Monday, June 21, 1999
By Eric Pierce
& Adam Michael
If Roche surprised Wall Street earlier this month with its plans to buy out Genentech and then sell some of it back on the equity market, equally clever are the pharma company's plans to leave GNE with the writeoffs of the goodwill and other intangibles that are part of the purchase.
Indeed, the burden of the amortization that will fall on GNE's P&L has gone largely unnoticed in the euphoria over the pharma company's decision to leave part of GNE in public hands and with the stock free of its $82.50 cap prior to the takeout.
GNE's filing with the SEC last week confirmed that under so-called "push down" rules, the biotech's balance sheet will bear the goodwill and other intangibles - the difference between Roche's purchase price and GNE's tangible net assets - generated from the transaction. The net effect of the goodwill hand-off will be a significant drag on GNE's earnings for an as yet unknown period.
The filing estimated the intangibles from the transaction at $3.1 billion ($1.6 billion in goodwill and $1.5 billion in other intangible assets). Because GNE is now wholly owned by Roche, the biotech company said in its filing that it will be required to establish a "new accounting basis for our assets and liabilities, based on Roche's cost in acquiring all of our stock. In other words, Roche's cost of acquiring Genentech is 'pushed down' to us and reflected on our financial statements."
Thus goodwill and intangibles have to be amortized over a period not exceeding 40 years. Assuming GNE amortizes the $3.1 billion over that period, it would place a $0.61 annual drag on its earnings. A 30-year amortization would translate into an $0.81 per share impact; and 15 years would generate a $1.61 per share charge.
GNE isn't talking, citing the quiet period surrounding the offering. But the pro forma figures in the S-3 filing suggest that the company plans to take the write down more quickly. In its 1998 pro forma P&L, GNE shows charges totaling $374.5 million, of which $150.2 million is related to goodwill amortization and $224.3 million is related to the amortization of other intangibles (see chart). Annualizing GNE's pro forma 1Q99 write down of $93.7 million provides a second metric of $374.8 million, consistent with the 1998 pro forma. At that rate, GNE would write down the entire amount in 8.3 years.
GNE's registration statement provided very few details on how many shares Roche plans to offer back to the public. No information was provided on the number of shares to be issued and the price range per share.