How Much for the Whole Company?

Facing the loss of a key technology license, Roche agrees to buy Igen. Also: Promising numbers for the week ahead; securities industry bounces back; corporate goals at variance with variable pay; and more.


For Roche Holdings, the course of treatment was straightforward, if expensive. To resolve a six-year legal battle with Igen International — and protect market share in medical-diagnostics technology — Roche has agreed to buy Igen for $1.4 billion.

The dispute had centered on Igen’s Origen technology, which detects bacteria, viruses, toxins, and disease-causing pathogens, Gaithersburg, Maryland-based Igen had accused Roche, headquartered in Basel, Switzerland, of using the Origen technology more widely than allowed under their licensing agreement. The buyout negotiations were spurred on by a recent U.S. Court of Appeals ruling that, at first, had seemed a setback for Igen.

The appeals court set aside $486 million in damages awarded to Igen, but upheld a lower court ruling that required Roche to renegotiate the licensing arrangement. After the reversal of the damages award — and after Igen terminated the agreement, which had generated about half of the company’s revenue in recent years, according to Reuters — its share price fell 27 percent.

Reuters added that the end of the Roche agreement would also have caused about $23 million of debt payments by Igen to accelerate, according to a recent filing with the Securities and Exchange Commission. Furthermore, covenants in the purchase agreement for the debt limited Igen’s ability to incur additional secured debt — restrictions that “may limit our operating flexibility,” according to the filing.

Losing access to the Origen technology, however, could have incurred far greater damage on Roche and its long-term relationships. Roche’s sales based on the technology have grown in the double digits in recent years, reports Reuters, which notes that analysts have generally praised the deal despite its relatively high price.

For each Igen share, that company’s shareholders will receive $47.25 in cash — which represents a 26 percent premium over Igen’s $37.20 Nasdaq Thursday close — as well as one share in a newly spun-off company that will control the Origen license. Roche is expected to fund the new company to the tune of $155 million, and will receive nonexclusive rights to Origen at no cost.

“I am convinced that we have achieved a clear win-win situation for all parties involved,” said Franz B. Humer, chairman and CEO of Roche, in a statement. “Putting this long period of uncertainty to an end will allow both Roche and the new spinoff company to fully focus on their respective businesses and to further develop them independently of each other.”

The Week to Come: “Packed with Economic Data”

Almost 65 percent of the S&P 500 companies have reported their earnings for the second quarter, and nearly 70 percent of those companies have exceeded analyst expectations, reports CBS Marketwatch. During the week ahead, says Reuters, reports are expected from American Express Co, BMC Software, Sprint Corp., Xerox Corp., McDonald’s Corp., Tyco International Ltd., Verizon Communications, The Walt Disney Co., Exxon Mobil Corp, Halliburton Co., and Procter & Gamble Co.

Thursday and Friday will be “packed with economic data,” adds the wire service. The GDP report, expected Thursday, is estimated to show that the gross domestic product for the second quarter grew 1.5 percent, up from 1.4 percent. The monthly Chicago Purchasing Management Index, expected that same day, is forecast at 54.0 in July, up from 52.5.

The July employment report, due on Friday, is expected to show an increase of 18,000 non-farm jobs for the month, following a loss of 30,000 jobs in June, according to economists polled by Reuters. The unemployment rate is forecast at 6.3 percent, down from 6.4 percent.

Also on Friday, according Reuters: The Institute for Supply Management’s monthly manufacturing index is estimated to rise to 51.8, from 49.8 in June (a reading of 50 or higher indicates growth); and the University of Michigan’s monthly consumer confidence survey is expected to show a reading of 90.5, up from 89.7.

The Week Just Past: Securities Industry Bounces Back

The securities industry, usually considered one of the leading sectors of the economy, is bouncing back from recession, according to a report issued by the Securities Industry Association. Revenue growth in the industry has resumed for the second straight quarter, with more of the industry’s business lines posting profits. Second-quarter profits were the highest in two years, and included improved results in underwriting and commission fees, in addition to fixed-income trading.

The industry’s profits for the second quarter are expected to reach $3.9 billion, up from $3.5 billion in the first quarter and far above the $1.1 billion for the fourth quarter of 2002. According to SIA, full-year 2003 profits are expected to be $15.0 billion, more than double the 2002 figure of $6.9 billion. The improved performance was the result of increased revenues from underwriting and commissions, as well as fixed-income trading. The trade group added that cost controls, combined with lower interest rates, resulted in a decline in expenses from $34.4 billion in the fourth quarter of 2002 to $31.6 billion in the first quarter and $33 billion in the second quarter.

In another sign of economic growth, new orders for manufactured durable goods rose by 2.1 percent in June, to $172.5 billion, according to the Commerce Department. The increases in both durable-goods orders and shipments were the highest since January. Gains were led by a 3.9 percent rise in orders for transportation equipment; excluding the transportation sector, orders rose 1.4 percent.

The housing sector also remains strong. The Commerce Department reported that June sales of new single-family houses rose 4.7 percent from the prior month, at a seasonally adjusted annual rate of 1.16 million homes. June nationwide results rose 21 percent from last year’s levels. All regions of the country showed improvement; particular strength came from housing activity in the Northeast.

Corporate Goals Still at Variance with Variable Pay, Says a Survey

A report by Burlington, Massachusetts-based management software provider Performaworks reveals that 80 percent of the companies that responded to its survey have a goal-setting process in place. However, most of these goals are set only annually — and none has a direct connection to corporate goals on an ongoing basis.

Part of the problem, according to the report: the “rapid pace of change at large companies.” In the survey — which polled 156 HR managers at North American companies with 2,000 or more employees — 35 percent of managers reported M&A activity at their company over the past year, 50 percent reported significant leadership changes, and 26 percent reported significant strategy changes.

Fully 75 percent of respondents predicted a gradual penetration of variable pay practices into a larger percentage of the workforce — but for the time being, perhaps they’re thinking of someone else’s company. Variable pay plans cover less than 25 percent of employees at about half the companies surveyed; plans that cover most or all employees are in place at only 16 percent of companies.

Short Takes

  • “Something has gone very wrong with the maestro,” wrote Paul Krugman in The New York Times, the latest publication to ponder Alan Greenspan’s cautiously optimistic Congressional testimony, which fueled a selloff in the Treasury market.” There is very little evidence in the data for a strong recovery ready to break out. As far as I can make out, Mr. Greenspan’s optimism is entirely based on models predicting that tax cuts and low interest rates will get the economy moving.”

    Adds Krugman: “Mr. Greenspan must know that his legacy is in tatters; at the rate things are going, history will remember him not as the maestro of the new economy, but as an accomplice in America’s descent into debt.”

  • Baxter Healthcare has filed a lawsuit in San Francisco federal court that claims a former employee provided manufacturing trade secrets to German conglomerate Bayer. The suit accuses Gopal Dasari of copying confidential files on Baxter’s biological manufacturing processes to compact discs shortly before taking a job with Bayer in May. Bayer denies the accusation.
  • Microsoft has unveiled a new financial management organization. The software company will spread duties among sub-CFOs who will manage the finances of seven different business units: Windows, server software, mobile software, office software, video games, business software, and MSN. CEO Steve Ballmer and CFO John Connors will oversee Microsoft’s combined finances.
  • Software maker Hyperion Solutions agreed to acquire rival Brio Software for $142 million in cash and stock.

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