table represents unaudited consolidated pro forma information as if the June 30, 1999 redemption of our Special Common Stock occurred at January 1, 1999, and January 1, 1998. The pro forma information also gives effect to the 1990 through 1997 purchases of our Common Stock and Special Common Stock by Roche. The pro forma results for each of the years ended December 31, 1999 and 1998 include amortization of goodwill ($153.3 million) and other intangible assets ($227.6 million), and compensation expense ($13.7 million) related to certain stock option arrangements. In addition, the 1998 and 1999 pro forma results reflect the sale of inventories adjusted to fair value at the beginning of each period (such adjustments totaling $186.2 million for the periods 1998 and 1999) related to the allocation to our financial statements of Roche's purchase prices and our redemption of the Special Common Stock. The pro forma results also reflect the book tax benefits related to each of these pretax pro forma adjustments other than goodwill (which will have no book tax benefits) at a 40% marginal rate. The pro forma results exclude $1,207.7 million of non-recurring Redemption-related charges, including charges for IPR&D, as these items are non-recurring. (Refer to above for further information on these charges and adjustment.) The following table is in thousands, except per share amounts.
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Our operations are treated as one operating segment as we only report profit and loss information on an aggregate basis to our chief operating decision-makers. Information about our product sales, major customers and material foreign source of revenues is as follows (in millions):
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Hoffmann-La Roche contributed approximately 7% of our total revenues in 2000, 7% in 1999 and 11% in 1998. See the "Related Party Transactions" note below for further information. Three other major customers, Caremark, Inc., Bergen Brunswig and Cardinal Distribution, Inc., each contributed 10% or more of our total revenues in at least one of the last three years. Although Caremark, a national distributor, did not contribute over 10% of our total revenues in 2000 and 1999, it accounted for 10% in 1998 of our total revenues. Caremark distributes primarily our growth hormone products through its extensive branch network and is then reimbursed through a variety of sources. Bergen Brunswig, a national wholesale distributor of all of our products, contributed 13% in 2000, 14% in 1999 and 11% in 1998 of our total revenues. Cardinal Distribution, a national wholesaler distributor of all our products, contributed 15% in 2000, 13% in 1999 and 11% in 1998 of our total revenues.
Net foreign revenues were $164.2 million in 2000, $155.0 million in 1999 and $199.6 million in 1998. Material foreign revenues by country were as follows (in millions):
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We currently sell primarily to distributors and health care companies throughout the U.S., perform ongoing credit evaluations of our customers' financial condition and extend credit generally without collateral. In 2000, 1999 and 1998, we did not record any material additions to, or losses against, our provision for doubtful accounts.
To gain access to potential new products and technologies and to utilize other companies to help develop our potential new products, we establish strategic alliances with various companies. These strategic alliances include the acquisition of marketable and nonmarketable equity investments and convertible debt of companies developing technologies that fall outside our research focus and include companies having the potential to generate new products through technology exchanges and investments. Potential future payments may be due to certain collaborative partners achieving certain benchmarks as defined in the collaborative agreements. We also entered into product-specific collaborations to acquire development and marketing rights for products.
In December 1997, we entered into a collaboration agreement with Alteon Inc. to develop and market pimagedine, an advanced glycosylation end-product formation inhibitor to treat kidney disease in diabetic patients, and invested $37.5 million in Alteon stock. In 1998, as a result of the decline in Alteon's stock value and the unsuccessful clinical trials with pimagedine, we took an other than temporary charge of $24.2 million of our investment in Alteon. In 1999, due to the continued decline of Alteon's stock value and unsuccessful negotiations with Alteon, we took another charge of our remaining $10.8 million investment in Alteon.
The income tax provision consists of the following amounts (in thousands):
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Tax benefits of $226.1 million in 2000, $83.0 million in 1999 and $17.3 million in 1998 related to employee stock options and stock purchase plans were credited to stockholders' equity, and reduced the amount of taxes currently payable and deferred income taxes.
A reconciliation between our income tax provision and the U.S. statutory rate follows (in thousands):
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The components of deferred taxes consist of the following at December 31 (in thousands):
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Total tax credit carryforwards of $183.7 million expire in the years 2006 through 2017, except for $81.0 million of R&D credits and $43.0 million of alternative minimum tax credits which have no expiration date.
Net operating loss carryforwards of $456.4 million expire in the years 2017 through 2020.
The following is a reconciliation of the numerator and denominators of the basic and diluted earnings (loss) per share computations for the years ended December 31, 2000, 1999, and 1998 (in thousands):
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Options to purchase 40,944,862 shares of our Common Stock ranging from $12.53 to $95.66 per share were outstanding during 2000, but were not included in the computation of diluted earnings per share. Options to purchase 41,551,604 shares of our Common Stock ranging from $12.03 to $42.94 per share were outstanding during 1999, but were not included in the computation of diluted earnings per share. Options to purchase 714,300 shares of our Special Common Stock ranging from $17.63 to $17.79 per share and 414,800 shares of Special Common Stock at $14.75 per share were outstanding during 1998, but were not included in the computation of diluted earnings per share. The above option exercise prices were greater than the average market prices of the Common Stock and Special Common Stock and therefore, the effect would be anti-dilutive. See "Capital Stock" note for information on option expiration dates.
During 1998, we had convertible subordinated debentures which were convertible to 4,053,788 of Special Common Stock, but were not included in the computation of diluted earnings per share because they were anti-dilutive. As a result of the Redemption, the convertible subordinated debentures are no longer convertible to Special Common Stock. For additional information, you should read the "Long-term Debt" note below.
Securities classified as trading and available-for-sale at December 31, 2000 and 1999 are summarized below. Estimated fair value is based on quoted market prices for these or similar investments.
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