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Letter to Stockholders
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"We enter 2005 with strong performance against our 5X5 goals and a solid foundation in place to translate our Horizon 2010 vision into long-term growth." |
| Arthur D. Levinson, Ph.D., Chairman and Chief Executive Officer |
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2004 was another eventful year for Genentech, with many successes across the business. We launched two breakthrough oncology products, Avastin™ (bevacizumab) and Tarceva™ (erlotinib), saw promising results in numerous clinical trials, and added more than a dozen new projects to our development pipeline. We also delivered substantial growth, worked to increase our manufacturing capacity, and continued to receive recognition as a great place to work over the past year. We enter 2005, the final year of our 5X5 plan, with strong performance against our 5X5 goals and a solid foundation in place to translate our Horizon 2010 vision into long-term growth.
We had strong top- and bottom-line growth in 2004, with 43 percent growth in product sales, 41 percent growth in non-GAAP(1) net income, and 38 percent growth in non-GAAP(1) earnings per share (EPS) over 2003. Our GAAP net income for 2004 increased 40 percent, and our GAAP EPS for 2004 increased 38 percent. Driven by four new product launches over a 16-month period, our total operating revenues increased to $4.6 billion, more than doubling since 2001. Our financial position also remains strong, with approximately $2.8 billion in unrestricted cash and investments.
Research and development activities in 2004 resulted in the addition of 13 projects to the pipeline, six of which are new molecular entities: anti-NGF (nerve growth factor) for acute and chronic pain, BR3-Fc for rheumatoid arthritis, topical Hedgehog antagonist for basal cell carcinoma, topical VEGF (vascular endothelial growth factor) for diabetic foot ulcers, and two other undisclosed molecular entities. We also signed 15 significant business development deals and initiated work on multiple new indications for existing products. Our development programs focusing on combination therapies, such as studying Avastin plus Tarceva in Phase II trials for renal cell and non-small cell lung cancer, may also potentially bring important new targeted therapies to patients with unmet medical needs.
We were pleased to announce in late 2004 a clinically and statistically significant improvement in survival in a trial testing Avastin in patients with second-line colorectal cancer in combination with a commonly used chemotherapy regimen. In the immunology arena, we announced positive Rituxan® (Rituximab) clinical trial results in patients with moderate-to-severe rheumatoid arthritis (RA) who have an inadequate response to disease-modifying anti-rheumatic drugs (DMARD) therapy. The study demonstrates Rituxan's potential as a therapy for RA and, on a broader scale, furthers our understanding of the role that B-cells may play in treating patients with a variety of autoimmune disorders.
In addition to these two trials, we continued our late-stage development programs, with Phase III trials in Avastin for a number of cancers, Rituxan for several autoimmune disorders, Herceptin® (Trastuzumab) in the adjuvant breast cancer setting and Lucentis™ (ranibizumab) for the wet form of age-related macular degeneration. In terms of our overall pipeline as we move into 2005, we have an extensive oncology program, with ongoing clinical programs in eight of the top 10 fatal cancers in the United States and a growing focus on immunology and vascular medicine. To sustain growth going forward, we are gearing up our research and development efforts to strengthen the pipeline in all stages, with the goal of having multiple projects in early-stage development and a steady flow of projects advancing into later stages of the pipeline.
Our commercial successes in 2004 include total net product sales of $3.7 billion, with strong performance in both BioOncology and Specialty BioTherapeutics. Relating to our new products, the Avastin launch was the most successful of any oncology therapeutic to date in the United States. The $545 million in total U.S. product sales for Avastin's first 10 months on the market exceeded the first full-year revenues of any other product in this therapeutic category by approximately $175 million. Our collaborator Roche also received approval for Avastin in Israel and Switzerland in 2004 and in the European Union in January 2005.
Tarceva was approved on November 18, 2004 for the treatment of patients with locally advanced or metastatic non-small cell lung cancer (NSCLC) after failure of at least one prior chemotherapy regimen. It is the only drug in the epidermal growth factor receptor class to demonstrate an increase in survival in advanced NSCLC patients in a Phase III clinical trial. With fewer than 30 selling days in 2004, Tarceva generated $13 million in total net product sales. Together with our collaborator OSI Pharmaceuticals, Inc., we are pleased with the launch of Tarceva and the increasing acceptance of this important new product.
Rituxan recorded another strong year, with 2004 total net sales growing 15 percent over 2003 to $1.7 billion, as did Herceptin, with 2004 total net sales growing 14 percent over 2003 to $483 million. The Specialty BioTherapeutics business also performed very well in 2004, with net sales growing 39 percent over 2003. Xolair® (Omalizumab) sales continued to grow and reached $189 million in 2004 compared to $25 million in 2003 following its approval on June 20, 2003. RAPTIVA® (efalizumab) sales were $56 million compared to $1 million in 2003 following its approval on October 27, 2003. Our legacy products — the Nutropin® [somatropin (rDNA origin) for injection] family, our cardiovascular products, and Pulmozyme® (dornase alfa, recombinant) Inhalation Solution — also continued to deliver growth. In 2004, the combined sales of these products reached $731 million, an increase of 8 percent over 2003. In early 2005, we also received FDA approval for Cathflo® Activase® (Alteplase) for the treatment of catheter occlusions in pediatric patients.
