Fred Frank and Mary Tanner
In 1978, Lehman Brothers managed a transaction that turned out to be a very big deal for Fred personally. The client, Humana, sought to acquire a regional hospital corporation headquartered in Philadelphia called American Medicorp. When negotiations on a sale price broke down, Humana made a hostile tender offer to shareholders. Suddenly, TWA (Trans World Airlines) intervened as a ‘white knight’ – a second bidder willing to make a higher evaluation of the target. Frank explains the rationale of the airline’s interest: “They also owned hotels – beds in hotels, beds in hospitals.” Frank was convinced that the deal was crucial for Humana. He advised his clients to put in a higher offer. They did, and won the bidding.
Frank had assembled a large team to work on the acquisition. A young banker from Lehman Brothers’ associate pool had been assigned to the group, a woman named Mary C. Tanner, a young Harvard graduate. Frank was impressed with her contributions and incredible work ethic. After the transaction, she was expected to go back into the associate pool, but Frank had other ideas: “I thought, ‘She’s not going anyplace. This is the smartest banker I’ve ever met. She’s staying and working in my group.’”
Tanner joined the Lehman Brothers life sciences team, and eventually became the group’s chief operating officer: “She trained the young people and ran the projects and staff,” Fred explains. “We had the largest life sciences practice on Wall Street.” The duo worked in tandem on dozens of biotech stock offerings and mergers. Eventually, the business associates became a couple and an item ‘on the Street.’ They married in 1988. Tanner eventually took a leave to raise their son, but husband and wife were reunited professionally in 2009 at Peter J. Solomon Company, where Frank serves as Vice-Chairman and Tanner is a Managing Director.
Historically, biotech companies have relied on venture capital investments to support growth through startup phases. Venture capitalists have, in turn, counted on initial public offerings (IPOs) as chances to exit investments in companies that often lack substantial revenues and earnings. Since 2000, financial shocks and crises have made the public wary of risky biotech stocks. The IPO market has diminished, but mergers and acquisitions have increased. Large corporations have taken advantage of opportunities to incorporate innovative biotechnologies. Can venture investors rely on mergers and acquisitions to realize and distribute returns to limited partners? Will IPOs come back? Is there a sustainable future for the biotech industry without them?
Making a Splash
The Genentech-Roche deal made Fred Frank a legend inside the biotech community. Jim Gower, who worked closely with him on the merger, on the Genentech side, recalls an evening in October 1997 when Fred was honored with a Biotech Hall of Fame Award at the Annual Biotech Meeting in Laguna Niguel hosted by G. Steven Burrill and Brook Byers: “We were out by the pool at the Ritz-Carlton. Brook Byers presented the award. He introduced Fred as ‘the man for all times and seasons in biotech, the man who walks on water....’ Fred was seated across the pool from the podium. As only Fred could do, he picked up on that line and proceeded to walk straight across the pool to accept the award, and plunged into the water. He ended up treading water in full suit and tie. Everybody just cracked up.”
LSF Magazine: Summer 2012
The Ubiquitous Frederick Frank
Biotechnology is a capital-intensive industrial sector. It usually takes a biotech company ten-to-twelve years to develop a new product. For young science-driven firms without substantial revenues, the search for funds is perpetual. Capital is life.
In the beginning, venture capitalists were the first to supply it, the first to bet on biotech. A few large pharmaceutical and chemical corporations also acquired stakes in biotech startups in order to keep tabs on the latest technological developments. Of late, ‘angels’ (high net worth individual investors) have made important contributions. However, in order to finance growth into maturity, most biotech firms have had to make the transition from private to public equity, where sizable capital can be accessed.
When the industry was still in its infancy, biotech CEOs began traveling to New York for lessons in high finance, and on Wall Street, a handful of investment bankers began learning the biotech business. The bankers soon started counseling clients, arranging transactions, and developing specialized financial instruments to meet the needs of biotech companies and intrepid investors. In doing so, they shaped the financial architecture of the industry.
