West Coast Editor

Genentech Inc.'s planned takeover of Tanox Inc. for $20 per share, or $919 million - about $650 million net of cash - would end the royalty payout to Tanox on U.S. sales of the asthma drug Xolair from Genentech, which would also get the royalties Novartis AG has been providing Tanox as part of the companies' three-way deal.

Shares of Genentech (NYSE:DNA) closed Friday at $81.59, up 24 cents, and Tanox's stock (NASDAQ:TNOX) ended the day at $19.75, up $6.11, or 44.8 percent. The deal, approved by the boards of both firms, is expected to close in the first quarter of next year.

Analyst Bret Holley, with CIBC World Markets in New York, called the buyout "relatively low impact" for Genentech and the price "reasonable," given the Xolair (omalizumab) factor, as Wall Street buzzed with speculation about a potential bidding war similar to the recent one that involved competing efforts to acquire AnorMED Inc. by Genzyme Corp. and Millennium Pharmaceuticals Inc. (See BioWorld Today, Oct. 18, 2006.)

Given the premium offered by Genentech for Tanox, other bidders seem unlikely, and Genentech already may have scared Basel, Switzerland-based Novartis, which owns 14 percent of Tanox, away from the table.

"I've got to believe, if Genentech made the offer first, [Tanox] took the offer to Novartis," said Terence Flynn, with Lazard Capital Markets in New York. Flynn had a "hold" rating on Tanox, and estimated revenue that the firm would get from all sources in the Xolair deal at $52 million this year, $66 million next year, $91 million in 2008 and $117 million in 2009.

The price paid by South San Francisco-based Genentech "seems a little hefty," Flynn acknowledged. "That could be the Novartis factor. [Also,] we assume our own steps in the royalty. Perhaps the U.S. royalty steps up quicker than we're expecting, and it made sense for Genentech to do the deal now."

Flynn had modeled the fair value of Tanox at $13 per share, consisting of $9 for Xolair, $3 for available cash and $1 for TNX-55, the company's Phase II, anti-CD4 antibody in development as a viral entry inhibitor against HIV/AIDS.

Along with that compound, Genentech is buying the preclinical compound TNX-234 for the dry form of age-related macular degeneration (a larger market than wet AMD), and TNX-650, an interleukin-13 target that is in Phase I trials for Hodgkin's lymphoma and asthma.

Flynn said the high doses of TNX-355 necessary to generate viral reductions - three times that of an average antibody - will relegate the compound to the salvage-patient population, which is due to become increasingly competitive.

"We just don't think it's commercially viable, and we didn't like the fact that [Tanox was] basically dumping the Xolair royalty stream back into that asset," he said, predicting that the buyout will take place and Genentech will out-license TNX-355.

"It's basically on the verge of Phase III, and it was mentioned last" by Arthur Levinson, CEO of Genentech, during Friday's conference call. "I think that was telling."

Separately, a federal jury last week ruled in Genentech's favor against a Pennsylvania ophthalmologist who claimed he was due up to $1.16 billion for research involved in developing Lucentis (ranibizumab), the compound for the wet form of AMD. Genentech argued that no agreement had been made with Kourosh Dastgheib regarding royalties on the drug.

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