As you may know, we updated the Avastin label in January 2005 to include information regarding an increased risk (4.4 percent versus 1.9 percent) of arterial thromboembolic events associated with the use of Avastin in combination with chemotherapy. The potential risk of these events should be viewed in context with Avastin's ability to improve overall survival in patients with metastatic colorectal cancer, a fatal disease. Our pivotal trial data with Avastin has shown a net improvement in survival with this subgroup.
On the product operations front, we continued our efforts to increase our bulk capacity to keep up with our growing product demand, and we are on track with our projects to expand capacity at our sites in Vacaville, California and Porriño, Spain, as well as at our future contract sites with the Lonza Group Ltd. and Wyeth Pharmaceuticals. In 2004, we received FDA approval to manufacture Avastin bulk drug substance at our Vacaville facility and also broke ground at our new facility in Vacaville, which, when combined with our existing facility, will be the largest biotechnology manufacturing facility in the world. In Porriño, we successfully initiated production of Avastin bulk drug substance for use in clinical trials. We subsequently received approval from the Spanish regulatory agency to export material to the United States, and in December 2004 we filed an Investigational New Drug application so that we can begin using the Porriño material early in 2005. Finally, after experiencing some equipment problems in the second quarter in our South San Francisco filling facility that led to several failed lots and facility downtime, we corrected those issues and are working to reduce future supply risk by building our inventories and licensing additional filling sites as shorter-term and longer-term back-ups for our key products.
Our intellectual property position remains strong, with more than 2,000 pending patent applications directed to full-length nucleic acids, full-length polypeptides, antibodies and related compositions of matter. We currently hold more than 5,500 patents worldwide and have close to 6,000 patent applications pending worldwide.
Among the challenges of conducting groundbreaking research in biotechnology are the various legal proceedings that can arise, including patent infringement litigation, licensing and contract disputes, and other matters. We were pleased that in April 2004 the U.S. Court of Appeals unanimously affirmed the 2002 judgment of a U.S. District Court that found in favor of Genentech in the Chiron patent litigation, and the U.S. Supreme Court has denied Chiron's petition to review the matter. We also settled all litigation with Novartis AG and Tanox, Inc. related to the development and commercialization of certain anti-IgE antibodies, including Xolair and TNX-901. In October 2004, we were disappointed that the California Court of Appeal upheld a 2002 judgment of the Los Angeles County Superior Court for the City of Hope, and we subsequently filed a petition for review with the California Supreme Court. The California Supreme Court only reviews a very small percentage of those cases which it is asked to review, but on February 2, 2005, the Court granted review of the case.
In October 2004, the company received a subpoena from the U.S. Department of Justice requesting documents related to the promotion of Rituxan, and we are cooperating with the ongoing investigation. We are committed to ethical and legal promotional practices and have strict standards in this regard.
I would like to highlight a few areas of interest in the political/economic arena, including Medicare reimbursement, follow-on biologics, clinical trial transparency and the current FDA safety debate. The 2005 Physician Fee Schedule and the Hospital Outpatient Prospective Payment System Final Rules announced on November 3, 2004 were in line with our expectations, as were the key reimbursement rate changes published on December 16, 2004. We will be monitoring the changes closely, and we continue to anticipate minimal additional impact to our products in 2005.
Regarding follow-on biologics, patient safety and drug efficacy remain serious concerns. We advocate further investigation and understanding of these issues and believe they need to be appropriately addressed before moving forward. We filed a Citizen Petition with the FDA in April 2004 outlining the scientific and legal issues raised in the development of an approval process for follow-on biologics, and we urged the FDA to initiate an inclusive public process to discuss these issues before moving forward. As a result, the FDA held a broad stakeholder meeting in September 2004 and a more in-depth public discussion with the Drug Information Association (DIA) in February 2005. The DIA meeting focused on the unique challenges of biotech manufacturing, the potential safety risks posed by follow-on biologics and the need to proceed cautiously with developing public policy on this issue.
Genentech places a high priority on ensuring that clinical trial information is available to physicians and other interested parties. We currently submit protocol information to the Clinical Trial Data Bank (CTDB) for trials in serious and life-threatening conditions, according to FDA guidance. To provide more transparency and in line with the proposed requirement by the International Committee of Medical Journal Editors, we also plan to register protocol information for all of our sponsored Phase II, III, and IV trials with the CTDB. In addition, we are planning to post clinical trial results for our marketed drugs to the CTDB and are currently finalizing our internal guidelines for this process.
Finally, we believe that we are well placed in the current FDA safety debate because of our focus on innovative products that address unmet medical needs, our emphasis on the development of diagnostics to determine candidates for our products when appropriate, and our efforts in product safety monitoring, including the use of patient post-marketing registries.
