Roche Bids to Buy Remaining Genentech Shares for $43.7 Billion
By Dermot Doherty
July 21 (Bloomberg) -- Roche Holding AG, the world's biggest maker of cancer drugs, offered to buy the rest of Genentech Inc. for $43.7 billion to gain the U.S. company that supplied it with the best-selling Avastin and Herceptin tumor medicines.
Investors in Genentech would get $89 a share in cash, 8.8 percent more than the July 18 closing price, the Basel-based drugmaker said today. Roche already owns 56 percent of the South San Francisco, California-based company.
Roche today reported a decline in first-half profit as sales of the Tamiflu pill fell because governments stopped stockpiling the medicine that could slow an influenza pandemic. The purchase would be Roche's biggest ever and the combined company would generate more than $15 billion in annual sales. Roche shares declined the most since January on investor concerns it'll have to raise the bid for Genentech, the world's second-biggest biotechnology company.
``The transaction has positive and negative aspects,'' Rahn & Bodmer analyst Birgit Kulhoff said today in a note to investors. ``Roche can protect operating margins and EPS growth through this acquisition.'' The ``very low premium'' means that Roche either sees the prospects for Genentech ``very negatively, which would justify a low valuation, or the offer to Genentech shareholders will have to be raised.''
Roche fell as much as 3.7 percent to 173 Swiss francs and declined 5.7 francs, or 3.2 percent, at 10:54 a.m. in Zurich trading. The shares had decreased 8.2 percent this year, outperforming the Bloomberg Europe Pharmaceutical Index of 19 companies, which has declined 12 percent. Genentech rose 5 euros, or 10 percent, to 56.30 euros ($89.48) in German trading today.
`Unlikely to Succeed'
Genentech spokespeople Caroline Pecquet and Geoff Teeter didn't respond to out-of-office hours telephone calls and e- mailed requests for comment.
The offer is ``highly unlikely to succeed,'' at this level, Cazenove analysts James Millett and David Adlington wrote in a research note today. ``We would expect Roche will have to make a significantly higher offer if it is to acquire Genentech.''
First-half net income fell to 5.73 billion Swiss francs ($5.58 billion) from 5.86 billion francs a year earlier, Roche said today in a separate statement. Analysts surveyed by Bloomberg had a median profit estimate of 5.55 billion francs. Roche, which doesn't report quarterly profit, pushed up its earnings release from July 24.
Group sales decreased 3.6 percent in the first half to 22 billion francs. Revenue from Tamiflu declined 71 percent to 327 million francs.
Boost in Growth
Drugmakers are looking to boost growth with acquisitions as the U.S. pharmaceutical market, the world's biggest, becomes more difficult because of stricter regulators and patent expirations. Novartis AG in April agreed to buy a 25 percent stake in Alcon Inc. from Nestle SA for $11 billion and may acquire another 52 percent to become the world's biggest maker of eye-care products.
Sanofi-Aventis SA, France's largest drugmaker, made a $2.02 billion offer for the remainder of Zentiva NV earlier this month. The French drugmaker wants Zentiva to expand into eastern Europe's ``branded generic'' market, where copies of original treatments are more profitable than in western Europe.
``This makes a lot of sense,'' said Beatrice Kunz, a portfolio manager at Clariden Leu in Zurich who helps manage $147 billion in assets, including shares of Roche. ``The weak dollar and the fact that they are not paying a huge premium make this rather attractive.''
The purchase would be the biggest in the pharmaceuticals sector since Pfizer Inc.'s 2003 purchase of Pharmacia Corp. for about $64.3 billion in stock, according to Bloomberg data. The deal would be the biggest in the industry this year. The second- biggest so far this year is Teva Pharmaceutical Industries Ltd.'s July 18 bid to buy Barr Pharmaceuticals Inc. for $7.46 billion.
Sales Multiple
Roche's bid represents a sales multiple of about 7.45, according to Bloomberg data. That compares with a sales multiple of 4.63 in Pfizer's bid for Pharmacia.
Roche confirmed its outlook for an increase of almost 10 percent for group sales, with above-market rate growth in both its pharmaceuticals and diagnostics divisions. The forecast excludes sales of Tamiflu to governments and corporations. Roche said it expects core earnings per share to remain at least in line with the record level achieved in 2007.
The Genentech purchase would result in pretax savings of $750 million to $850 million a year and would add to EPS in the first year after closing, Roche said.
Debt
Roche is being advised by Greenhill & Co. and plans to finance the transaction through a combination of its own funds and debt. Roche's Chairman Franz Humer said he's confident the company can raise the necessary debt financing.
``We talked to a consortium of banks beforehand and I am sure the financing will not be a problem while at the same time leaving us with enough cash for further smaller and mid sized deals,'' he said in a Bloomberg interview.
The Genentech board is likely to establish an independent committee to review the offer, Roche said. Genentech board members who are employees of Roche won't participate in the evaluation of the proposal. The deal will likely be subject to approval by a majority of the owners of Genentech shares not held by Roche, the Swiss company said.
Genentech's independence has always been ``a big plus,'' Clariden Leu's Kunz said. ``If the wrong people now start leaving, there may be some problems,'' she said.
Humer said the company would continue to run under the Genentech name and retain an independent research organization.
``The diversity will remain,'' he said. ``This is not about cost-cutting but rather creating synergies. We will be saving infrastructure costs.''
Raised Forecast
The U.S. company raised its 2008 forecast July 14 as Avastin gained from the new use in breast cancer. Genentech said second- quarter profit rose 4.7 percent and revenue increased 8 percent to $3.2 billion, led by U.S. sales of Avastin. The medicine, first approved in 2004 for colon cancer and for lung malignancies two years later, is being studied against 20 tumor types worldwide.
Avastin sales in the U.S. rose 15 percent to $650 million, about $7 million more than analysts had projected. Rituxan, a treatment for non-Hodgkin's lymphoma and rheumatoid arthritis that Genentech markets with Cambridge, Massachusetts-based Biogen Idec Inc., generated $651 million, a 12 percent increase. Sales of Tarceva, used to treat lung and pancreatic cancers, gained 17 percent to $119 million.
