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GENENTECH RETRIEVING ACTIVASE, PROTROPIN AND GAMMA INTERFERON FROM R&D PARTNERSHIPS IN $400 MIL. STOCK TRANSACTION; FIRM DECLARES STOCK SPLIT

Executive Summary

Genentech will have the exclusive U.S. rights to Protropin (human growth hormone), gamma interferon and Activase (tissue plasminogen activator) after its planned buyout of the two R&D partnership which own the drugs. The stock transaction is worth at least $400 mil. based on an $80 a share market value for Genentech common stock. "Genentech believes these transactions will have a positive impact on the company for the following reasons," the company explained in an Oct. 27 press release. "First, product rights and all profits from future sales will belong solely to Genentech. Second, if Genentech were to wait for the partnerships to complete their R&D programs, it would be buying the completely developed products that would have to be capitalized and amortized. Third, Genentech will deduct the purchase price of the buyouts for tax purposes and therefore reduce future taxes." Under the plan, Genentech will offer 3.3 mil. shares of its common stock, or 3,000 shares for each $50,000 partnership unit of Genentech Clinical Partners (GCP). In addition, the company will offer to buy the assets of Genentech Clinical Partners II (GCP II) for roughly 1.7 mil. shares of common stock, or 2,500 shares for every $50,000 unit purchased. Genentech's announcement coincided with the declaration of a two-for-one stock split, and Wall Street's immediate reaction to the two news items was favorable. Genentech stock closed at 92-1/2 on Oct. 28, up 12-3/4, putting a quick $62.5 mil. premium on the proposed deal. After some investor profit taking, the stock closed the week at 90-3/4. Established in 1982, GCP covers the development of Protropin and gamma interferon. GCP II, which covers Activase, followed in 1983. Funds raised by the partnerships, $55 mil. for GCP and $34 mil. for GCP II, were reported as revenues by Genentech over a period of several years. Both partnerships were to be fully paid in during 1986, Genentech said. Under the original agreements, the company could have begun the GCP buyout in 1988, but the buyout of GCP II could not take place until two years after the approval of Activase. Buyouts Require Partnership Approvals; Proxies To Be Mailed In Mid-December To distribute product revenues, a joint venture was also established between the company and the partnerships, taking effect when the first product reached the market. That happened in the last quarter of 1985, when Protropin was approved by FDA. The joint venture agreement calls for Genentech to manufacture and market the products and receive 78% of revenues, with 22% going to the partnerships. Genentech said that the joint venture will cease once the buyout takes place. To date, Protropin is the only one of the three products to reach the market. The company filed an NDA for Activase in April and gamma interferon is still undergoing clinical evaluation. Genentech's timing for the partnership buyout gives the firm a period to prepare for the approval of Activase, which the firm believes may be cleared by FDA soon. Approval by the holders of a majority of the partnership units of each partnership will be required to effect the transactions, according to the company, and proxies will be mailed in December. According to the release, accounting rules require that the company reflect the acquisition of the in-process R&D in its fourth quarter results as a one-time, non-cash expense of approximately $300 mil., based upon a stock price of $80 per share. Genentech said its R&D partnership for tumor necrosis factor is unaffected.
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