Frederick Frank, formerly of Lehman Brothers and now a Director at Peter J. Solomon Company, was the first life sciences specialist in investment banking, and the most prolific. In a career spanning fifty-four years, Frank has served as the lead underwriter in more than 125 initial public offerings. He has negotiated more than 75 mergers and acquisitions, including some of the largest and most important transactions in the history of biotechnology. So central was his role in biotech finance that he became known among Wall Street banking peers as ‘the ubiquitous Fred.’
Fred Frank arrived on Wall Street in 1958, after graduating from Yale University with a degree in philosophy, serving a stint in Europe with the U.S. Army, and earning an MBA from the Stanford Graduate School of Business. It was a good time to get started.
Wall Street was in the midst of a bull market that ran from early 1953 into 1969. The rise was fueled by money from the masses, investments flowing from new segments of the public into stocks, bonds, and mutual funds – especially mutual funds. The shadow cast by the Great Depression had faded, and a new generation looked toward the future without trepidation.
“I interviewed with two leading investment banking firms,” says Frank, “Merrill Lynch and Smith Barney. Both offered me a job. I was more interested in Smith Barney because they had the number one-ranked research department.” The firm also had a formal training program, which appealed to Frank because it introduced newcomers to every aspect of the business. The research portion of the program required trainees to produce an industry report. Fred selected the tire and rubber industry because Smith Barney hadn’t yet covered it: “I felt that a report on a strongly research-supported area wouldn’t contribute much.”
When the training program concluded, the firm assigned Frank to the research department: “I worked for Bill Grant,” he says. “Bill was the head of research and also the drug and chemical industry analyst. He was a fabulous guy.” At the time, it was standard Wall Street practice for the pharmaceutical and chemical industries to be covered by the same analyst. Frank assisted Grant in both areas.
After several months on the job, Fred went to his boss, who was a chemist by training, and said, “Bill, it makes no sense. These two industries have little in common. Why don’t you cover chemicals, and I’ll cover pharmaceuticals?” Grant approved the idea. “He graciously let me do it,” Frank says. “I was fortunate.” Fred Frank became Wall Street’s first dedicated pharmaceutical industry analyst. It wasn’t long before every firm followed.
Frank again reconfigured his area of specialization in 1962. He made an announcement before a crowd of 300 at an annual Smith Barney research conference: “I want you to know that I no longer cover the pharmaceutical industry.” His colleagues were puzzled. Frank went on to explain that he would henceforth include medical devices, diagnostics companies, and healthcare services within his purview: “I’m going to cover the life sciences industry.” He was only thirty years old, and relatively new to Wall Street, but he had already established a reputation as an innovator and trend-setter.
Frank also became known for his genius in cultivating relationships. Robert F. Johnston – who later became a serial entrepreneur in biotech, founding Genex, Cytogen, Sepracor, and others – joined Smith Barney as a fresh recruit in 1962. To Johnston, Frank was “the analyst who wrote up the little companies like Raychem and Millipore that younger guys like me were interested in. We didn’t care about Dow and Dupont.” He recalls that Fred had already acquired “a golden rolodex.” Johnston and other junior analysts would go to him to talk about companies. They knew him to be generous: “He’d make introductions for us.”
Smith Barney quickly recognized Frank’s natural leadership abilities. He was appointed Co-Director of Research at the firm, and then Vice-President and Director while still in his mid-thirties. In 1969, he left to join Lehman Brothers, again achieving Wall Street firsts – he became the first partner from the investment banking industry ever to leave Smith Barney for a Wall Street competitor, and the first partner ever to join Lehman Brothers from the outside.
The first biotech investment banker
Three years later, Frank gave up research and analysis and moved to the investment banking side of the business. He began helping company executives negotiate mergers and acquisitions (M&A) and raise money in capital markets. It was, once more, a good time to get started – paradoxically. In 1969, a long period of expansion in the national economy was drawing to a close. A series of supply shocks – the tripling of oil prices by OPEC in 1973 was the largest – induced stagflation and a protracted economic malaise. Wall Street suffered through a decade of stagnation.
