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It Ain't Over Till It's Over At Genentech


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IT AIN'T OVER TILL IT'S OVER AT GENENTECH

From the moment he arrived at Genentech in 1985, Abbott Labs veteran G. Kirk Raab crowed about how much more fun and exciting biotech was than the stodgy drug industry he had abandoned. He left his suit and tie home most days; he raved about the super-bright, dedicated young Genentech scientists; he said he was proud that Genentech had no big-company manual which, he said, "people only read when they want to fire somebody."

By July 10, Genentech's board had read some company's manual cover to cover. It dismissed Raab from his posts of CEO and president, citing his ethically dubious lapse during a recent negotiation with 66%-owner Roche Holdings Ltd., and cryptically questioning his "leadership" in recent years. It replaced him with the company's respected research director, Arthur D. Levinson.

Such decisive board action might be seen as evidence of effective corporate governance and a situation well under control. At Genentech, however, it more likely reflects some amount of panic. Though still a stunningly effective scientific machine and highly profitable, the biotech giant has been embarrassed by several government investigations. And morale is being sorely tested by the uncertainty created by a majority shareholder that may decide to impose its will at any time.

Now, in fact, Genentech is scrambling to convince shareholders they should approve a deal that would extend Roche's right to purchase the remaining 34% of the company it doesn't already own. In documents made public recently, Genentech admitted it was worried about retaining top scientists made jittery by Roche's undefined role at the company. It portrayed Raab as virtually begging a standoffish Roche to buy the rest of the company.

NO GUARANTEE. It was this negotiation that led directly to Raab's ouster. During the Roche discussions, he admits, Raab asked the Swiss company to guarantee $2 million in personal loans he needed to cover a big tax bill. Besides raising questions of conflict of interest, the request weakened Genentech's defense in shareholder suits suggesting the extension was a bum deal. Roche and Genentech settled the suits by agreeing to slightly up the call price on Roche options, which extend to 1999.

The gaffe was oddly typical of a tenure marked by extremes. In 1990, within months after he had eclipsed founder Robert A. Swanson as CEO, Raab's wife was snared in an insider trading scandal. Constant charges that Genentech's sales force was too aggressive, from the medical community, patient groups, and competitors, have dogged the company. Even now, federal investigators are looking into the company's marketing practices; a sales executive has even been indicted (table).

Yet Raab also doubled income last year to $124 million, on sales of $795 million, and has hiked sales over 60% since 1990. Genentech pushed the exciting cystic fibrosis drug Pulmozyme to market in record time. And while there's a current lull in new products, many still consider Genentech's product pipeline the industry's richest.

Given that record, marvels one major biotech company CEO, "it's rare to see somebody publicly hanged." If anything, indeed, Raab's sudden downfall has only added to Genentech's woes, sparking widespread gossip and rumors within the biotech community of more bad news to come. Says Raab, peeved at the board's swipe: "There is no smoking gun or allegations of secret sexual misconduct or anything like that." Neither board Chairman Swanson nor member C. Thomas Smith, who led the board inquiry of Raab, would return calls.

SCHOLAR IN CHARGE. The board hopes Levinson can make Roche happy. He's an unlikely choice, though. While he rose from a bench gene jock to run Genentech's research effort and is popular among the company's scientists, he has little sales, marketing, or financial experience and seems uneasy in the spotlight.

Does having a scientist in the corner office fit into Roche's grand design? Genentech's sugar daddy has been moving research and development resources to California ever since its 1994 purchase of Syntex Corp. in Palo Alto. In the pending deal with Genentech, moreover, it will pick up all non-U.S. marketing rights to Genentech products. Says an investment banker familiar with both companies: "They'll buy Genentech within a year, I bet, and it will become a research institute." Levinson denies a change in direction is afoot. Already, however, he has announced his top priority is to accelerate Genentech's R&D pace. And ultimately, he will have to feed Roche's appetite for hot new products to stay in the saddle.

ONE EMBARRASSMENT TOO MANY

Blips in G. Kirk Raab's tenure as chief of Genentech

1990 Raab's wife, Mollie, settles an SEC charge that she gave inside information on the deal between Genentech and Roche to her brother.

1994 In a probe of growth-hormone marketing practices, a Genentech sales executive, Caremark, and a Minneapolis physician are charged with conspiracy. Genentech is not indicted.

1994 Federal regulators expand the ongoing investigation surrounding the growth hormone to include Genentech's flagship drug.

1995 Raab resigns after acknowledging that, during negotiations with Roche, he asked for a guarantee on a $2 million personal loan.

DATA: COMPANY DOCUMENTS, BUSINESS WEEKBy Joan O'C. Hamilton in San Francisco


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