Swiss drug giant F. Hoffmann-La Roche pumped about $2.1 billion into its coffers this week through an unusual stock transaction involving its subsidiary Genentech Inc., the world's first biotechnology company and a bellwether for the industry.
Roche earlier this year bought up the 36 percent of Genentech shares it didn't own and took the company's stock off the market for a month.
Then on Tuesday, Roche sold part of the company in an initial public offering, under a new ticker symbol, DNA -- as though Genentech, of South San Francisco, Calif., were a brash young start-up instead of the established scientific powerhouse that it is.
The new shares promptly soared to record highs.
Roche had purchased the old outstanding shares at $82.50 apiece. The company on Tuesday sold the new shares, accounting for about 17 percent of Genentech stock, to institutional investors and favored brokerage-firm customers at $97 apiece.
In public trading that day, Genentech stock closed at $127, and then rose to $132.87 1/2 on Wednesday amid rising enthusiasm for biotechnology stocks in general and Genentech in particular. The price edged back later in the week amid broad nervousness in the markets, but still closed yesterday at $129 -- or 33 percent above Tuesday's initial public offering price.
The unorthodox series of transactions left both Roche and Genentech in stronger positions, at least in the short run. Roche now owns a bigger share than it did of a far more valuable company. Genentech's tax situation is simpler and its credit rating has improved.
The deal poses an obvious risk, however. Genentech paid cash settlements to many of its key employees to compensate them for old stock options. Now, sitting on piles of money, many of these employees are free to strike out for greener pastures. A few analysts are worried that a mass departure could undermine the very science that put Genentech in such a strong position initially.
The windfall "makes it easier for them to leave," said Jim McCamant, editor of the Medical Technology Stock Letter, a Berkeley, Calif., publication that follows the industry. "The tighter you can tie them to the company, the better."
But Louis Lavigne, Genentech's chief financial officer, isn't too worried. Genentech was born in the entrepreneurial culture surrounding San Francisco Bay, and Lavigne said the prime issue for most employees was that it remain a separate company. This week's deal ensures that it will.
"Genentech has a unique culture, an independent spirit," Lavigne said. "That uniqueness of culture is important to scientific productivity. Roche clearly recognizes that."
Roche bought a majority stake in Genentech in 1990, and the prospect that the drug giant would exercise an option to buy the rest had long acted as a drag on Genentech's stock. This week's soaring share price was just the latest sign that the stock market has become enamored of big, successful biotechnology companies.
Genentech has lately put novel cancer treatments on the market and has a rich "pipeline" of additional drugs in various stages of testing.
Roche invested in Genentech at a time when the company badly needed a cash infusion. Analysts were long baffled as to how Roche would unlock the value of its investment while bowing to Genentech's independent streak. The ultimate solution was certainly clever. When the dust settled this week, Roche not only had $2.1 billion in additional cash, it owned a stake in Genentech worth about $13.6 billion. To get that $15.7 billion return, Roche had invested $6.6 billion in Genentech shares over the years.
CAPTION: REBIRTH OF A STOCK (This graphic was not available)