Letter to Stockholders
2005 was an outstanding year for Genentech. Highlights included eight consecutive positive Phase III trial results, record product sales and earnings, a new manufacturing facility acquisition, three new molecular entities moved into clinical development, five submissions for new approvals filed with the U.S. Food and Drug Administration (FDA), and three FDA line-extension approvals. At the end of 2005, we completed our 5X5 program, a set of strategic goals we introduced in 1999. We are pleased with our performance against these ambitious goals, and the results can be viewed on page 8 of this report. Over the course of the 5X5 program, Genentech has undergone unprecedented growth and transformation:
In looking at the performance of the company over this period, we view our growth and success as the result of a commitment to four guiding principles: strong science, long-term planning, excellent execution, and the importance of our people and culture. Our goal at Genentech is to discover and develop drugs that dramatically improve the treatment options for patients with life-threatening and serious diseases. We are not looking for an incremental change in existing therapies; we aim to develop genuine breakthroughs. To accomplish this objective, we focus on basic scientific research that is rooted in our ever-increasing understanding of the biological and genetic basis of disease. We believe that rigorous basic research is the key for identifying breakthrough drug candidates for development in the clinic, and we have a strong track record of making sound research and development investments. We base our decisions on science and plan to continue to do so, as that approach has allowed us to consistently deliver novel therapies to the market. We also focus the business on the future, and we avoid sacrificing long-term growth for short-term gains. We will continue to manage the business with an eye towards the long term. We know that we will best satisfy our investors if they enjoy returns over many years and not just for a few months or a few years. Excellent execution is critical to the delivery of long-term growth, so we emphasize its importance throughout the company. We set ambitious goals for ourselves and recognize that to attain them requires exceptional performance in every area of the business. Finally, we believe our people are our most important asset, and we spend a lot of time thinking about how best to recruit and retain talented employees as well as how to preserve our distinctive culture so that Genentech remains a great place to work. In hiring new employees, we continually stress the importance of finding the right person for each position. As a company, we take scientific and financial risk to be an innovator and develop first-in-class therapies, and we look for people who bring a rigorous and entrepreneurial spirit to their jobs. As of December 31, 2005, we had more than 9,500 employees, an increase of approximately 25 percent over 2004, and we anticipate approximately 15 percent growth in 2006. The significant increase in new employees is challenging to a company whose culture has been so critical to its success. We are dedicated to protecting and nurturing our unique culture, which is characterized by a commitment to science, a dedication to patients, and a respect for the individual and individual initiative. We were honored when, in January 2006, FORTUNE ranked Genentech number one on its list of the "100 Best Companies to Work for" in America. We have earned a place on the FORTUNE list for eight consecutive years. We were also recognized as a top employer by several other publications in 2005: Science magazine named Genentech "the top employer and most admired company in the biotechnology and pharmaceutical industries" for the fourth year in a row; Working Mother magazine named Genentech one of the "100 Best Companies for Working Mothers" for the 13th time; and ESSENCE magazine recognized Genentech as one of 17 "Great Places to Work" for women of color for the third year in a row. We are very happy about all of this recognition, and we will continue to elicit feedback from employees and ask how we can do better, especially as we grow and integrate new employees. In addition to remaining a great place to work, we are committed to ensuring patient access to our products and to playing a positive role in our communities. In 2005, we donated drugs with a total market value of approximately $200 million to more than 18,000 uninsured patients as part of our Access to Care Foundation. To further support patient access to therapies for various diseases, we donated more than $21 million to various independent public charities that offer co-pay assistance to eligible patients. In addition, we provided approximately $15 million in financial support to a variety of nonprofit organizations in our local communities. Through philanthropic support, as well as through Genentech employee volunteerism, we worked to help improve health science education and strengthen many other educational, civic and community-based groups located in South San Francisco, Vacaville, and Oceanside, California, as well as Porriño, Spain. Finally, given the magnitude of Hurricane Katrina, Genentech and the Genentech Foundation donated in excess of $2.5 million toward relief and long-term recovery efforts. In