By Mary Welch

F. Hoffmann-La Roche Ltd. did not wait until the much-anticipated, end-of-the-month deadline to exercise its call option for the remaining 33 percent of Genentech Inc.'s common stock at $82.50 per share, for about $4.2 billion.

The move, which leaves Genentech as an independent, publicly traded company, was coupled with other good news for the firm. Genentech reported that a federal jury was unable to reach a verdict in the $400 million patent infringement lawsuit brought by the University of California (UC), relating to the firm's human growth hormone product, Protropin (somatrem).

Genentech spokeswoman Marie Kennedy said the company is pleased to have Roche's call-option deadline behind it, but otherwise is conducting business as usual.

"We can move ahead with our goals," she said. "Really, not much has changed other than that."

The Roche option had been hanging over Genentech's head since it originally made the deal with the Basel, Switzerland-based firm in 1990. That deal called for Roche Holding Ltd. to invest $492 million in capital in South San Francisco-based Genentech, and purchase half of the company's stock for $36 per share. As a result, Roche owned 60 percent of Genentech's stock.

The merger agreement was amended in 1995 to extend for another four years Roche's option to purchase the remaining common stock, at a new purchase price of $82 per share, until June 30, 1999. If Roche chose not to exercise the option, Genentech's stockholders would have the opportunity to buy some or all the shares at $60 per share within a 30-day period starting July 1.

As late as last month, analysts - as well as Genentech officials - did not know which road Roche would choose. Many, in fact, didn't believe Roche would exercise the option. The general agreement was that without Roche's option casting a shadow on Genentech, the company's stock would be trading at about $120, instead of generally under $90.

The worry in some quarters was that Roche's fingerprints might harm an entrepreneurial corporate culture that had developed what analysts called one of the better pipelines in biotechnology. (See BioWorld Today, Jan. 22, 1999, p. 1.)

Now that the decision is made, many observers are calling the deal a winner for both sides.

"It's the most elegant solution," said Matthew Geller, senior biotech analyst with CIBC Oppenheimer Corp., in New York.

Jon Alsenas, managing director of ING Baring Furman Selz LLC, in New York, said the issue became whether Roche "wanted a short-term profit, or wanted to gamble on humans creating long-term profits and pipelines. They've got their cake, and can eat it too. It's certainly better than being folded into Roche."

Eric Schmidt, vice president of SG Cowen Securities Corp., in Boston, said the deal "makes a lot of sense for Roche, but I also think they are putting a fast one over on the investment community. The person losing isn't Genentech or Roche. It's the investor."

After the redemption is completed, Roche will sell up to 19 percent of Genentech shares, presumably at a much higher price. Roche expects to file a registration statement relating to the public offering in a few weeks. The public offering will be made only by means of a prospectus. After the public offering, Roche will remain the majority shareholder, and does not anticipate any future put or call agreements.

"It's up to the analysts to guess what the stock will sell for," Kennedy said. "But it was selling for around $86 even though investors knew there was a ceiling and that it was worth only $82.50."

Joel Sendek, senior vice president of Gerard Klauer Mattison & Co. Inc., in New York, said the short-term downside of Roche's decision will be experienced by investors "who were holding stock, waiting for Roche not to exercise the option so the value of Genentech's stock could be unlocked. Well, the value is now going to Roche. A lot of people were willing to take that risk."

Alsenas estimated Roche, "with the spin-out and sale of 19 percent, [will] recoup all of its money and maybe more. They had to do it, and investors were daring Roche to do it by bidding the price up about $82."

The bigger question now is whether Genentech will be allowed to remain "independent" or will become closer to the parent company.

Schmidt said Roche "will still likely let Genentech operate at arm's length. I'm sure they'll keep the management."

Alsenas, however, sees a potential cloud on the horizon. "The questions is whether Roche will give themselves rights to products," he said. "I doubt it, but it may come up."

In addition to the Roche decision, the company is breathing a big sigh of relief concerning the patent infringement case. The nine-member jury voted 8-1 in favor of UC, but could not reach a unanimous vote. During the five-week trial, a former Genentech scientist admitted he and a colleague had used the university's technology and had not independently performed the work on human growth hormone, as they had published in a 1979 scientific journal. Damages could have been between $200 million to $400 million.

"Obviously, we didn't know about the testimony," Kennedy said. "We learned a lot, and we have the lab notebooks up on our website, so the scientific community can look at them. These notebooks make quite clear that we did our own independent, proprietary research, and we will prove it."

The university alleged that Genentech's manufacture and sale of Protropin infringed UC's patent under the doctrine of equivalents. Protropin was the first drug marketed by Genentech, after its 1976 founding.

"It's a win for Genentech, because they escaped having to pay some very serious damages," said Alsenas.

But, he said, the company was not unscathed by the episode.

"It's a very unsavory situation, and while it ultimately won't have any effect on the business side, it's a tawdry episode," Alsenas said. "It's a black eye for the company."

No decision has been made as to Genentech's claim that UC defrauded the U.S. Patent and Trademark Office when it obtained the patent. A favorable ruling would make UC's patent unenforceable. Whether UC will appeal was not known.

Genentech's stock (NYSE:GNE) closed Thursday at $82, down $4.50.