Faced with the likelihood that Switzerland-based Roche HoldingsLtd. would not exercise its option to takeover Genentech Inc. nextmonth, the South San Francisco-based company negotiated a four-year extension, in part, to protect its stock value.

Roche, which purchased 60 percent of Genentech in 1990, now owns66 percent and had until June 30 to buy out the remaining stock at$60 per share. The takeover would have cost Roche more than $3billion.

Roche's anticipated exercise of its option has been a factor in theprice of Genentech's stock. Many analysts speculated the Swisspharmaceutical giant had decided not to complete the buyout andthey suggested that if Genentech had not negotiated an alternative,the value of its stock could have dipped to $40.

Genentech (NYSE:GNE) closed Monday down $2.50 to $47.87, a 5percent drop, on trading of more than 3.8 million shares.

Jim Weiss, spokesman for Genentech, said the two companiesinitiated discussions as the June 30 option deadline approached andworked out the extension after Roche indicated it was considering notpurchasing the remaining shares.

Weiss added that the new agreement will have a positive effect onGenentech's short-term earnings. Roche has an option to co-developdrug candidates in Genentech's pipeline and it will begin sellingsome Genentech products in Canada and Europe, sending backroyalties to its American partner.

Extension of the Roche option also allows Genentech to maintain itsindependence, Weiss said, adding, "We get the best of both worlds."

Under the revised agreement, Roche has until June 30, 1999, to buyall remaining Genentech shares at a price that escalates $1.25 pershare quarterly for the first two years and then increases $1.50quarterly for the last two years up to a maximum of $82. Roche canpurchase as much as 79.9 percent of Genentech on the open market.

If at the end of four years, Roche has not taken over Genentech,stockholders have the option of selling their shares to Roche at $60per share.

Roche also gets a 10-year option for commercial rights toGenentech's pipeline of products outside the U.S. If it decides tocollaborate on a product, Roche will split development costs in theU.S. and will assume all those expenses in other countries. On salesoutside the U.S., Roche will pay royalties.

In addition, Roche gets marketing rights in Canada for four ofGenentech's approved products: Activase, a clot-buster; Protropinand Nutropin, human growth hormones; and Pulmozyme, a treatmentfor cystic fibrosis. Roche also can sell Pulmozyme in Europe. Inreturn for rights to those products, Roche will pay Genentechroyalties of 20 percent.

"Roche makes out like a king," said Joyce Lonergan, of Cowen andCo. in Boston. "They don't pay for the buyout and Roche getsproducts for sale in Europe and all they have to do is send back aroyalty."

David Crossen, of UBS Securities in New York, said the newagreement "mitigates the perceived damage from Roche notexercising the option."

In addition, Crossen said, "The Swiss are well known for looking atlong-term horizons. They may have decided not to commit to buy thecompany until they look at what happens on the thrombolyticmarket."

Activase (tPA) is Genentech's biggest selling product with 1994 salesof $280 million. The drug, used to treat heart attacks, commands 70percent of the thrombolytic market, but Crossen said sales may peaknext year if competing forms of treatment, such as angioplasty andanti-platelet therapy, become more popular.

Roche also may be waiting to see what products look the mostpromising in the pipeline, he added. Under the revised agreement,Roche doesn't have to decide to co-develop drug candidates until theconclusion of Phase II trials.

Barbara Hoffman, of Hoffman & Co. in Denver, described theextended option as "a compromise to preserve Genentech'sindependence while giving Roche access to Genentech's currentlyavailable products and its products in the pipeline." n

-- Charles Craig

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