| Editorial | Financials |
Letter to Stockholders
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"Never before have we had such talented employees, insights into the biology of so many diseases, powerful tools and technologies, and extensive expertise and resources to help us develop breakthrough therapies to improve patients' lives." |
| Arthur D. Levinson, Ph.D. Chairman and Chief Executive Officer |
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We are pleased with our performance in 2007, which was a year of growth and development across Genentech's business. With a 26 percent increase in full-year operating revenues to $11.7 billion, 2007 was our tenth consecutive year of double-digit revenue growth. Only five years ago, our annual revenues barely exceeded $2.5 billion, so we are proud to achieve a greater than four-fold increase in such a relatively short time. Our non-GAAP earnings per share were $2.94 in 2007, up 32 percent from 2006, and our non-GAAP net income increased 31 percent to $3.1 billion.¹
Our continued strong financial results fuel our important research and development efforts. As a company, Genentech's paramount objective is to develop a strong pipeline of novel and important drugs that have the potential to make an important difference for patients suffering from significant diseases.
In support of this objective, last year we announced our plan to add a total of 30 new molecular entities into clinical development by the end of 2010, and we are encouraged by the progress we've made. In 2007, eight new molecules were added to the pipeline, and we now have 20 new molecules in development, most targeting novel mechanisms based on promising biology.
In 2008, we look forward to generating clinical data from our early pipeline and to moving new molecules into clinical trials. We will also continue to invest in possible line extensions for our commercial products, including Rituxan® in earlier-stage rheumatoid arthritis, multiple sclerosis and lupus; and Avastin® in metastatic breast cancer, renal cell carcinoma and glioblastoma multiforme (a form of brain cancer), as well as in combination with Tarceva® for advanced non-small cell lung cancer.
While we are proud of the caliber of our internal research organization, we recognize that Genentech is not the only place for great science, and therefore collaborations play an important role in our pipeline development. As one example, in collaboration with Curis, we are developing a small molecule antagonist of the hedgehog pathway, which could represent an important new approach to treating patients with solid tumors. In 2007, we entered into agreements for 64 collaborations, which included four molecules that are currently in clinical trials or expected to move into clinical trials in 2008. These four molecules are being developed in collaboration with Seattle Genetics, BioInvent and Abbott.
Our scientific accomplishments continue to translate into strong market success. Looking at our commercial performance in 2007, total net U.S. product sales were $8.5 billion, a 19 percent increase from 2006 sales. Avastin became our top-selling product for the first time in 2007 and, along with Rituxan, is now our second product to generate more than $2 billion in annual sales. We are pleased with the performance of our broad product portfolio and believe that we are well positioned in the marketplace; four of our oncology products have demonstrated overall survival improvement in multiple tumor types.
We made significant progress in other areas of the business in 2007. In product operations, we announced the construction and development of an E. coli manufacturing facility in Singapore for the production of bulk Lucentis® product. Additionally, in April we received U.S. Food and Drug Administration (FDA) licensure of 90,000 liters of capacity for the production of bulk Avastin product at our Oceanside, California, facility. In corporate developments in 2007, we completed the acquisition of Tanox, Inc., the first acquisition in our history, which supports the development of new treatments for patients with asthma and improves our Xolair® business.
Last year also brought challenges that highlight the complexities and risks associated with our business. For example, data from the AVAiL study evaluating high and low doses of Avastin led to a decline in the use of high-dose Avastin in non-small cell lung cancer.
In August, we resubmitted the supplemental Biologic License Application for Avastin with chemotherapy in first-line metastatic breast cancer based on data from the E2100 trial. In February 2008, we were pleased to receive accelerated approval for Avastin in combination with paclitaxel for the treatment of patients who have not received chemotherapy for metastatic HER2-negative breast cancer.² The accelerated approval program allows the FDA to approve products based on initial positive data from a surrogate endpoint, and we plan to provide additional trial data that may support full approval. Avastin is now approved for treatment of the three leading causes of cancer deaths in the United States.
As always, we remain dedicated to making all our medicines available to patients who need them and ensuring that price is not a barrier to access. In 2007, we launched several initiatives as part of our ongoing effort to improve our patient access, including the Avastin Patient Assistance Program, which offers free Avastin to eligible patients once they have received 10,000 milligrams in a twelve-month period. Separately, the expansion of other existing programs helps address coverage gaps for eligible Tarceva patients enrolled in a Medicare Part D plan. We are also working with ophthalmology medical organizations to enhance programs that facilitate and expedite patient access and physician reimbursement for Lucentis. In total, Genentech has donated approximately $1 billion in free medicine since 1985 to uninsured patients through the Genentech® Access to Care Foundation and other product donation programs. Additionally, we have donated more than $140 million since 2005 to independent non-profit organizations that provide financial assistance to eligible patients for co-pay costs.
