Subject: Genentech Plans to Sell 60% Stake To Roche Holding Date: Published: 2/5/90 (249 lines) Source: Wall Street Journal. Copyright Dow Jones & Co. Inc. Genentech Plans to Sell 60% Stake To Roche Holding for $2.1 Billion --- Pact With Swiss Company Is Designed to Free Firm Of Wall Street Pressures ---- By Marilyn Chase Staff Reporter of The Wall Street Journal Genentech Inc.'s agreement on Friday to sell a controlling interest to Roche Holding Ltd. is a deal designed to free Genentech from the tyranny of Wall Street, but it was crafted in uncustomarily successful secrecy by a Wall Street banker. The transaction essentially gives Genentech, the U. S.'s biggest biotechnology drug company, the wherewithal to finance its diverse drug-development program without worrying about disappointing Wall Street analysts and fickle investors with erratic quarterly earnings. The appeal of the biotechnology industry to the investment community has dimmed in the last several years because genetically engineered drugs haven't hit the market or racked up sales as quickly as expected. Biotech stocks, including Genentech's, had dropped as a result. But Roche's decision to buy a 60% interest in Genentech for $2.1 billion, with an option to acquire the remaining interest for as much as $2.5 billion more, is a stunning reaffirmation of biotech's promise, or at least Genentech's. If Roche buys all of Genentech, the purchase price could exceed 100 times the company's 1989 earnings of $44 million. Part of the agreement calls for Roche to buy half of Genentech's 84 million shares outstanding for $36 a share, a premium of 66% over the stock's price on Thursday. Roche also is to buy a new issue of 22 million shares at Friday's pre-announcement market price. Genentech's remaining common will continue to trade on the New York Stock Exchange, but Roche has a five-year option to redeem those shares at as much as $60 a share. In composite trading on the Big Board, Genentech stock closed Friday at $29.875, up $8.125. With about 4.4 million shares trading hands, the issue was the most active on the Big Board. "We have so much we want to do," said Genentech's president, G. Kirk Raab, on Friday. "The quarterly pressures of the stock market, though real and understandable, inevitably inhibit the brain trust here on this 30 acres." The deal with Roche gives Genentech a source of patient Japanese-style capital to build long-term strategies without an obsessive eye on the ticker tape. Other biotech companies, smaller and more cash-starved than Genentech, may also seek merger partners in an extended round of consolidation within the industry. But they won't fetch premium prices unless they have attractive drug-development programs. Biotech stocks generally surged in trading Friday. Even competing executives feel vindicated at Roche's vote of confidence in biotechnology, long chilled by the market's skepticism. But some analysts cautioned that the rally may be premature. "The market is treating this as though everybody will be bought out at this premium," said Denise Gilbert of Montgomery Securities in San Francisco. "Genentech was a one-of-a-kind deal." Moreover, it heightens competitive pressure on the small independent biotech firms. "If I were Amgen {Inc. }, Cetus {Corp. } and Chiron {Corp. }, I would start to consider Genentech a serious competitor, she said. Though not currently competing head to head, "they'll go into the same niches or get marketing rights to the same products." Roche's deal with Genentech is apt to raise some political controversy. It puts control of the company that pioneered biotechnology and is developing the most extensive group of biotech drugs, in the hands of a foreign company. "There can and should be debate on this," said Stephen A. Duzan, chairman of Seattle-based Immunex Corp., though he said he believes the deal simply underscores the fact that biotech is a global industry. Moreover, Genentech had sought an American alliance and failed. In late summer, Genentech decided it needed a major partner to continue the costly research, development and production of biotech products. Piecemeal financing like its recent, successful $72 million research and development limited partnership to fund development of its CD4-based AIDS therapy wasn't big enough or sustained enough to keep the fertile and ambitious research program afloat. Genentech consulted its investment bankers and approached several potential partners, including American companies, to no avail. Finally, in October, Genentech's founder and chief executive officer, Robert Swanson, and Mr. Raab flew to New York for a scheduled board meeting. Then they secretly extended their itinerary to include a rendezvous in Switzerland with officials of Roche, whose chief operating unit is F. Hoffmann-La Roche & Co. The suitor was selected by Frederick Frank, an investment banker for Shearson Lehman Hutton Inc., co-investment adviser to Genentech with Wasserstein Perella & Co. "The ubiquitous Fred," as he is called by competitors, is the architect of several drug company alliances and was the prime mover. "It was Fred's deal," said Mr. Raab. On Saturday night Oct. 21 in the elegant Dolder Grand Hotel, Mr. Frank prepared for the first meeting of the two parties. He first played for Fritz Gerber, Roche's chairman, and Henri Bernard Meier, Roche's chief financial officer, the corporate equivalent of mood music: a slickly produced 45-minute video, featuring interviews with Genentech scientists "to give them the flavor" of the California entrepreneurs. Next came dinner in a private hotel dining room. "That's when I introduced them" to Messrs. Swanson and Raab, said Mr. Frank. Deftly steering the discussion away from concrete terms, the investment banker stressed long-term scientific strategy and potential synergies. "From that first meeting, there was exceptional spirit," he said. Even the preoccupied Mr. Raab, whose wife was then eight months pregnant with twins, said dinner was "wonderful, full of good vibes. From the beginning, we sensed this was going to be a reality." Both sides took extreme steps to keep the subsequent talks secret. "Rumors