Genentech Inc.'s ousted president and CEO, Kirk Raab, said Mondayhe did nothing improper by asking Roche Holdings Ltd. for a $2million personal loan guarantee during negotiations between the twocompanies on extension of the Swiss pharmaceutical giant's mergeroption in May.

Genentech's board of directors disagreed. After considering thepotential conflict of interest raised by the loan guarantee request andreviewing Raab's leadership, the directors demanded Raab'sresignation and he complied, effective last Friday.

Arthur Levinson, Genentech's senior vice president in charge ofresearch and development, was named to succeed Raab, who waspresident and CEO for 10 years.

Raab told BioWorld Today he was not bitter about the board'sdecision, but he did not agree with it. He was seeking a personal loanfrom a Swiss bank and asked Roche to guarantee it. Roche did notprovide the guarantee.

Raab said he was not included in the board's discussions of hisleadership. But he added there were other issues involved beyond theperception of a conflict of interest in seeking a loan guarantee whilenegotiating terms of Roche's merger option.

In announcing Raab's resignation, the directors said a specialcommittee, initially formed to investigate the loan guarantee matter,recommended his dismissal based on a review of the past few years.

Raab said the review did not uncover anything improper. "It related tocommunication between me and the board," he said. "There's not somesmoking gun or anything behind the scenes."

Raab praised the board of directors and said he plans no action againsthis former employers concerning his ouster. He said he is stillnegotiating some terms of his severance, but they did not involvefinancial considerations.

He also apologized "for any problems caused by my departure," butinsisted he negotiated a fair deal on Roche's merger options. On thatpoint, the board of directors agreed.

Raab walks away from Genentech after 10 years as president and CEOseemingly a wealthy man. He will get a one-time payment of $1.2million, which equals his annual salary plus bonus as of Dec. 31, 1994.Raab was the biotechnology industry's highest paid executive,according to the 1995 BioWorld CEO Compensation Report.

In addition, for the next 15 years, he will receive annual payments ofmore than $40,000, which is 34 percent of his yearly compensation.

Raab also said he owns about 600,000 Genentech shares, which at theclosing price Monday of $49 per share would be worth about $29.4million.

As for his future, Raab told BioWorld Today, he intends to remaininvolved in the biotechnology industry.

"What that means, I don't know," he said. "I've been talking withpeople about some small companies or consulting." He said thatrunning another company was a possibility.

Carl Feldbaum, president of the Biotechnology Industry Organization,said he was "greatly saddened" by Raab's departure from Genentech.Raab was the industry organization's first chairman, from 1993 to1995.

"He just completed a highly successful tenure as BIO's chairman,"Feldbaum said. "He made tremendous contributions to the industry."

Phase III Trials Of Pulmozyme Discontinued

Genentech experienced some other bad news Monday. The companywas forced to discontinue Phase III trials of Pulmozyme for chronicobstructive pulmonary disease (COPD) after an interim analysisshowed the drug was having no benefit. Pulmozyme already is on themarket as a treatment for cystic fibrosis.

Neither Raab's resignation nor the discontinued trials affectedGenentech's stock Monday. It closed unchanged at $49. The lack ofstock movement reflects Roche's buy out option, which was extendedMay 1 for four years. Roche purchased 60 percent of Genentech in1990 and now owns nearly 70 percent.

Under the May 1 deal, which Raab negotiated, the per shareacquisition price escalates periodically from $61.25 July 1 to $82 onApril 1, 1999. If Roche has not purchased the shares by June 30, 1999,Genentech shareholders can sell to Roche for $60 per share.

The agreement was the subject of class action shareholder lawsuitsagainst Genentech and Roche. The Genentech shareholders claimed thedeal was not fair.

Genentech, in announcing Raab's resignation, said the lawsuits weresettled, pending approval of the Delaware Chancery Court. Under thesettlement, each price at which Roche can buy out Genentech'soutstanding stock was boosted 50 cents per share. However, the $60per share price that Genentech shareholders can get after June 30,1999, remains the same.

A `Clear Conflict Of Interest'

Raab's request for the loan guarantee from Roche was uncovered as aresult of the shareholders' class action lawsuits.

Barbara Hoffman, an independent biotechnology analyst with Hoffman& Co. in Denver, said Raab's attempt to get a personal loan guaranteefrom Roche "while negotiating a deal [with the pharmaceuticalcompany] on behalf of Genentech's shareholders was a clear conflict ofinterest."

As for the failed Phase III Pulmozyme trial, Hoffman said any otherbiotechnology company experiencing a similar setback would face asignificant stock correction on Wall Street. Among the implications forGenentech, she said, is that Pulmozyme sales will be restricted tocystic fibrosis patients, who represent a much smaller market thanthose suffering from COPD.

In selecting Levinson to succeed Raab, Hoffman said Genentech willbe accelerating product development. Under Raab, Genentechconcentrated on taking one or two products per year from thelaboratory to clinical development.

With Levinson, Hoffman said the company expects to move three tofive new products into the clinic in the next 18 months.

Matthew Geller, an analyst with Oppenheimer & Co. in New York,agreed that Levinson will be more aggressive in product development.

"Genentech picked someone who's a scientist," Geller said. "For thenext couple of years wheeling and dealing is not going to be the focus.The concentration will be on research and development."n

-- Charles Craig

(c) 1997 American Health Consultants. All rights reserved.