Pharmaceutical stocks dived, but drug companies continued to enjoy robust growth. The industry was quick to rebound. The introduction of blockbuster drugs – SmithKline’s ulcer drug, Tagamet®, was the first, in 1976 – bolstered the sector’s growth trajectory and premium investment valuation followed suit. The combination of trends led to a wave of consolidation that swept over the industry in the 1980s, and accelerated in the 1990s. It all added up to a prosperous time for healthcare investment bankers. Fred Frank managed several very large transactions for Lehman Brothers, including the Bristol-Myers Squibb merger in 1989 that formed what was, at the time, the second largest pharmaceutical corporation in the world.
Frank was introduced to biotechnology in 1977 when scientist, inventor, pharmaceutical executive, and biomedical entrepreneur Alejandro Zaffaroni called on him to look at a small firm in the San Francisco Bay Area called Cetus. Zaffaroni was a Director. Cetus had been founded in 1971 by Nobel Prize-winning physicist-turned-microbiologist Donald Glaser and Berkeley, California venture capitalist Moshe Alafi, along with molecular biologist Ron Cape and physician Peter Farley, who served the company as CEO and President, respectively. Dr. Carl Djerassi, a co-founder of ALZA with Zaffaroni, was also a Director.
The Company was developing improved strains of bacteria for fermentation processes, and had recently begun to investigate industrial uses of recombinant DNA (rDNA) technology. The co-inventor of rDNA technology, Stanford University physician and pharmacologist Stanley Cohen had recently joined the Company’s scientific advisory board. Frank flew to the West Coast and met with the principals. Cetus needed to raise additional capital. The executives and the Board of Directors wanted to take the firm public. At that time, Cetus had no products, and fewer than ten employees. Fred gently advised the group to delay, but said, “The time will come.”
He credits Ron Cape with teaching him about rDNA technology and possible applications in the pharmaceutical and chemical industries: “I spent a lot of time with Cetus, getting educated. Ron Cape was a good mentor, very patient.” Frank was convinced that the new technology would become immensely important: “In my way of thinking,” he says, “this was a game-changing opportunity in the life sciences field.” Frank’s association with Cetus would continue through the company’s IPO and its 1991 merger with Chiron Corporation, with various financings in between.
Shortly after his introduction to Cetus, Frank began calling on the Company’s principal biotech rival, Genentech. Genentech was founded in 1976, also in the Bay Area, by University of California, San Francisco microbiologist Herb Boyer – who was Stanley Cohen’s partner in the invention of rDNA technology – and a young entrepreneur named Robert Swanson. Frank talked at length with Swanson about Genentech’s possible future. He also spent time with venture capitalist Tom Perkins, the Chairman of Genentech’s Board of Directors, as the company prepared to make an initial public offering of stock. According to Frank, Perkins eventually gave him a friendly ultimatum: “‘Fred, you have to make a choice. If you want to work with us, you can’t work with Cetus. We’re too competitive.’”
Frank sensed that the Genentech offering was going to be spectacular, but declined with regrets: “I felt I had an obligation to Cetus because I had been working with them for a few years. I did not accept the Genentech offer, and unfortunately was not involved in their extraordinarily successful IPO.” On October 14, 1980, Genentech went public and electrified Wall Street. The offering price was $35 per share. Shares ran up to $85 before floating down to close at $71.25. The event cemented the new scientific field of genetic engineering in the public consciousness, not only as means of scrambling DNA, but also as a wealth-generating technology. “When Genentech hit,” says Frank, “I called up Cetus and said, ‘Now you’re going public.’ We led the offering.”