can destroy a deal," Mr. Gerber said Friday. They never met in Basel, Switzerland, where Roche is based, and they used the code names "Giant" and "Regal" for Genentech and Roche, respectively. "I lied a lot," Mr. Raab said. He wasn't alone. "My secretary says her nose grew too," while inventing cover stories for her boss during three negotiating trips from California to Europe, he added. Only six Genentech officers were privy to the talks until Jan. 26. But at every turn, sources said Mr. Frank did the trans-Atlantic shuttling and jawboning, and he spared the principals the need to have face-to-face confrontations that might mar the good vibes. South San Francisco-based Genentech announced the deal Friday morning to its 1,200 employees who were hastily assembled just as a news release went out over the wires. Terms of the pact were lustily cheered by employees. Genentech will take a one-time charge currently estimated at $150 million to cover merger-related costs including fees to its investment bankers and employee stock options. All employees were given 500 new options to mark the deal, one quarter of which they can cash out immediately as an added sweetener to the deal. Shearson's Mr. Frank said the deal's unique structure is designed to give Genentech continued autonomy. Current management will remain in place, and Roche, initially at least, will get to name only two directors, raising board membership to 13 from 11. In a related announcement, Genentech's Mr. Swanson was promoted to chairman, succeeding venture capitalist Thomas Perkins as chief long-term strategist. President Raab takes on the added title of chief executive, succeeding Mr. Swanson in the top day-to-day management of company affairs. Last year was Genentech's most successful year ever with $400 million in revenue. Roche, with interests in pharmaceuticals and chemicals, expects to report total world-wide revenue for 1989 of $6.5 billion, about 45% of which came from pharmaceutical sales. Genentech will gain a rich and permissive parent. Roche gains an creative company with two solid sellers already on the market (the heart drug TPA and a growth hormone), plus a vast cornucopia of new products under development to treat acquired immune deficiency syndrome and many other ailments. The point, said Roche's Chairman Mr. Gerber, is "to maintain the entrepreneurial spirit of Genentech, to let them have their culture. We'd be the last ones to want to kill that." Providing deep pockets for Genentech to tap -- Roche is so rich it is financing the whole deal from cash on hand -- Roch will aid Genentech's scientific quest immeasurably. Moreover, Roche insists its perspective on scientific discovery is long and unhurried, more like the Japanese than like Wall Streeters obsessed with the bottom line. The Swiss also offer Genentech considerable U. S. marketing muscle. Analysts figure Hoffmann-La Roche has 1,200 U. S. sales representatives out of 3,500 worldwide. That compares with Genentech's U. S. sales force of 278. Analysts agreed the deal is good for Genentech. "Genentech will make out like bandits, assuming its employees are happy. And they're worth a lot more than they were last week," said Jacqueline Siegel, an analyst with Hambrecht & Quist in New York. A few biotechnology executives expressed reservations about yoking a homegrown industry to foreign financiers. Mr. Duzan of Immunex said, "Americans are very concerned now about foreigners buying up pieces of America." But he and others point out that Roche has long allowed its American unit, Hoffmann-La Roche Inc. of Nutley, N. J., to manage itself and its 15,000-person work force very much as an American company. Also, Genentech and other U. S. biotech companies have long held a variety of research and marketing agreements with companies overseas. "Biotech is global. That's the main point," said Mr. Duzan. Moreover, biotech executives see the $2.1 billion as a major vote of confidence for biotechnology. "People turned sour and said biotech is overrated. Well, this merger says louder and clearer than anything: That's wrong," said Robert Fildes, chairman of Cetus of Emeryville, Calif. Mr. Fildes pointed out that Cetus is also 4%-owned by Roche, making it and Genentech "distant cousins, though not kissing cousins." Roche has a strategic alliance with Cetus in the area of high-tech diagnostics based on Cetus's gene amplification (PCR) technology. Acquiring access to Cetus's PCR power plus Genentech's prowess in gene-spliced proteins means "Roche has now tapped into two of the most promising areas in biotech and gotten a major play on both," he said. But Genentech's sudden windfall can only serve to heighten the contrasts between it and other capital-starved biotech companies. "You're always working under restricted resources," Mr. Fildes said. This may toughen the competitive atmosphere especially if, as some analysts believe, Genentech uses some of its cash to shop for marketing rights to other companies' products. "They'll go out and fish for every major product they can," predicted Ms. Gilbert of Montgomery Securities. Still, Genentech's pipeline is so full of its own products, including the recent and unannounced renewal of its ambitious quest for an AIDS vaccine, that it needn't pick from other companies. Mr. Raab insisted Genentech simply wants to pursue "the ideas, the proteins, the dream Bob Swanson and {University of California scientist} Herbert Boyer created" at Genentech's founding 14 years ago. --- Joann S. Lublin contributed to this article. --- Although Genetech's Stock Has Fallen... ...Its Product Line Is Diverse DRUG NAME/ 1989 Sales TREATS ($ millions) Activase/ $196.4 Heart attacks Protropin/ 122.7 Dwarfism Actimmune/ Awaiting FDA Immune deficiency action CD4-IgG In clinical AIDS trial Argatroban In clinical Blood-clotting trial Insulin-like growth In clinical factor/Nutritional and trial growth disorders [This article is made available here by Dow Jones Co. for the personal and non-commercial use of callers to this bbs, in the hope that it will be of some help to those who are suffering from the disease and others who are seeking to help them.]