All pharma friends again

After an initial tender offer, two refusals and a hostile takeover threat, Roche finds a price that Genentech likes

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BASEL, Switzerland—After eight months of back-and-forth dealings, Roche and South San Francisco-based Genentech singed a merger agreement March 12 under which Roche will acquire the outstanding publicly held interest in Genentech for $95 per share in cash, or a total payment of approximately $46.8 billion to equity holders of Genentech other than Roche.  The special committee of Genentech's board of directors has approved the agreement and recommends the deal to Genentech shareholders.

The ongoing acquisition drama started in July 2008, when Roche offered $89 per share, or roughly $43.7 billion, for the 44.1 percent of Genentech shares the company didn't already own. Genentech twice turned down Roche, and announced in December 2008 that it would consider selling the remaining stake in the company for $112 per share, or about $52 billion.

From there, Roche decided to go hostile, saying in January that it would make a tender offer directly to Genentech's shareholders for $86.50 per share, or about $42 billion.

Interestingly, in a research note released shortly after the initial July offer, Chicago-based financial firm Robert W. Baird & Co., upped its target price from $89 per share to $95—which ended up being the actual final amount—and Baird analyst Christopher J. Raymond predicted that in the end, Genentech would likely take an offer in the $95 to $100 per share range to secure the shares.

"Really, the outcome was not unexpected once the process had begun," notes Michael D. Becker, president and CEO of biotech-focused strategic advisory firm MD Becker Partners in Newton, Pa. "Roche made clear that they were interested and Genentech made clear at what price they felt the deal could get done and lo and behold, we had a figure that was higher than the original offer. I think Roche looked down the road and thought about what Genentech might cost them if the Avastin studies came back with positive results, and decided it could well cost them much more than $95 per share."

Becker says he would not be surprised to see more deals like this, particularly when a pair of companies has a relationship and one of them has a substantial investment in the other, such as is the case with Bayer and Onyx Pharmaceuticals or Eli Lilly and Amylin Pharmaceuticals.

"I am delighted that the intensive negotiations have led to a successful conclusion. Working together, we aim to close the transaction quickly, thus removing uncertainty for employees and allowing us to focus even more intently on innovation and long-term projects," says Franz B. Humer, chairman of the Roche Group. "We have tremendous respect for our colleagues at Genentech and look forward to working with them to further accelerate our search for solutions to unmet medical needs."

The combined company would be the seventh largest U.S. pharmaceuticals company in terms of market share, Roche and Genentech note, generating approximately $17 billion in annual revenues and employing around 17,500 employees in the U.S. pharmaceuticals business alone, including a combined sales force of approximately 3,000 people. 

Roche has said that research and early development will operate as an independent center within Roche from Genentech's existing campus in South San Francisco, "retaining its talent and approach to discovering and progressing new molecules." In addition, Roche's commercial operations in pharma in the U.S. will be moved from Nutley, N.J., to Genentech's campus. The combined company's U.S. commercial operations in pharmaceuticals will operate under the Genentech name, and the existing U.S. sales organizations of both companies will be maintained, "resulting in a very strong presence in several specialty areas."

"I'm less sanguine about the Roche-Genentech transaction than some others might be," Becker admits, pointing out that when large pharmas buy entrepreneurial-minded biotechs, something often gets lost in the process. "Roche has gone above and beyond to paint the picture that they will keep Genentech not only in name but in its entrepreneurial spirit, but I don't know how you really do that as the complete owner of the entity."

On the bright side, the infusion of nearly $47 billion into the market might bode well for other biotechs as investors redeploy their proceeds, Becker suggests. A March 13 article from Reuters predicts the same, with Sven Borho, portfolio manager for OrbiMed Advisors—which has about 3 million Genentech shares—saying that the money will likely be poured back into healthcare stocks, with big biotechs like Celgene, Gilead, Genzyme, Biogen Idec and Amgen being the most likely recipient, as they offer the most "Genentech-like" risk and return profile.

The downside of this reinvestment, Becker says, is that he doesn't foresee that money trickling down to the 120 publicly traded biotechs with less than six months of capital on their books. The money will go to large-cap companies, he thinks, and not be distributed among small- mid- and large-cap companies as much as he and other market-watchers would like to see.

"So, we're probably looking at a very large portion of the publicly traded biotechs coming to an end or running out of cash and becoming acquisition targets," he says. "No matter how it shakes out, it will be transformational, as there are only about 300 publicly traded biotechs out there." DDN

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