Clockwise from top left: Alex Zaffaroni, Ronald Cape, George Rathmann, Gordon Binder
At Cetus, there was never a question that Lehman Brothers would underwrite the sale. Ron Cape explains that Fred Frank was “the most knowledgeable, the most personable, and therefore the most attractive person to be our number one contact.” Cetus went public on March 1, 1981. Gross proceeds totaled $122 million. “It was a pretty phenomenal offer,” says Frank. At the time, it was the second-largest IPO in U.S. corporate history. The Genentech and Cetus stock offerings had a massive impact on the development of the biotech industry. By the end of the decade, over eighty U.S. biotechnology companies had followed the leaders and sold shares to the public, raising hundreds of millions of dollars to fund early stage R&D programs.
Despite the eye-catching success of the first two offerings, Lehman Brothers remained reluctant for a time to underwrite biotech IPOs. It was a struggle for Fred to convince his colleagues. Many of the sales were relatively small. Failed offerings would besmirch the firm’s reputation, and it remained difficult in the early 1980s for bankers to understand how companies mired in red ink, without marketed products or substantial revenue streams would appeal to buyers in public markets. There were no historical precedents.
Still, Frank managed to put Lehman Brothers in front of several early biotech IPOs. The Firm led Applied Biosystems’ initial offering in July of 1983. Applied Biosystems was an instrument maker. Frank had argued that even though biopharmaceutical companies hadn’t proved themselves, the industry needed enabling tools, and Applied Biosystems already had a successful product on the market. That persuaded the Firm that Applied Biosystems was a viable enterprise. A month before Lehman had turned down a chance to take Amgen public – against Frank’s strong recommendation to seize the opportunity. Amgen had only science; it lacked tangible wares.
Even though Fred did not underwrite the Amgen sale, the story of events leading up to it illustrates his ‘ubiquity’ and broad influence during the industry’s early explorations of Wall Street and public finance. Gordon Binder, then Amgen’s CFO, has written about it: Amgen was almost out of money. At a board meeting, CEO George Rathmann asked for suggestions. Binder, who had earlier met with Frank to discuss financial strategies, proposed an IPO and met with the usual objections: ‘How can you go public without revenues or earnings?’ Binder replied, “Fred Frank says we can.” The board swiftly agreed: ‘If Fred says we can go public, then we will.’
It wasn’t long before Lehman Brothers accepted Frank’s assurances that the world had changed. The firm became a major player in the biotech IPO game, the leader among Wall Street’s first tier investment banks – although Frank’s leading competitors in biotech finance were specialized boutiques such as Alex Brown, Cowen & Co., Montgomery Securities, and Robertson Stephens.
Mergers & acquisitions
In the late 1970s and early 1980s, entrepreneurs and investors alike were optimistic that biotechnologies could revolutionize the pharmaceutical industry (and many other industrial sectors) by supporting the development of fully integrated, self-sustaining drug companies (i.e., firms that independently manage research, product development, regulatory affairs, manufacturing, marketing, distribution, sales, and other functions). Only a handful of companies from biotech’s first wave accomplished the goal, and, from that original cohort, only Amgen, located in Thousand Oaks, California, remains independent.
The first acquisitions of small biotech firms by big pharma corporations occurred in March of 1986: Bristol-Myers acquired Genetic Systems, a Seattle monoclonal antibody company, and Eli Lilly & Co. purchased Hybritech, a San Diego monoclonal antibody company. Many analysts believed the transactions signaled a coming tsunami. In fact, consolidation of the field did not proceed as rapidly as many predicted, but it did proceed inexorably. Since 1986, there have been hundreds of mergers and acquisitions in the biotech sector, many of ‘blockbuster’ scale.
Arguably, none has been more important than the staged acquisition of Genentech by Swiss pharmaceutical giant F. Hoffman-LaRoche in 1990. The structure of the deal was original; many aspects were unprecedented. Fred Frank was its architect. By 1990, he was already highly regarded for his financial ingenuity, but many knowledgeable observers consider the Genentech-Roche deal his masterpiece. The terms and conditions were profoundly consequential.