terms of our financial performance in 2005, we continued to deliver strong top- and bottom-line growth over 2004, including: a 44 percent increase in total operating revenues, a 55 percent increase in non-GAAP² net income, and a 54 percent increase in non-GAAP² earnings per share compared to 2004. We also set record sales across our product portfolio in 2005, with all of our products showing an increase in sales and total U.S. product sales growing to more than $5 billion. In particular, we are very pleased with the performance of Avastin® (bevacizumab) — sales topped $1 billion in 2005 — and with its future potential. On the research and development front, in 2005 we announced positive results from eight out of eight Phase III clinical trials, many of which are the result of research efforts that originated internally some years ago. As you probably know, it is typically the case in drug development that about half of Phase III trials are successful, so this performance is quite remarkable. Most important, this string of positive results may provide potential new treatment options for several significant unmet medical needs, including certain forms of breast cancer, lung cancer, age-related macular degeneration, and rheumatoid arthritis. In 2005 and early 2006, we also received four FDA approvals extending our labels for Cathflo® Activase® (Alteplase), Nutropin® [somatropin (rDNA origin) for injection]/Nutropin AQ® [somatropin (rDNA origin) injection], Tarceva® (erlotinib) and Rituxan® (Rituximab). One highlight of 2005 was the joint analysis from two Phase III trials that showed that adding Herceptin® (Trastuzumab) to chemotherapy reduced the risk of breast cancer recurrence by 52 percent in HER2-positive early-stage breast cancer patients. The results of the joint interim analysis provide additional hope for women with HER2-positive breast cancer. Running these kinds of multi-year studies is resource-intensive, but these trials showed that patient benefit may occur when we test a therapy that has worked in the metastatic setting on patients in the early-stage setting. We are very excited about the potential clinical benefit demonstrated by these trials, and we submitted the supplemental Biologics License Application (sBLA) for Herceptin in the adjuvant treatment of operable breast cancer in February 2006. We were also very pleased with the Phase III data for Lucentis™ (ranibizumab) in patients with wet age-related macular degeneration that showed that Lucentis improved vision in the majority of patients. We submitted a BLA for Lucentis in December 2005. In addition to Lucentis and the potential new adjuvant indication for Herceptin, we are expecting to submit sBLAs for additional indications for Rituxan, Avastin and Herceptin in 2006. We believe these potential approvals and the remaining projects in our late-stage pipeline position us well for short- and medium-term growth. In the intellectual property arena, we are committed to protecting the significant investments we make in novel research and development technologies, and our efforts continue to serve us well. Our patents relate to all aspects of our technologies, including products and product candidates, therapeutic targets, methods of making products and methods of treatment. We currently have approximately 5,500 non-expired patents worldwide and approximately the same number of patent applications pending. Our '415 Cabilly patent, which covers an important technology related to antibodies, will be undergoing re-examination by the United States Patent and Trademark Office this year. We are confident in the strength of our intellectual property position and look forward to the outcome of the Cabilly re-examinations. While we are very pleased with our progress as a company in 2005, we remain focused on the future to ensure we have a strong plan in place to take us through 2006 and beyond. We are aware of the many challenges that we face as a business, including: addressing product pricing and reimbursement concerns; enhancing our early-stage pipeline; meeting manufacturing capacity demands; successfully scaling our culture; and addressing the high expectations that are being set for us in terms of both research and development and our financial performance. While we are mindful of these challenges, we are looking forward to the future with a great sense of the possibilities that still exist in biotechnology. We believe the scientific potential today is more exciting than it has ever been, and that if we continue to invest wisely and appropriately in research and development, we will have the opportunity to continue to deliver novel targeted therapies for significant unmet medical needs. One of our most important business priorities is to strengthen the early-stage pipeline by adding and advancing innovative new molecules. We believe that we have a rigorous and effective approach to selecting projects for development, and we are committed to maintaining our high standards. In 2005, the development organization entered three new molecular entities into the development pipeline and initiated work on multiple new indications for our existing products. We currently have 11 new molecular entities in the early development pipeline and approximately 10 additional projects in late-stage developmental research with the potential to enter clinical trials over