Fatal Blunder:
Genentech CEO, a Man
Used to Pushing Limit,
Exceeds It and Is Out
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While in Talks With Roche,
Raab Asked It to Provide
Personal Loan Guarantee
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Scientist Named as Successor
By Joan E. Rigdon07/11/1995
The Wall Street Journal
Page A1
(Copyright (c) 1995, Dow Jones & Co., Inc.)
G. Kirk Raab finally skated over the edge.
Mr. Raab built Genentech Inc. into a biotech power through daring and
aggressive marketing strategies that generated strong sales but earned him
a reputation for pushing the boundaries of propriety. Yesterday, he was
ousted from his posts as chief executive and president after a board
committee did a broad review of his leadership.The proximate cause was an audacious effort by Mr. Raab to secure a
$2 million guarantee of a personal loan from Roche Holding Ltd., which
owns 66% of Genentech's stock and has an option to buy the rest. Mr.
Raab sought the guarantee in the midst of renegotiating Roche's option --
a negotiation that ended in a deal some shareholders felt had
shortchanged them.Mr. Raab never told his board he had sought the loan guarantee.
Although Swiss-based Roche eventually balked and Mr. Raab didn't get
the guarantee, to many -- including, apparently, substantial numbers of
directors -- the effort seemed a clear conflict of interest.But there was more to it than that. Mr. Raab's misstep unleashed the
board probe that in effect provided a pipeline of independent information
to the directors. Genentech said the special committee did an "extensive
review of Mr. Raab's leadership over the past few years," including his
personal finances and continuing outside investigations of the South San
Francisco, Calif., company.In one of those cases, Genentech's top sales executive is under indictment
in Minneapolis for allegedly bribing a doctor to prescribe Genentech's
human growth hormone for more children; trial is set for next month.
Genentech's practices also are the subject of broad investigations by the
Food and Drug Administration and the Federal Trade Commission.
Prosecutors and regulators are scrutinizing many of the very marketing
methods Mr. Raab has used to forge Genentech into a biotech power.On the board committee's recommendation, directors voted last Friday to
demand Mr. Raab's resignation. He submitted it that day, and it was
announced yesterday morning. As his successor, Genentech named
Arthur D. Levinson, a senior vice president.In an interview, Mr. Raab maintained that he was guilty of no more than
bad judgment, brought on by money troubles. So why did he seek the
loan guarantee? "I've asked myself that question a whole lot," Mr. Raab
said. "I'm clearly paying a great price."Genentech itself could pay a price for its CEO's messy departure. Some
speculate that Roche, should it eventually buy all of Genentech, might be
less inclined to continue letting it operate autonomously.Roche's original option to buy the rest of Genentech was to expire June
30, but the deal negotiated this spring gave the Swiss company four more
years to do so, at steadily rising per-share prices. Under sweetened terms
announced yesterday -- at the same time as shareholder suits challenging
the four-year extension were dropped -- Roche increased the maximum
price it could pay in 1999 to $82.50, up 50 cents. Despite the dropping
of the suits, the deal remains controversial.Genentech had more jolting news yesterday. It is dropping efforts to
expand its cystic-fibrosis drug to a much broader category of lung ills.Genentech's choice for Mr. Raab's successor raised some eyebrows,
because he is primarily a scientist. Dr. Levinson, a biochemist who joined
Genentech in 1980, exudes a kind of brilliant boyishness that has made
him much-liked in Genentech's laboratories. His office walls are lined with
his children's artwork rather than the usual assortment of degrees. It is a
touch that, colleagues say, tells much about Dr. Levinson's priorities.His enthusiasm for science is on open display, too. Once during an
interview, he got so excited explaining the creation of a monoclonal
antibody (an antibody that can target diseased cells and minimize damage
to healthy ones) that he leapt from his chair, flung his arms up and struck
a scarecrow-like pose to depict the antibody's molecular structure."Art is a fabulous scientist, but not in my opinion one you would suspect
could run this company," said Gary Kaminsky, a Cowen & Co. portfolio
manager who until recently was one of Genentech's biggest shareholders.
Dr. Levinson said in a statement that he brings "a passion for our science
and a strong commitment to the highest business standards."His predecessor's tumultuous ride ended in a fashion that, critics say, now
seems almost preordained. A master marketeer, Mr. Raab, 59, joined
Genentech in 1985 after missing out in a run for the top job at Abbott
Laboratories. There, Mr. Raab is remembered by Jack Schuler, who
succeeded him as Abbott's president, as a man who would push the
envelope. Within the limits of the law, Mr. Schuler said recently, "Kirk
will take it as close to the edge as he can."Mr. Raab's creative and hard-charging tactics are clearly responsible for
the sales success of Genentech's leading drug, TPA, a genetically
engineered clotbuster for heartattack patients. Mr. Raab gambled $55
million in a huge 1993 study that Genentech hoped would show TPA
superior to an older and far cheaper rival called streptokinase.The study gave TPA a tiny but statistically significant edge, suggesting it
could save one additional life per 100. Some scientists to this day dispute
the finding, but Mr. Raab exploited it to the fullest. He sent thousands of
copies to hospitals and funded hospital seminars, at one of which a
malpractice attorney hinted that doctors could be legally liable if they
didn't prescribe TPA.TPA now dominates the market for clot-busters, and it helped Genentech
more than double its net income last year to $124.4 million, or $1.04 a
share, on revenue of $795.4 million.Mr. Raab also took risks with his personal finances. He said in the
interview yesterday that he had sought the loan guarantee because he
didn't have the money to pay his taxes. Yet the CEO was paid nearly $1
million a year, holds stock in Genentech valued at roughly $786,000 and
reaped about $3 million from selling Genentech holdings last year.
