Roche Will Buy Rest of Genentech Shares

Roche Holdings Ltd. said Thursday that it will exercise its option to buy the outstanding shares in Genentech for $4.2 billion, but has decided to allow the South San Francisco biotechnology company to continue operating independently.

The Swiss-based pharmaceutical company, which already owns 65% of Genentech stock, will pay $82.50 a share for the remaining shares. Then, if regulators approve the deal, it will raise more than $2 billion by selling up to 19% of the company back to the public.

Part of the deal will expand on Roche’s right to pick drugs from Genentech’s rich pipeline for co-development, but it will pay a premium for drugs near the end of testing in patients.

Genentech executives welcomed Roche’s decision to let the smaller company steer its own course in developing genetically engineered drugs. President and Chief Executive Arthur D. Levinson said that Genentech is determined to remain independent and maintain a culture of innovation that is distinct from the atmosphere found at many large drug companies.

“It’s my emphatic belief that Roche is sincere in its efforts to allow this company to exist as an independent operation, and I honestly believe our future success is dependent on that,” Levinson said.

Analysts hailed the Roche move as brilliant and unexpected--and good for the health of a highly regarded, pioneering biotech firm.

“Roche found a very smart way of having its cake and eating it too,” said Meirav Chovav, an analyst with Salomon Smith Barney.

The deal grew out of a 1990 merger agreement, revised five years later, that gives Roche the option of completing its takeover by the end of June of this year, at $82.50 a share.

But in recent weeks the share price peaked at $90 as investors and some analysts bet that Roche would choose not to exercise its option and the share price would then leap upward. Others believed that Roche would be foolish to pass up a chance to grab the balance of the company at a price well below the underlying value of the stock.

“If Roche would have just let the option expire, they would be leaving money on the table,” said Chovav.

But some analysts want to see the structure of the new company before passing judgment.

“The company will be a different piece of paper,” said Hambrecht & Quist analyst Richard A. van den Broek. “Roche will maintain an ownership position and maintain its right of first refusal [for promising drugs] in perpetuity.”

However, Levinson said that the new stock issue “assures a continued arms-length relationship from Roche,” and he described changes in the companies’ marketing and development agreements as “financially and mathematically neutral.”

Genentech is one of a small number of profitable biotech companies, and it has several successful drugs on the market, including human growth hormone and Herceptin, an antibody that has been shown effective in treating advanced breast cancer.

Earlier this week, the company received a reprieve in its long-running patent dispute with the University California when a federal jury deadlocked on whether the biotech firm had infringed the university’s growth hormone patent. A retrial is expected.

Genentech shares closed at $82 on Thursday, down $4.50, on the New York Stock Exchange. In European trading, Roche shares rose 2%.