the next several years. Another important business priority is to continue to increase manufacturing capacity to meet our growing product demand, especially in light of all of our recent clinical successes. Our acquisition of a biologics plant in Oceanside, California in June 2005 was an important piece of our overall effort to increase capacity. Other milestones in 2005 included receiving commercial licensure for 20,000 liters of capacity at our Porriño, Spain plant to manufacture Avastin; receiving licensure for Lonza to manufacture Rituxan at its Portsmouth, New Hampshire plant; filing for approval to manufacture Xolair® (Omalizumab) at Novartis' facility in Huningue, France (the facility received approval in January 2006); and managing successful production campaigns across our existing facilities. While we are pleased with our progress in 2005 and early 2006, manufacturing remains a key challenge for the business over the next few years. In order to maintain adequate supply, we will need to continue to implement all our priority capacity expansion projects and achieve licensure on schedule; successfully adhere to an aggressive production plan that will utilize nearly 100 percent of our capacity in the near term; and maintain a state of regulatory compliance at all production sites. We are focused on these efforts. In April 2006, we will celebrate our 30th anniversary as a company. Herb Boyer and Bob Swanson founded the company three decades ago with little more than some exciting new science and a vision of how this science could change the course of medicine. We have realized much of their original vision in the last 30 years, but the science is still evolving rapidly and there are many more insights yet to be discovered. We remain inspired by our farsighted, courageous founders and dedicated to their mission of transforming the science of biotechnology into medicines that help patients suffering from serious illnesses. I thank all the employees, stockholders, business collaborators, community members and, most of all, patients and their families who have believed in Genentech and helped build it into the company that it is today. We will do everything in our power to continue to deliver on the promise of biotechnology for the next 30 years and beyond.
Arthur D. Levinson, Ph.D.
¹ Non-GAAP amounts exclude the after-tax effects of recurring charges related to the June 30, 1999 redemption of our Special Common Stock by Roche Holdings, Inc. and litigation-related special items, and the cumulative effect of accounting changes. The compound annual GAAP earnings per share growth rate was 31 percent from 1999 through 2005. (Given negative GAAP earnings in 1999 and 2000, a directly comparable calculation of the average annual growth rate for 1999 through 2005 is not available and compound annual growth rate instead of average annual growth rate is provided.) Our GAAP net (loss) income was ($1.2) billion in 1999 and $1.3 billion in 2005. See pages 20-23 for the full reconciliation between our non-GAAP and GAAP numbers. ² Non-GAAP amounts exclude the after-tax effects of recurring charges related to the June 30, 1999 redemption of our Special Common Stock by Roche and litigation-related special items, and the cumulative effect of accounting changes. Our GAAP net income increased 63 percent and GAAP earnings per share increased 62 percent in 2005, compared to 2004. See pages 20-23 for the full reconciliation between our non-GAAP and GAAP numbers. This Annual Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements relating to our research and development pipeline, the expected timeline for regulatory filings for Rituxan, Avastin and Herceptin, potential indications for Herceptin, Avastin, Lucentis and Rituxan, the future potential of Avastin, the Cabilly re-examinations and growth in the short, medium and long-term. Such statements are just predictions and involve risks and uncertainties such that actual results may differ materially. Among other things, our research and development pipeline and the expected timeline for regulatory filings could be impacted by unexpected safety, efficacy or manufacturing issues, additional time requirements for data analysis, decision making and BLA preparation, or FDA actions or delays; potential indications for our products could be affected by all of the foregoing and failure to receive FDA approval; the potential of Avastin could be affected by all of the foregoing and by a number of other factors, including competition, pricing, reimbursement, the ability to supply product, product withdrawals, new product approvals and launches; the Cabilly re-examinations could be affected by the actions of the PTO; and our growth could be affected by all of the foregoing and by a number of other factors, including, achieving product sales revenue consistent with internal forecasts, unanticipated expenses such as litigation or legal settlement expenses or equity securities write-downs, costs of sales, R&D expenses, fluctuations in royalty and contract revenues, and fluctuations in tax and interest rates. Please also refer to Genentech's periodic reports filed with the Securities and Exchange Commission. Genentech disclaims, and does not undertake, any obligation to update or revise the forward-looking statements in this Annual Report. |
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