Roche offers $43.7 billion for remainder of Genetech shares

BASEL, Switzerland—In what Roche Chairman Franz Humelcharacterizes not as an acquisition, but "a partnership that we are trying to lift to a new level," the Swisspharma giant on Monday offered $89 per share cash, or roughly $43.7 billion,for the 44.1 percent of Genentech shares the company doesn't already own.

According to Roche, the company expects the combination will result in synergysavings between the two companies of between $750 million and $800 million.

The offer marks a scant 8.8 percent premium over the closingof Genentech's shares last Friday before the offer, and may not be quite enoughto entice the holders of the remaining shares to sell, say numerous industryanalysts.

In a research note released Monday, Chicago-based financialfirm Robert W. Baird & Co., upped its target price from $89 per share to$95, which may be the minimum offer needed to get the deal down.

"The 8.8 percent is not a huge premium," notes Baird analystChristopher J. Raymond. "We didn't write this in our note, but what may serveas a guide or a proxy for this is the Novartis-Chiron deal, where Novartisowned part of Chiron. There were different dynamics, but there were two orthree different iterations [of the offer] and it eventually went for about a 30percent premium."

While Raymond doesn't think Genentech should command thathigh a premium, Wall Street had a similar reaction to Roche's first offer,sending shares to as high at $94 per share in morning trading after theannouncement, well above the offer price. In the end, it may take an offer inthe $95 to $100 per share to secure the shares, Raymond estimates.

Yet neither market reaction, nor analyst sentiments willlikely affect Roche's offer. If history is any indication, the Swiss drug makermay elect to sit on its $89 per share offer and wait it out.

This is exactly what it did with its bid to buyPhoenix-based Ventana Medical Systems last year, as Ventana management andshareholder rejected Roche's standing offer four times over the course of sevenmonths, before Roche finally raised its bid 19 percent to close the deal inFebruary.

However, the situation with Genentech has a much differentflavor than does the Ventana deal, namely Roche's long-standing majorityownership of Genentech stock.

"Don't forget, we've owned for 18 years the majority ofGenentech," said Humel in an interview Monday morning on cable financial newsnetwork CNBC. "So we are taking the company private. This is not a megaacquisition like others are."

That said, there are a number of reasons why Roche isinterested in acquiring the remainder of shares now. At the top of the listwould be anticipated growth in the sales of Genentech's successful cancer therapeuticAvastin, which is expected to be approved for additional indications in thecoming years. Humel is quick to point out, though, that this is not merely aplay to leverage the growth of a successful product.

"This was not a decision that was driven by Avastin," hesays. "It was a decision that is driven by two components, strengthening theinnovation for Roche and achieving synergies where it makes sense."

While this may seem somewhat counter to Roche's paststrategy of essentially staying out of the way of the folks at Genentech toallow them to cultivate their culture of innovation, Humer says he understandshow important it is to maintain that aspect of the company, should the deal gothrough.

Further, Roche is looking to Genentech to help it navigatewhat Humel sees as a very difficult market environment in the coming years, viaGenentech's strength in R&D, an area Baird's Raymond calls "a nationaltreasure" and "one of the premiere in all of biopharm."

"We are going to run Genentech research as an independentunit," he says. "The Genentech research and early development, as it existstoday, will not be affected by this change."

Genentech company officials were mum on the proposedbuyout, simply acknowledging via a press statement that the company hadreceived the offer letter from Roche.