The merger stabilized Genentech’s stock without compromising the firm’s autonomy or destroying its unique culture. It enabled the Company to maintain its research programs and introduce a string of important new biopharmaceutical products to the medical marketplace in the 1990s. The industry enjoyed an extended period of (mostly) fair weather on Wall Street from the mid-1990s until 2008. Genentech’s highly-visible success through these years helped to maintain the favorable climate. ‘Fred’s deal,’ as it came to be known, allowed the Company to continue its research-focused forward progress. It became an exemplar for configuring relations between biotechnology and pharmaceutical companies in mergers and acquisitions.
In 1989, Genentech was the leading biotechnology company in the world, but it was in a predicament. The company had employed recombinant DNA techniques to develop three major pharmaceutical products – human insulin, human growth hormone, and t-PA (a protein that dissolves blood clots), but the success was doubled-edged. The general expectation on Wall Street was that such a company would increase revenues and earnings at a rate greater than twenty percent each year. Genentech’s leadership knew that earnings rate would not be sustained if the Company continued to support its promising research and development programs.
The company had a strong pipeline of drug candidates, but taking full advantage of it would require huge R&D expenditures. The spending would place a drag on earnings. In addition, sales of Genentech’s t-PA, marketed under the brand name Activase® for the treatment of heart attacks, had not generated the substantial revenues and profits that had been expected. A high price per dose and an equivocal result in a clinical comparison of efficacy (in terms of mortality reduction) with the less expensive standard of care had attenuated the drug’s market penetration.
In the summer of 1989, the Company’s stock was sliding, and appeared as if it might drop into single digits. Two years earlier, it had traded in the fifties. It was hovering at $21 per share when Tom Perkins, Chair of Genentech’s Board of Directors, Bob Swanson, the Company’s CEO and Co-Founder, and G. Kirk Raab, Genentech’s President and Chief Operating Officer, called on Fred Frank for financing ideas. They feared that the Company was becoming an irresistible takeover target.
Swanson and Raab had reached the painful conclusion that the only way to sustain Genentech’s research and preserve shareholder value was to sell the company. The board had given its assent. The Firm’s leadership sought terms that would prevent a buyer from raiding the kitchen without replenishing the cupboards – they wanted to ward off any attempt to squeeze the company’s assets (patents, royalties, products, etc.) for whatever could be wrung from them, while rationing R&D.
Frank agreed to help. Jim Gower, Genentech’s Vice-President of Sales & Marketing was brought in to work on the project. Beyond Swanson, Raab, and the directors, Gower was the only person at the Company who knew what was happening. Frank opened preliminary discussions with potential buyers in September. Among U.S. companies, only one conversation acquired gravity. Merck was interested, but the discussion was brief. Genentech’s insistence on operational autonomy was a source of discomfort. As Raab puts it, Merck saw that “they would probably turn the acquisition into Merck West. They didn’t think that was a good idea. They could pay to build Merck West cheaper than they could buy Genentech.”
Frank then made a trip to Wilmington, Delaware to explore the possibility of combining DuPont’s pharmaceutical business with Genentech’s. The idea made sense, he believed, because “DuPont, having acquired a mid-sized pharmaceutical company, still had no idea what they were doing in pharmaceuticals, not a clue.” In theory, Genentech could sail into a safe harbor, DuPont would benefit from Genentech’s innovative capacity and R&D expertise, and there would be little incentive for the big firm to smother the small one by drafting it into the service of larger corporate projects. It would make more sense to let Genentech put DuPont’s pharmaceutical research to its own ends.
The previous year, Frank had architected the merger of Marion Laboratories and Merrell Dow Pharmaceuticals, a subsidiary of the Dow Chemical Company. Dow pursued the merger to take advantage of Marion Laboratories’ high-performing sales and marketing organization. The big chemical company did not want to absorb Marion’s assets and take on an enormous amount of ‘goodwill’ on its balance sheet that would have to be amortized. It wanted to shuffle Merrell Dow’s R&D program into Marion’s corporate structure. Fred saw that an acquisition premised on a similar kind of complementarity would suit Genentech’s wants and needs. He thought that Genentech-DuPont might make a good match. Unfortunately, he couldn’t find anyone in Delaware, or anyone advising the chemical giant, who agreed.
