Replies to post #64445 on Biotech Values

[read_this_n0w]

such changes are usually a sign,
will be interesting to see if you are correct in your assumption this time,

good odds on yes

[DewDiligence]

Roche Eyes Bid to Buy Full Stake in Genentech

[Roche is holding its 2Q08 CC in about one hour. We should have more information before then.]

http://online.wsj.com/article/SB121658871989368689.html

›By DANA CIMILLUCA, JEANNE WHALEN and MATTHEW KARNITSCHNIG
July 21, 2008

Swiss pharmaceutical company Roche Holding AG is considering buying the part of U.S. biotech firm Genentech Inc. that it doesn't already own, people familiar with the matter say, in a deal that would highlight the drug industry's hunger for new products.

Roche already owns about 56% of Genentech, which has a market value of roughly $86 billion. It isn't clear what premium Roche might offer to buy out minority shareholders should it move forward with a deal. But, at the current market price, the rest of the California-based company is worth about $38 billion.

Buying the rest of Genentech would be an ambitious but risky move for Roche's new chief executive, Severin Schwan, who took the reins at the company in March. It would give Roche, which is based in Basel, full control of one of the world's most-productive biotech firms. But it could in some ways undermine the independence that both Roche and Genentech have always maintained is critical to Genentech's success. That success has been crucial to development of the next generation of new medicines.

A spokesman for Roche declined to comment. [We will presumably know more in about one hour.] A Genentech spokesman reached late Sunday said the company doesn't comment on rumors or speculation.

Roche said Sunday it would push forward the planned announcement of its first-half results to Monday from Thursday, but didn't give a reason.

Big pharmaceutical companies, struggling to develop drugs on their own amid a general slump in lab productivity, have been stepping up their investments in the biotech sector, which is generally considered more successful in churning out new products. GlaxoSmithKline PLC, Pfizer Inc., Merck & Co. and others have spent heavily in recent years to acquire entire biotech companies or to form partnerships to gain access to promising biotech drugs.

Roche bought a controlling stake in Genentech in the early 1990s, just as the San Francisco-area biotechnology sector was taking off. That deal is widely considered one of the savviest in the drug industry's recent history. It gave Genentech the wherewithal to finance its drug-development program without worrying about disappointing Wall Street analysts and fickle investors with erratic quarterly earnings. For Roche, it offered a promising pipeline of drugs in development and control of one of the leaders in the genetics and biotechnology revolutions.

Innovative Spirit

Roche from the beginning said it would leave Genentech to be run as a fully separate entity, because it didn't want to crush the innovative spirit that had made the smaller company such a promising catch. That arms-length relationship has paid off for both parties.

Roche has become increasingly dependent on Genentech's stable of cancer drugs for both sales and profits in recent years. Drugs developed by Genentech contributed nearly a third of Roche's total sales of 46.1 billion Swiss francs, or about $45 billion, in 2007.

Because several of Genentech's products have near-monopoly positions in their respective markets, they command very high prices and are extremely profitable. Roche already consolidates Genentech sales in its profit-and-loss statements.

Since Roche bought control of Genentech, the latter has brought to market a slew of cutting-edge medicines that have racked up sales of more than $1 billion a year, including Avastin, Rituxan and Herceptin for various forms of cancer. Indeed 2007 sales of Avastin and Rituxan both topped $2 billion world-wide. As part of the two companies' arrangement, Genentech sells the drugs inside the U.S. and Roche outside the U.S.

If Roche buys the rest of Genentech, a big question is what will become of the biotech company's independence. Because Roche has always been emphatic that Genentech's managerial independence is key to its success, it is likely that the Swiss drug giant will attempt to retain some sort of arms-length relationship with Genentech management.

When Roche first acquired the majority stake in Genentech, it prompted an exodus of many Genentech scientists, who left to set up other biotech companies, many in the San Francisco Bay Area. Anticipation that Roche would take the company over completely in 1999 put other scientists and executives on headhunters' lists.

A purchase of Genentech would represent a departure from Roche's usual strategy of buying controlling stakes, rather than full ownership, in companies that research and develop drugs. But Roche's Mr. Schwan has already demonstrated an acquisitive spirit. Last year, as head of Roche's diagnostics division, he helped spearhead the company's move to buy Ventana Medical Systems Inc. of Tucson, Ariz. for $3.4 billion.