Genentech's success is predicated on our ability to recruit and retain highly qualified people in all areas of the company. In 2004, we recruited and hired more than 1,400 people, bringing the total number of employees to more than 7,600, an increase of approximately 23 percent over 2003. Everyone worked hard across the company to ensure that all of our new employees were successfully oriented and integrated into our unique culture, which is essential to our ongoing success. In 2004, Genentech continued to receive external recognition as an employer of choice. The company was named by Science magazine as "the top employer and most admired company in the biotechnology and the pharmaceutical industries" for the third year in a row; by The Scientist magazine as one of the "Best Places to Work in Industry"; by Working Mother magazine as one of the "100 Best Companies for Working Mothers"; and by Essence magazine as a "Great Place to Work" for the second year in a row. In January 2005, FORTUNE magazine also included Genentech on its 2005 list of the "100 Best Companies to Work For in America" for the seventh year in a row.
We announced in late 2004 that our chief financial officer (CFO), Lou Lavigne, has decided to retire from Genentech in March 2005 after 22 years of service. Since Lou took over as CFO in 1988, Genentech's annual revenues have grown from $334 million to over $4.5 billion in 2004. His tenure signifies an outstanding record of strategic and financial leadership. As previously announced, David Ebersman will replace Lou as CFO and has been working with him closely to ensure a smooth transition.
As we continue to grow our business, we remain strongly committed to playing a positive role in our communities. In 2004, we donated drugs with a total market value of $75 million to more than 6,200 uninsured or underinsured patients as part of our Access to Care Foundation. We also provided nearly $9 million in financial support to a variety of nonprofit organizations. Through philanthropic support, as well as through Genentech employee involvement and expertise, we worked to help improve health science education and strengthen many other educational, civic and social service community-based groups and institutions located in the South San Francisco, Vacaville and Bay Area communities where we operate and live. Finally, given the unprecedented magnitude of the tsunami disaster in Asia and the global call for support, Genentech made a corporate donation of $500,000 to the American Red Cross International Response Fund in January 2005.
As we head into the final stretch of our 5X5 plan, we expect to exceed our most important goal of average annual non-GAAP EPS growth of 25 percent. Our goal of 25 percent non-GAAP net income as a percent of total operating revenues, however, will probably not be met due to our profit-sharing arrangement for Rituxan, though the success of Rituxan is a major contributor to our overall EPS growth. We are well positioned to exceed our goal of five significant products/indications in late-stage development and have already exceeded our goal of five new products or indications approved through 2005. We are uncertain at this time as to whether we will meet our goal of $500 million in new revenues from alliances and/or acquisitions, but we have entered into more than 50 significant agreements since 1999 which position us well for future growth. Building on the success of our 5X5 plan, we have outlined our goals for Horizon 2010 and are directing our activities towards fulfilling this vision (see Horizon 2010).
In closing, I would like to express thanks to the thousands of employees and stockholders who have helped us evolve into a premier biotech company over the past 29 years and who continue to help us revolutionize medicine with breakthrough biotherapeutics. I also want to pay tribute to the more than four million patients, as well as their families and physicians, who have put their trust in our innovative therapies. They motivate us to see things differently in the lab and in the boardroom, and they inspire us daily to find new ways to extend and enhance the lives of people with serious and life-threatening diseases.
Arthur D. Levinson, Ph.D.
Chairman and Chief Executive Officer
March 2005
(1) Genentech's non-GAAP earnings per share and non-GAAP net income exclude recurring charges related to the 1999 redemption of our stock by Roche, litigation-related special items, the cumulative effect of the change in an accounting principle in 2003, and all related tax effects. See pages 16—17 for the reconciliation to our GAAP numbers. All share and per share amounts reflect the May 2004 two-for-one split of Genentech common stock.
The statements on the Letter to Stockholders, 5X5 Report Card and Horizon 2010 pages of this online Annual Report relating to the expected number of projects in our development pipeline, our ability to bring potential new targeted therapies to patients, including Rituxan as a therapy for rheumatoid arthritis, the impact of Medicare reimbursement changes on our product sales, our long-term growth, including growth in non-GAAP EPS, and achievement of our Horizon 2010 goals, are forward-looking and actual results could differ materially. Among other things, the number of projects in our development pipeline, including our Horizon 2010 goal of adding programs into research and clinical development, and developing potential new therapies could be affected by a number of factors, including safety, efficacy or manufacturing issues, FDA actions or delays or failure to receive FDA approval; the impact of Medicare reimbursement on our product sales could be affected by changes in physician prescribing conduct; our Horizon 2010 goals of becoming number one in oncology sales and building a leading immunology franchise could be affected by all of the foregoing and by competition, pricing, the ability to supply product, product withdrawals, new product approvals and launches and achieving sales revenue consistent with internal forecasts; and long-term growth, including our Horizon 2010 goal of targeted EPS growth, could be affected by all of the foregoing and a number of other factors, including unanticipated expenses such as litigation or legal settlement expenses or equity securities writedowns, costs of sales, R&D expenses, fluctuations in contract revenues and royalties, and fluctuations in tax and interest rates. Genentech disclaims any obligation, and does not undertake to, update or revise any forward-looking statements in this Annual Report.