Clockwise from top left: Kirk Raab, Robert Swanson, James Gower, Thomas Perkins
From the DuPont Hotel in Wilmington, Frank got on the phone to F. Hoffman-LaRoche, Ltd. in Basel, Switzerland. He proposed pushing Roche’s U.S. business in Nutley, New Jersey into Genentech. Roche expressed interest; negotiations commenced. Frank met with Roche officials in Zurich rather than Basel, in order to keep the negotiations secret. Although officially retained by Genentech, he effectively represented both parties. Former Genentech Chairman Tom Perkins comments on the unusual arrangement: “Roche had enough confidence in, and respect for, Fred Frank that they did not use an investment banker. That's pretty astonishing.” In the matchmaker role, Frank had to find a way to harmonize the interests of two corporate entities in very different sets of circumstances.
As always, price was an issue. Genentech needed protection while it developed products. How much would it cost Roche to provide it? Initially, Frank attempted to replicate a structure that he had crafted for the Marion Merrell Dow deal. In that transaction, Fred had pioneered the use of contingent value rights (CVRs), instruments that have since proven to be particularly well-suited to biotech finance. CVRs are securities issued in acquisitions to provide sellers with insurance against losses should the buyer’s stock underperform after closing. In the Marion Merrell Dow case, they entitled holders to cash payments if the stock traded below a predetermined price when the rights expired on a specified future date. Similar instruments called contingency payment rights (CPRs) protect buyers and tie payments to the achievement of specific scientific or commercial milestones involving acquired assets.
CVRs and CPRs are employed to bridge valuation gaps. Fred saw that they could bring divided parties closer together. They could, for example, satisfy shareholders of acquisition targets that they are receiving full value for the assets they are transferring, while simultaneously reducing amounts that buyers have to pay in cash for goodwill premiums. In the case of Marion Merrell Dow, CVRs assured Marion shareholders that the Company’s highly profitable business would be appropriately valued. In the Genentech-Roche case, Frank envisioned CVRs persuading Genentech shareholders that the company’s development pipeline and scientific capabilities would be properly appraised.
Governance issues were equally important to Genentech. The company’s leadership felt that operational autonomy was essential to continued progress in research and development. Fred Frank agreed. He cautioned Fritz Gerber, Roche’s Chairman and CEO, Jürgen Drews, the Company’s head of R&D, and Henri Meier, the CFO, that if they attempted to meld Genentech’s people and programs into Roche’s system, they would inadvertently destroy what they were buying: “I explained that Genentech had a very special culture, which was different from theirs. At Genentech, you came to work anytime, day or night. At Roche, you came to work from nine to five, and you wore jackets and ties. I warned them not to upset the culture because that was what made the Company distinctive and innovative.” Gerber, Drews, and Meier were receptive to the message. “They had the vision,” Raab says, “to let Genentech be Genentech.”
‘Fred’s deal’ was characterized by a number of highly unusual features. Although Roche was purchasing a majority share in the company, it took only two of 13 seats on Genentech’s Board of Directors. “Fred Frank did a superb job of convincing them,” says Tom Perkins, “that this would be good for them, and good for all parties. It was done that way, and it worked.” The final agreement was full of stipulations that impeded Roche’s ability to interfere with Genentech’s independent decision-making. “Obviously,” says Raab, “we couldn’t do anything to dilute or undermine their ownership position, but outside of that, they had little power over anything else.”
