Genentech to issue $2 billion in bonds -- Funds to help pay for growth of its cancer drug business

Bernadette Tansey, Chronicle Staff Writer
Thursday, July 14, 2005

Genentech Inc. announced plans Wednesday for a $2 billion bond offering that will help fund the South San Francisco biotechnology company's rapidly expanding cancer drug business.

The company will use $585 million from the issue of senior notes for lease payments on its plant in Vacaville, where it is increasing capacity.

An undisclosed amount will go toward upgrading another plant in Oceanside (San Diego County) that Genentech bought from Biogen Idec Inc. for $408 million in late June.

The funds will also help pay for gaining Food and Drug Administration approval to produce its colon cancer drug Avastin in Oceanside.

The rest of the cash will be used for other purposes, such as research and development, capital projects and acquisitions of products or businesses, Genentech said in a statement. Company spokeswoman Debra Charlesworth said it could not comment further before the bond deal is completed.

Genentech, whose corporate fortunes have been rising on positive news about Avastin and other drugs, is racing to realize the full commercial potential of its approved products while seeking a next wave of drug candidates to continue its growth.

The biotech giant, which just reported a 73 percent increase in profit for the second quarter, is considering buying other biomedical companies to add to its pipeline of experimental drugs.

Financial experts said the bond issue offers a successful company like Genentech many advantages over other means of raising money, such as selling more shares.

For one thing, it's cheaper, said Chris O'Connor, senior managing director at Bear Stearns. With its excellent credit rating, Genentech can sell the bonds at a lower interest rate than less solid companies whose notes would carry more risk. Moody's rates Genentech at A-1, he said.

Genentech plans to offer a combination of five-, 10- and 30-year senior notes. O'Connor said their average interest rate could be 5 percent or lower - - a narrow spread over U.S. Treasury bond yields.

Genentech can also deduct the interest to reduce its tax liability, O'Connor said. By comparison, an equity offering provides no tax advantages, and raising capital that way could cost as much as 9 percent, he said.

Issuing new shares would dilute earnings, spurring investors to sell and drive down the share price, said Arthur Wong, director of Standard & Poor's corporate ratings group. Companies that maintain high-priced shares can use them as valuable currency to acquire other companies or compensate employees, he said.

Raising capital through debt instruments like bonds is a preferred method for mature companies and is increasingly being used by larger biotech firms, he said.

"It means that the biotech industry has come of age,'' Wong said.

Standard & Poor's raised Genentech's corporate credit rating from A to A+ Wednesday, assigning an A+ rating to the proposed bond issues as well.

"The upgrade reflects a marked improvement in Genentech's business position accompanied by a sustained commitment to conservative financial policies,'' S&P analyst David Lugg said in a note.

Genentech shares gained 9 cents, or 0.92, percent to close at $86.68 Wednesday.

E-mail Bernadette Tansey at btansey@sfchronicle.com.