Franz Humer, who stepped down as Roche's CEO this year but who remains chairman, has been loath to do big mergers and had lauded the merits of looser partnerships with affiliates such as Genentech and Chugai Pharmaceutical Co., a Japanese drug maker. His theory was that these companies were more successful at finding new drugs and attracting talented scientists if they stayed relatively small and maintained the spirit of a start-up.

Roche recently boosted its stake in Chugai to 59.9% from 50.1%.

One of the Best

Roche is generally viewed as one of the pharmaceutical industry's best performers, though this year has been less promising. When Roche reports earnings Monday, analysts expect the company to say that sales of the flu drug Tamiflu declined sharply in the first half, because governments are scaling back their efforts to stockpile the drug for a possible flu pandemic. The decline in Tamiflu sales will likely put pressure on operating profits and mask healthy sales elsewhere. But Roche's portfolio of cancer drugs is still growing at a good pace. Roche reports earnings on a half-year basis, rather than quarterly.

For the second quarter of 2008, Genentech's total product sales were $2.54 billion, up 4% from $2.44 billion in the year-earlier quarter. Net income was $871 million or 82 cents a share, up from $834 million, or 78 cents a share. Although its torrid double-digit earnings growth cooled to single digits as expected, Genentech recently increased its forecast for 2008 net income to between $3.40 and $3.50 a share.‹


Let’s talk biotech!
“The efficient-market hypothesis may be
the foremost piece of B.S. ever promulgated
in any area of human knowledge!”

[DewDiligence]

Roche Offers $89/sh for All Outstanding Shares of Genentech

[Roche already owns 56% of DNA shares from a deal struck in the 1990’s. The $89 buyout price is only a 9% premium to DNA’s latest closing price; hence, I would expect DNA to hold out for a better deal. Indeed, the portion of this PR I’ve highlighted in bold-face type suggests that Roche fully expects DNA to ask for more.]

http://www.roche.com/med-cor-2008-07-21b

›Basel, 21 July 2008

* Combination to enhance innovation by allowing for diversity of research approaches while also encouraging sharing of IP, technologies, partnerships and other key assets

* Improved operational efficiency to result from reduced complexity, elimination of duplications and increased scale in the U.S.

* Genentech’s unique research culture to be maintained; South San Francisco site to operate as an independent research and early development center and become headquarters of combined U.S. commercial operations

* Transaction to deliver annual pre-tax synergies of US$750 -$850 million; Expected to be EPS accretive in the first year after closing

* Offer represents a one day premium to Genentech shareholders of 8.8% and a one month premium of 19.0%

Roche (SWX: ROG.VX; RO.S; OTCQX; RHHBY), a world-leading healthcare company, announced today that it has proposed to acquire the outstanding publicly held interest in Genentech (NYSE: DNA), a leading biotechnology company, for US$89.00 per share in cash, or a total payment of approximately US$43.7 billion to equity holders of Genentech other than Roche. Roche acquired a majority in Genentech in 1990 and currently owns 55.9% of all outstanding shares.

Commenting on the proposal, Franz Humer, Chairman of the Board of Roche, said, “Our long and successful participation in Genentech has provided great benefits to both of our companies and shareholders. It has resulted in one of the biggest success stories in the healthcare industry. Roche’s significant investment in Genentech over many years has helped it to focus on innovation and long-term projects, leading to some of the most important breakthroughs in the treatment of cancer and other life-threatening diseases. The transaction will create a unique opportunity to evolve Roche’s hub-and-spoke model into a structure that allows us to strengthen the focus on innovation and accelerate the search for new solutions for unmet medical needs. Combining the strengths of Roche and Genentech will create significant value and result in benefits for patients, employees and shareholders.”

Severin Schwan, CEO of Roche, said, “We are looking forward to working more closely with our colleagues from Genentech. We have great respect for their achievements and we will take the necessary steps to nurture Genentech’s innovative and unique science-driven culture. The Genentech Founders Research Center will operate as an independent unit within the Roche Group to safeguard a diversity of different approaches and to foster the long term flow of novel breakthrough medicines. At the same time, we will be better able to share technologies and expertise in pharmaceuticals and diagnostics across the Group and broaden the mutual access to the external innovation networks of both companies. As Genentech has grown from a research-focused biotech venture into an integrated pharmaceutical organization, the transaction will also unlock synergies by leveraging the scale of the combined operations in the U.S. and improving operational efficiency.”

