12:00 AM
 | 
Aug 18, 2008
 |  BioCentury  |  Finance

Ebb & Flow

Investors reached new heights of optimism after a special committee of three independent Genentech board members rejected Roche’s offer to buy the 44.1% of the biotech it doesn’t own for $89 a share, or $43.7 billion. Genentech (NYSE:DNA) closed Friday at $98.23, approaching its all-time high close of $98.94 on Nov. 21, 2005.

The company’s market cap is now $103 billion.

The special committee also approved “a broad-based employee retention program” that the full board had authorized it to develop. The move is part of an effort to avoid one of the downsides to public battles over company acquisitions - that the best (and most mobile) employees often leave if they don’t want to work for the bidder.

According to Genentech’s SEC filings, none of Genentech management had change of control provisions in their employment agreements at the time Roche (SWX:ROG) made its bid last month (see BioCentury, July 28).

“The objective of the program is to address employee retention at this time of uncertainty with the Roche proposal,” said Genentech spokesperson Caroline Pecquet.

She said the program would include a cash retention bonus in lieu of the 2008 stock option program, a cash severance payment, a health benefit program and the acceleration of stock options under certain conditions.

Genentech said it expects to divulge further details in an 8-K filing with the SEC.

The partners’ 1999 “affiliation agreement” does map out how unvested stock options would be treated in the case of an acquisition.

The agreement states that after a merger, employee options become either immediately exercisable for the full number of shares, or exchangeable for deferred cash compensation. In the latter case, the cash would vest on the same schedule as the option at a value that Roche deems equivalent to the value of a share.

The pharma also could cancel the options and replace them with an option for what it deems is an equivalent amount of Roche stock.

At Dec. 31, Genentech had 92.3 million shares underlying outstanding options, with a weighted average exercise price of $60.94. That would translate into a total pre-tax gain of $3.4 billion for the exercise holders at Friday’s closing share price.

Genentech Chairman and CEO Arthur Levinson had 5 million exercisable shares at that date with a weighted average exercise price of $35.51. He had another 1.2 million unvested options, with a weighted average exercise price of $77.39. All told, Levinson conceivably could make about $342 million pre-tax, if all the options were immediately exercisable and sold at Friday’s close of $98.23(see “Genentech Executive Payouts”).

PML opportunism

Financier Carl Icahn apparently isn’t too worried about two recent cases of progressive multifocal leukoencephalopathy reported in multiple sclerosis patients receiving Tysabri natalizumab, which is marketed for MS in the U.S. and Europe by Biogen Idec (NASDAQ:BIIB) and Elan (NYSE:ELN).

The partners reported the cases in an SEC filing on July...

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