Our employees' passion for and dedication to helping patients is nurtured by our unique company culture. It is our belief that this culture makes Genentech a great place to work and allows us to recruit and retain highly talented and motivated people who can further our objective of developing first- and best-in-class therapies. We are focused on creating an exceptional company where employees are excited about their work. We want all employees to know that their unique ways of thinking are welcome and that they can take the initiative to propose ideas and projects they believe can help drive the company's success. We have been recognized externally for this focus; in 2007, Science magazine named us as a "top employer in the biotechnology, biopharmaceutical, pharmaceutical and related industries," and in January 2008 Genentech was named one of FORTUNE magazine's "100 Best Companies to Work For" for the tenth consecutive year.
Looking back, 2007 has been a year of significant growth and achievement. We are pleased that we are currently on track to meet all five of our Horizon 2010 goals (described in greater detail on page 5 of this report).
Never before have we had such talented employees, insights into the biology of so many diseases, powerful tools and technologies, and extensive expertise and resources to help us develop breakthrough therapies to improve patients' lives. We expect 2008 to be another active year for us as we anticipate clinical data from a number of important trials and news from other areas of our business.
We remain confident in our approach to running the business and will continue our focus on excellent science, planning and investing for the long term, disciplined execution against our aggressive goals, and a passionate commitment to patients and our employees. There are tremendous advances occurring in understanding the biological basis of many debilitating diseases, and these advances play to Genentech's greatest strengths as we strive to translate the biology into new drugs. It is my hope, and my belief, that Genentech will continue to deliver important new therapies and make a meaningful difference in the lives of the patients we serve.
Arthur D. Levinson, Ph.D.
Chairman and Chief Executive Officer
February 25, 2008
¹ Our GAAP earnings per share for 2007 was $2.59, an increase of 31 percent compared to 2006, and our GAAP net income for 2007 was $2.8 billion, an increase of 31 percent compared to 2006. Our 2007 non-GAAP amounts exclude the effects of: (i) recurring charges related to the 1999 redemption of our Special Common Stock by Roche (Redemption) and our acquisition of Tanox, Inc. in the third quarter of 2007, which was $132 million on a pretax basis, (ii) litigation-related and similar special items for accrued interest and bond costs on the City of Hope judgment, which was $54 million on a pretax basis, (iii) employee stock-based compensation expense recognized under Statement of Financial Standards No. 123(R), "Share Based Payment" (FAS 123R), which was $403 million on a pretax basis, (iv) certain items related to the acquisition of Tanox, Inc. in 2007, including in-process research and development expenses of $77 million (a non-recurring expense in the third quarter of 2007), recurring recognition of deferred royalty revenue of $6 million on a pretax basis, and a gain pursuant to Emerging Issues Task Force Issue No. 04-1, "Accounting for Preexisting Relationships between the Parties to a Business Combination" (EITF 04-1), of $121 million on a pretax basis (a non-recurring gain in the third quarter of 2007), and (v) the related tax benefits on these items of $166 million. Our 2006 non-GAAP amounts exclude the effects of: (i) employee stock based compensation expense associated with FAS 123R of $309 million on a pretax basis, (ii) recurring amortization charges related to the Redemption, which was $105 million on a pretax basis, (iii), litigation-related and similar special items for accrued interest and associated bond costs on the City of Hope judgment, which was $54 million on a pretax basis, and (iv) the related income tax benefits on these items of $191 million. See pages 26-27 for the full reconciliation between our non-GAAP and GAAP amounts.
² On February 22, 2008, Genentech received accelerated approval for Avastin in combination with paclitaxel for the treatment of patients who have not received chemotherapy for metastatic HER2-negative breast cancer. The effectiveness of Avastin in metastatic breast cancer is based on an improvement in progression-free survival. Avastin is not indicated for patients with breast cancer that has progressed following anthracycline and taxane chemotherapy administered for metastatic disease. Currently, no data are available that demonstrate an improvement in disease-related symptoms or increased survival with Avastin in breast cancer.
This Annual Report contains forward-looking statements regarding developing a small molecule antagonist of the hedgehog pathway; line extensions for Rituxan, Avastin and Tarceva; the potential of Avastin and Trastuzumab-DM1 in treating breast cancer; adding new molecules into clinical development by 2010; bringing new products/indications onto the market by 2010; becoming the number one U.S. oncology company in sales by 2010; and growth in non-GAAP earnings per share (EPS) and cumulative free cash flow by 2010. Such statements are predictions and involve risks and uncertainties such that actual results may differ materially. Among other factors, actual results could be affected by unexpected safety, efficacy or manufacturing issues, additional time requirements for biologic license application (BLA) or new drug application (NDA) preparation or decision making, need for additional data or clinical studies, FDA actions or delays, the failure to obtain or maintain FDA approval, changes in dosing or duration of product use, competition, pricing, reimbursement, intellectual property or contract rights, the ability to supply product, product withdrawals, new product approvals and launches, product sales, contract revenues and royalties, cost of sales, R&D or MG&A expenses, stock-based compensation expense, unanticipated expenses such as litigation or legal settlement expenses or equity securities write-downs, fluctuations in tax and interest rates, and changes in accounting or tax laws or the interpretation of such laws. Please also refer to Genentech's Form 10-K for the period ended December 31, 2007, attached to this report. Genentech disclaims, and does not undertake, any obligation to update or revise any forward-looking statements in this report.