Genentech no more?

Roche offers $43.7 billion for remainder of Genetech shares

August24th,2008
Chris Anderson
BASEL, Switzerland—Amid multiple public statements by Roche Chairman Franz Humer that the company intends to maintain Genentech as an independent research unit, at press time Roche was holding firm to its initial offer of $89 per share—a total of $43.7 billion—to acquire the remaining 44.1 percent of the company it doesn't already own.

The offer marks a scant 8.8 percent premium over the closing of Genentech's shares the day prior and may not be quite enough to entice the holders of the remaining shares to sell, say numerous industry analysts.

In a research note released shortly after the offer, Chicago-based financial firm 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 done. Other analysts and published reports have suggested a price of as high as $102 to $105 per share might be what is needed to get the remaining shareholders to bite.

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

While Raymond doesn't think Genentech should command that high a premium, investors have indicated they, too, anticipate Roche coming back with higher bid as shares of the biotech have consistently traded in the $94 to $96 range since Roche made its bid.

As expected, three days after the offer, Genentech formed a special committee of the Board of Directors—essentially the three board members without an affiliation to Roche—to review the offer by Roche.

"The special committee intends to proceed in a timely manner to review the Roche proposal, which was both unsolicited and unexpected," says Charles A. Sanders, the chairman of the three-person special committee, which also includes Debra L. Reed and Charles A. Sanders, M.D. "The outcome of this process has not been pre-determined, and there can be no assurance that the special committee will approve any transaction with Roche."

Meantime, Humer has been publicly beating the drum of Roche's plans to provide a broad amount of latitude in how it will operate the Genentech site going forward. This is not surprising, given the possibility that the South San Francisco Genentech headquarters could experience a significant brain drain should longtime Genentech employees, known for their creative and innovative spirit, seek to recreate that environment by spinning off new companies in the fertile Bay Area biotech landscape.

"We will run Genentech's research and early development as a separate, independent unit within Roche, thereby maintaining the spirit, the culture, the whole environment of creativity, of diversity of approaches in research, which is necessary for that success," notes Humer in a company-produced interview providing additional details of Roche's offer.

The proposed deal is also not in the same vein as a mega merger between two unrelated companies.

"Don't forget, we've owned for 18 years the majority of Genentech," said Humer in an interview on cable financial news network CNBC. "So we are taking the company private. This is not a mega acquisition like others are."

That said, there are a number of reasons why Roche is interested in acquiring the remainder of shares now. At the top of the list would be anticipated growth in the sales of Genentech's successful cancer therapeutic Avastin, which is expected to be approved for additional indications in the coming years. Humel is quick to point out, though, this is not merely a play to leverage the growth of a successful product.

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

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

The combination of the two operations is expected to result in between $750 million and $800 million in synergy savings according to Roche, yet another important factor as it looks to compete in an ever-tougher worldwide pharma market.

In another development, and perhaps in anticipation of eventually closing a deal for the remaining Genetech shares, Roche has announced its intention to close its Nutley, N.J. manufacturing operation and move its U.S headquarters to San Francisco. Roche has said it still intends to keep certain R&D and development functions in the Nutley location. DDN 
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