Top: Roche Headquarters, Basel, Switzerland
Top: The Genentech Campus, South San Francisco, CA
Roche’s due diligence was also extraordinary – the company’s scientists and financial team never went to Genentech until the terms and conditions of the transaction were finalized. Instead, Frank hired a technical writer to interview Genentech’s scientists. He collected the information, took it to Zurich, sat with Jürgen Drews to review it, and that was the sum of the due diligence. Roche didn’t want to spook the talent. “That,” Fred notes, “was pretty extraordinary. It took a lot of courage and foresight on Roche’s part.” These aspects of the deal were wholly original and unprecedented.
Fred’s matchmatching skills are perhaps unparalleled, but the merger did not go off without a hitch. When Fred had worked out the terms and conditions, and secured an approval from Genentech, he met with Fritz Gerber and Henri Meier at the Dolder Grand Hotel in Zurich and reviewed the details. At the eleventh hour, Meier announced that Roche couldn’t go through with it as Fred had explained the fine points of the CVR. Fred was dismayed: “Here I am, thinking I had an agreement with both parties. My client thinks that Roche agreed to this deal, and now I have no deal. At lunch that day, I created what became the Genentech-Roche deal.” He jettisoned the CVRs and created a new structure that Roche was prepared to accept, one that has since been widely studied and discussed. The new arrangement would result in a larger cash payment to Genentech.
Dolder Grand Hotel, Zurich, Switzerland
On Frank’s advice, Genentech and Roche agreed to the following: Roche would buy $494 million worth of new stock from Genentech at the market price of twenty-one dollars a share. The company would simultaneously offer to buy half of the shares outstanding at a 67% premium – $36 per share. Roche would pay $2.1 billion in all, and own 60% of Genentech. The remaining shares would be exchanged for a new form of redeemable common stock with an embedded option: Roche could acquire additional pieces of the company, or all of it, at any time during the next five years, for a fixed price which would escalate every quarter ending at $60 per share in 1995. Genentech’s most enthusiastic and optimistic shareholders complained that the deal imposed a ceiling on the Company’s value – the price of its shares would not likely rise above the price that Roche could pay to acquire them. Most were happy that their investment didn’t wither in a takeover with the stock at its nadir. The merger was approved.
With this structure in place, the price of Genentech’s stock over the next five years closely tracked the linear rise of Roche’s option price (while most public biotech stocks fluctuated more or less wildly). The deal had stabilized the Company, just as it was intended to do, Genentech had preserved its operational autonomy, and it had cash to spend aggressively on R&D. In 1995, with the stock trading at $57, Frank went to Genentech and said, “My assumption is that when this option expires, Roche isn’t going to exercise it.” He reasoned that the terminal option price did not reflect the actual achievements of the Company, which lagged original projections.
Fred advised Genentech to renegotiate and extend the arrangement. As an enticement, he suggested offering rights to market Genentech products outside the United States: “You’re not going to be able to market outside the United States and Canada as effectively as they are. They have a huge marketing organization.” Roche accepted, and the option was given four more years of life. Both parties agreed that options and obligations would terminate with finality in 1999, with no further extension.
In the second iteration, Frank inserted an option for shareholders. “Henri Meier was very much against this,” he says, “but the CEO, Fritz Gerber, was willing to do it.”
Roche’s purchase option price would escalate over the four years to a maximum of $82.50 per share in 1999. If Roche had not exercised its option at that time, Genentech shareholders could then sell their shares to Roche for $60 each. Frank believed that this structure would encourage Roche to complete the acquisition at $82.50 per share. He expected the stock price to once again track Roche’s option price. If it did, shareholders would not exercise the $60 option. Calling in all shares at $82.50 would be Roche’s last chance fully to control the company.
Fred believed that Gerber and colleagues would do it. As the deadline approached, Wall Street got the idea that they would not. The sun was shining, Genentech was making hay, and Roche already held 60% of the Company. Investors came to believe, apparently, that Roche would not risk disrupting Genentech’s progress, and would let its options expire. The price of Genentech shares rose to $96. Roche exercised and purchased the remainder of the company for $3.7 billion.