Acquaintances say one drain has been a $10 million mansion Mr. Raab is
building in the Bay Area; one friend says that "it's turned into a money
pit."Mr. Raab wouldn't discuss his money problems specifically. "I was
putting my energy into Genentech," he said. "It's often the reason that
executives like me have very substantial financial-guidance help. I didn't
have that." But he said he had been in the hole for years and had
borrowed nearly $100,000 annually from Genentech -- and in one year
$1.1 million -- on his signature alone.By last year, his outstanding debt to the company had reached
$2,075,000, including $750,000 in home loans and "mortgage subsidy"
loans, according to Genentech's latest proxy statement. To bail himself
out, Mr. Raab sold about 79,000 shares, including 65,625 gained by
exercising stock options, grossing roughly $3 million. Theoretically, he
could have paid his bill and had more than $900,000 left. Instead, he paid
about $1.6 million, leaving a balance of $450,000; he won't say what he
did with the remaining $1.4 million.He does say that the stock sale left him with a huge capital-gains tax bill.
Mr. Raab says it was this tax bill that led to the move that cost him his
job.In April, with the tax deadline looming, Mr. Raab asked a bank for a
loan, with his own signature as collateral. "I was proud to find the money
myself, and find a way that Genentech didn't have to be involved," he
recalls. But the bank said no. It was then that Mr. Raab turned to Roche,
sending a four-sentence letter seeking the guarantee. Roche responded
with a letter of its own, dated April 10, saying that it would provide the
guarantee if Mr. Raab would put up collateral. He had none. Mr. Raab
said a Roche official later told him the overture was "inappropriate."Mr. Raab then turned again to Genentech. He says that at the end of an
April 13 board meeting, he asked for a new $1.5 million loan, but didn't
mention his approach to Roche. The board approved the loan.That might have been the end of it, had not a junior-level employee,
sorting through Mr. Raab's files to help respond to a slew of shareholder
lawsuits triggered by the May extension of Roche's option, discovered
the brief letter that Mr. Raab had written to Roche seeking the loan; later,
Roche's letter in response was turned up.Genentech executives were stunned by the discovery that Mr. Raab had
been privately seeking a deal with Roche while at the same time
negotiating the touchy option extension; in particular, corporate counsel
John McLaughlin was concerned, fearing even more shareholder wrath,
Genentech insiders say. In addition, some Genentech insiders say Mr.
McLaughlin had long been troubled by Mr. Raab's freewheeling tactics
and the scrutiny they have drawn. Mr. McLaughlin declines to comment.In any case, Mr. McLaughlin delivered a report to the board June 22 and
formed a special committee to investigate further. By now, Mr. Raab
could read the writing on the wall: On Friday, he faxed a terse note to the
board: "I hereby resign as chief executive, president and board director."In the interview, Mr. Raab seemed to contradict himself about the import
of the Roche loan request. On one hand, he said that it wasn't improper,
that it implied no quid pro quo and that it had no influence in his
negotiations with Roche. Moments later, he said that "I completely agree"
with a Roche official's view that the approach was "inappropriate."Cowen's Mr. Kaminsky, for one, wasn't surprised that Mr. Raab has
been caught in an ethical snare. "This is just another example of Raab
looking out for himself and not the independent shareholder," the portfolio
manager asserted.Certainly, Genentech and Mr. Raab have been dogged for years by
criticism of their aggressive ways. Much of it involves Protropin,
Genentech's human growth hormone. Besides the Minneapolis indictment
-- which doesn't name the company itself -- and prosecutors'
investigation of other allegations that doctors have been bribed to
prescribe more, the FTC is looking into Genentech's funding of two
charities that screened schoolchildren; the charities steered those who
were very short for their age to doctors, and the corporate connection
wasn't disclosed to parents. Genentech has suspended such funding but
maintains that there is nothing wrong with the program.Lesser examples concern the behavior of Genentech salesmen, such as
one who told doctors that a rival clot-buster was made from urine from
portable toilets; the drug is indeed made from urine, but not from such a
source.In 1990, Mr. Raab's wife, Mollie, agreed to pay $162,400 to settle
Securities and Exchange Commission insider-trading charges of having
tipped off a family member to Genentech's deal with Roche.Despite the clouds, Mr. Raab leaves Genentech with a vigorous research
department and a full pipeline of promising new drugs in varying stages of
development. These include a protein that spurs growth of cells vital to
blood clotting and a drug to fight tumors in the colon and pancreas.Mr. Raab continues to believe his crowning achievement will be the
Roche deal, which he says ensures Genentech's future as a well-heeled
scientific pioneer. But with the option extension, agreed to in May, Roche
has four more years to wait and see if Genentech's new drugs fulfill their
promise -- and if the investigations do any lasting damage. The
$82.50-a-share price at the end of the option period is considered too
cheap by many investors. Even though lawsuits triggered by the May
option extension have been settled, not all investor anger has dissipated.
(Yesterday, Genentech shares closed at $49, unchanged, in composite
New York Stock Exchange trading.)The problems Mr. Raab leaves behind have increased speculation that
Roche won't let Genentech continue as a freewheeling, autonomous
biotech pioneer. That is what Mr. Raab has always said the legacy of the
Roche deal would be, and he has fought hard to persuade the Swiss
company to let Genentech play by its own rules. Some analysts now
believe Roche is more likely to structure Genentech as more of a research
boutique than a full-fledged drug maker. A Robertson Stephens analyst,
Mark Simon, predicts that under Roche, Genentech will become a
"quasimolecular biology institute."---
Ralph T. King Jr. and Marilyn Chase contributed to this article.
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