Combined company structured to foster innovation
Genentech will operate as an independent research and early development center within Roche from its existing campus in South San Francisco, retaining its talent and approach to discovering and progressing new molecules. Roche’s Palo Alto Virology research and development activities will relocate to South San Francisco, while its Palo Alto Inflammation group will become part of Roche’s Nutley, NJ research and development organization. Nutley will host two global Disease Biology Areas (Oncology and Inflammation) as well as key functions in Metabolism and will remain an important pillar for the U.S. and Roche’s global organization. With Genentech’s site in South San Francisco and Roche’s New Jersey-based campus, the U.S. will be home to the biggest research and development centers within the Roche Group.

The structure of the combined company will allow for a diversity of approaches in research and early development, while also strengthening cross fertilization between the companies, leading to enhanced overall innovation within the Group. Roche’s recently adopted Disease Biology Area approach, which allows five diverse groups to manage their innovative portfolios, will be maintained and strengthened. This, together with recent moves into RNAi (Ribonucleic Acid interference) and delivery technologies, as well as licensing activities, continues to provide a stimulating environment for the creation of medically differentiated medicines.

Roche’s Pharma commercial operations in the U.S. will be moved from Nutley to Genentech’s site in South San Francisco. The combined company’s U.S. commercial operations in pharmaceuticals will reflect the Genentech name, leveraging the strong brand value of Genentech in the U.S. market. The existing U.S. sales organizations of both companies will be maintained, resulting in a very strong presence in several specialty areas.

Genentech’s Late Stage Development and Manufacturing operations will be combined with the global operations of Roche, achieving substantial scale benefits, operational synergies and cost avoidance. Roche’s manufacturing in Nutley will be closed and support functions, such as informatics and finance, will be consolidated.

Enhanced ability to innovate

The transaction will over time significantly enhance cooperation and cross fertilization among all research hubs inside and outside of the combined company. Sharing of technologies (e.g. RNAi, novel protein architectures), assets (e.g. chemical libraries), intellectual property (e.g. antibody production), unique capabilities (e.g. exploratory development, modeling and simulation) and know-how of the combined research organization will strengthen the Group’s ability to innovate. Genentech and Roche have many complementary strengths and assets and joining their respective experience and knowledge will be mutually beneficial. The separate research and early development unit in South San Francisco led by Genentech will be given the operational freedom to maintain a high level of creativity and independent decision making. Genentech will also have access to the full strength of Roche’s worldwide development organization, thus significantly enhancing its ability to leverage international clinical trials and expertise. The combined company will have one of the strongest emerging product pipelines in the industry, with a number of exciting compounds in development across key therapeutic areas.

Greater operational efficiency

By reducing complexity and eliminating duplicative functions in areas like development, manufacturing, corporate administration and support functions, the combination will result in well-aligned structures and lean processes. Bringing these functions into the Roche global structures will reduce complexity at Genentech’s South San Francisco site, concentrating Genentech’s focus on innovative research and early development and science.

Stronger competitive position and scale in the U.S.
The combined entity will be the seventh largest U.S. pharmaceuticals company in terms of market share. It will generate more than US$15 billion in annual revenues and will employ around 17,500 pharma employees in the U.S. alone, including a combined sales force of approximately 3,000 people. Including diagnostics, the Roche Group will employ around 25,000 people in the U.S. The company’s combined broad portfolio and expansive commercial operations will enhance its ability to successfully commercialize emerging new medicines in the critical, but challenging and rapidly evolving, U.S. healthcare market.

Strong financial benefits for both Genentech and Roche shareholders

The transaction will create significant value for shareholders of both Genentech and Roche. The offer represents a one day premium of 8.8% to Genentech’s closing price of US$81.82 on July 18, 2008 and a one month premium of 19.0% to Genentech’s closing price of US$74.76 on June 20, 2008.

Roche expects the combination to generate annual pre-tax cost synergies of approximately US$750 to $850 million. Savings resulting from this combination will enable the new company to increase and better focus its investment in innovation.

The transaction is expected to be accretive to Roche’s earnings per share in the first year after closing. The combined company will generate substantial free cash flow that will enable it to reduce acquisition-related debt rapidly, invest in further product launches and retain strategic flexibility.

No impact on guidance for 2008 and dividend policy
The transaction will have no impact on Roche’s sales and Core EPS targets for 2008, as communicated earlier in the year. Roche also remains committed to increasing its dividend pay-out ratio for the next three years as previously announced.