Roche then did a remarkable and prescient thing. It took 22,000,000 shares of Genentech, and put them up for sale in a public offering, at $97 each. On July 20, 1999, Genentech’s stock resumed trading on the New York Stock Exchange under the ticker symbol ‘DNA.’ Raab comments: “Roche went on to do brilliant things. They relisted the stock. Genentech remained Genentech. Art Levinson was the CEO, and it continued to be a wonderful research and development and domestic marketing machine.”
‘Fred’s deal,’ protracted as it was, became the model of an ideal merger and acquisition involving biotechnology and pharmaceutical companies. In the years following the original agreement in 1990, Genentech generated new clinical trial data to rescue Activase®, and went on to introduce a remarkable series of innovative biological ‘blockbuster’ products that included Pulmozyme®, Rituxan®, Herceptin®, Xolair®, Raptiva®, Avastin®, and Tarceva®. In 1989, Bob Swanson and Kirk Raab sought desperately to protect Genentech’s research. Fred Frank found a way to do it. Tom Perkins says, “I don't think we could have done it better.”
* * *
After Genentech-Roche, Fred Frank went on to broker many more important mergers and acquisitions in biotechnology, deals that reshaped the competitive dynamics of the field. He was involved in the 1991 merger of Cetus and Chiron, and parceled PCR to Roche Molecular Systems. In 1992, he devised terms and conditions for the sale of Genetics Institute to American Home Products that closely resembled the Genentech-Roche format. In 2009 and 2010, he was involved in the biotech industry’s first two hostile takeover attempts, both made by Astellas Pharma. Frank and team represented CV Therapeutics in the first bid, and OSI Pharmaceuticals in the second. Astellas’ bid for CV Therapeutics failed when ‘white knight’ Gilead Sciences made the purchase. The acquisition of OSI was completed after Astellas substantially increased its offer. Frank did not represent either party in the industry’s third hostile buyout effort, Sanofi’s pursuit of Genzyme in 2010-2011, but he suggested the use of a CVR to help bridge the valuation gap in that deal.
In March of 2009, Roche repurchased all publicly-traded shares of Genentech for $46.8 billion. Fred Frank was not involved – he was caught up in the collapse of Lehman Brothers in the aftermath of the late 2008 financial crisis. However, he reportedly suggested to Dr. Charles Sanders, the head of the directors’ committee at Genentech charged with managing the transaction, that a less than 100% ownership arrangement could still be negotiated. Although he played a crucial role in consolidating the biotechology industry, his reflections on the process are wistful: “I think it’s very sad that there’s no Genentech, no Genzyme, no Genetics Institute, no Chiron, no Cetus anymore... the pioneers are gone.”
He is also disappointed that access to public capital has become a critical problem for innovative young biotech companies – but not surprised. Frank points out that the overall return on public investments in commercial biotechnology, from the early days of Cetus and Genentech through the present, has been negative. “You can’t do that forever,” he says. “You can’t take a high-risk industry and have a negative return for thirty years and expect people to keep investing. We need to change a lot of things.”
Frank believes that, in order to survive and prosper, the biotechnology industry needs more collaboration, more risk-sharing, and more understanding of comparative advantage in research: “History shows that large pharmaceutical corporations are very good at ‘D’ – development. They’re not as good at ‘R’ – research. Early stage companies are good at ‘R,’ they have innovative science, but they aren’t as good at development – they can’t afford it, and they don’t have the experience. The industry has to become more collaborative.”
Despite the challenges, Fred still loves his work: “I deal with passionate people in the life sciences. They’re devoted to what they do. They aspire to build companies based on products that can improve the quality and longevity of life. What could be better than that? I feel great about it. It’s difficult and risky, but that makes it exciting and challenging.” Fred Frank recently celebrated his 80th birthday. He began working on Wall Street fifty-four years ago. He’s still active and fully-engaged. Has he contemplated retirement? “I came into the business vertically,” he says, “and I’m going out horizontally.”