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Genentech-A-Go-Go: Our Lips Are Sealed

Genentech Earnings
Genentech Earnings

On the Genentech third quarter earnings conference call analysts, investors and reporters were hoping to get some color on the status of the Roche play for the rest of DNA it doesn't already own.

But from the outset CEO Art Levinson warned, "Don't even go there because we ain't talkin'." That's a paraphrase, to say the least. "We will not be discussing anything further on the call today regarding the Roche proposal," is what Levinson actually said.

That didn't sit too well with at least one analyst. When his turn came up to ask a question Eric Schmidt at Cowen and Co. said he was going to ignore the "admonition" regarding the elephant in the conference room. Schmidt said Genentech has had a history of transparency with its investor relations and so, he's frustrated by what he called the lack of transparency on the proposed deal. Chief Financial Officer David Ebersman replied, "We regret your frustration, but we've been advised not to say anything." Translation: Our lawyers told us to keep our mouths shut.

Nonetheless, Schmidt is upgrading DNA shares this morning to the equivalent of a "Buy" rating from a "Hold". In a research note to clients he writes, "While management refused to discuss the Roche situation, we believe a deal is inevitable, and that an agreement would be facilitated by a recovery in the credit markets. We believe large-cap investors seeking economically resilient growth at a reasonable valuation will find Genentech shares attractive." He thinks the deal gets done at $90-plus--not a huge call given that Roche has already put $89 on the table and DNA has said it's too low. Maybe Roche will have more to say about the situation when it reports earnings next Tuesday.

Meantime, as is his way, Deutsche Bank's Mark Schoenebaum approached the touchy topic with a little levity. He prefaced his question on the call by saying, "If this happens to be your last quarterly call as a stand-alone company, you will be missed. And David (Ebersman, the CFO), if you wanna come back to the sell side (he used to be an analyst before going to work for Genentech)...it doesn't pay as much as it used to, but it's fun." At least a few people laughed in the Genentech conference room. If nothing else, the guy knows how to get a shout out on this blog.

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And speaking of employees leaving Genentech, the company spent 44 million bucks in the third quarter on retention bonuses to keep workers from bolting because they might not want to work for Roche and/or fear getting cost-synergized in a potential takeover. The expense was one reason for the earnings miss. On the call Ebersman estimated the plan will subtract eight cents from earnings per share this year, 12 cents next year and two cents in 2010. But all that could change, he said, if Roche ends up buying Genentech. And the money appears to be talking. Levinson said in the three months or so since Roche announced its intentions that there's been no increase in employee turnover versus the same amount of time prior to the surprise bid.

At a time when salaries, in general, could be at risk, according to an article in "The New York Times" today, a retention bonus--even if it's due to an unsolicited takeout offer--might have some employees feeling kind of lucky.

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