Shares of Tanox surged over 44 percent Friday after Genentech bought its asthma treatment partner for $919 million to save money on royalty payments.

Under the deal, announced late Thursday, South San Francisco-based Genentech will pay $20 per share for the Houston-based biotech company. The two companies have been teaming up with Novartis since 1996 on developing and commercializing the asthma drug Xolair, which the U.S. Food and Drug Administration approved back in 2003.

Shares of Tanox jumped $6.02 to $19.66 in recent trading, while Genentech shares fell $0.43 to $80.92.

The transaction is expected to close in the first quarter. Layoffs at Tanox do appear to be possible. The companies said they would be reviewing the current operations and job opportunities for Tanox employees in the coming months.

Lazard Capital analysts Joel Sendek, Terence Flynn, and Sharon Klahre see the deal as accretive for Genentech.

“The deal eliminates the royalty payments from Genentech to Tanox on U.S. Xolair sales, which we estimate at 8 to 12 percent,” they wrote in a research note.

They pointed out that Genentech will also receive royalties now on sales of Xolair by Novartis outside the United States. They estimate that could amount to approximately $40 million in incremental pretax operating revenue in 2007, with no incremental spending.

They are setting a $110 price target for Genentech stock. In addition, Genentech will acquire Tanox’s entire pipeline. Xolair sales could also expand beyond its current adult asthma treatment area into related areas such as food allergies and pediatric asthma.

Opening New Markets

The acquisition could also bring Genentech into other markets such as treatment for age-related macular degeneration and HIV, according to CEO Arthur Levinson.

“Tanox is a strategic fit given our long-term collaboration, our immunology focus area, and the opportunity we see for improved profitability for our asthma molecules,” he said in a conference call.

Xolair sales have grown to $107 million in the third quarter of 2006, he noted. He wants to develop a liquid form of Xolair, as well as expand the drug into new markets.

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