Next steps

Roche expects that the Genentech Board of Directors will establish a committee consisting solely of independent directors to evaluate Roche’s proposal with the assistance of independent outside financial and legal advisors. Genentech Board members who are employees of Roche will not participate in the evaluation of the proposal. Roche currently contemplates that the transaction would be implemented through a cash merger between Genentech and a Roche subsidiary, pursuant to which all currently outstanding shares and options of Genentech other than shares owned by Roche would be converted into cash. The precise terms of the transaction, as well as the conditions to its consummation, will be determined through negotiations with the independent directors. It is anticipated that, in addition to customary conditions, the merger would be subject to the approval of holders of a majority of the Genentech outstanding shares not held by Roche. Roche expects to complete the transaction as soon as possible following negotiation of a definitive merger agreement.

Roche has advised Genentech that its sole interest is in acquiring the remaining shares of Genentech held by the minority shareholders and that it has no interest in a disposition of its controlling equity stake in Genentech.

Greenhill & Co. is acting as financial advisor to Roche and Davis Polk & Wardwell is acting as legal counsel. Roche will finance the transaction through a combination of its own funds and debt financing. Roche is confident that it can raise the necessary debt financing to consummate the proposed transaction.

Following is the text of the letter Roche sent on July 21, 2008 to the independent directors on Genentech’s Board of Directors:

Dear Ms. Reed, Dr. Boyer and Dr. Sanders:

The healthcare industry, particularly with regard to pharmaceuticals, remains under significant pressure to improve innovation and to deliver more and better care and products of high value to society. A combination of these external pressures, our desire to achieve the best possible results for patients, and the necessary delivery of acceptable returns for our shareholders has caused Roche continually to seek ways to enhance innovation and improve our efficiency of operation and overall performance.

Over the course of the nearly 20 years that Roche has owned a majority of the stock of Genentech, the two companies have worked together with great success, to the benefit of all of our shareholders. During those 20 years Genentech has made great innovative contributions to patient care. Roche, over the same period, has progressed from a more diversified healthcare group to one with a sharper focus on innovation-driven activities within therapeutics and diagnostics, and importantly on the interplay between the two in developing personalized solutions and treatment for patients. While continuing its extraordinary research efforts Genentech has also, through its success and resulting growth, gradually come to resemble a major pharmaceutical company, both in terms of overall revenues and functional split of employees. As a result, there is today an opportunity to realize significant synergies by combining the two companies and integrating their operations while continuing the Genentech research engine and early development activities as an independent center under the Genentech name and leadership.

Accordingly, after considerable thought, we have reached the conclusion that combining Genentech and Roche will maximize the potential performance of the two companies and is in the best interests of Roche’s shareholders. In order to compensate Genentech’s public shareholders appropriately, we are proposing a cash merger between Genentech and a Roche subsidiary pursuant to which all currently outstanding shares and options of Genentech other than shares owned by Roche would be converted into cash at US$89.00 per share. This offer would provide a total of US$43.7 billion to equity holders of Genentech other than Roche.

The price we are offering represents a one day premium of 8.8% to Genentech’s closing price of US81.82 on July 18, 2008 and a one month premium of 19.0% to Genentech’s closing price of US$74.76 on June 20, 2008. We believe our offer is both fair and generous and provides an opportunity for all non-Roche Genentech shareholders to receive an immediate premium for all of their shares. We note that while we are committed to a combination of Genentech and Roche, we will not consider any sale or other disposition of Roche’s Genentech stock.

The merger would be subject to the negotiation of mutually acceptable documentation and the approval of a majority of the non-Roche shareholders of Genentech. We anticipate consummating the transaction promptly after Genentech shareholder approval has been obtained.

We understand your role as independent directors and your responsibility and intention to act in the best interests of the Genentech shareholders in reviewing and making a decision with respect to our offer. Accordingly, we expect and encourage you to retain counsel and financial advisors who are experienced in these matters and independent of Roche and Genentech. After you have had a chance to consider our offer with your advisors, we would welcome the opportunity to discuss our proposal with you and your advisors. Roche’s investment banking advisor is Greenhill & Co., and our attorneys are Davis Polk & Wardwell. They and we will be available to discuss matters with you and your advisors at your convenience.

Because we wish to be sure that all Genentech and Roche shareholders are fully informed about the proposal we are making, we have decided to release this letter to the public. (Attached is a copy of the press release that is being issued on July 21 at 6:30 a.m. CET.)

I look forward to speaking to you soon and to working together expeditiously to bring this transaction to a prompt and successful conclusion.

Very truly yours,

Franz B. Humer

cc: Arthur Levinson, Ph.D.‹


Let’s talk biotech!
“The efficient-market hypothesis may be
the foremost piece of B.S. ever promulgated
in any area of human knowledge!”

[corky]

you are good, very good