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Roche seen likely to raise bid for Genentech
2008-07-21
LOS ANGELES (Reuters) - Roche Holding AG (ROG.VX) may need to raise its $43.7 billion bid for the Genentech Inc (DNA.N) stock that it does not already own, but an eventual deal is likely, analysts and investors said on Monday. The Swiss drug maker already holds a 56 percent stake in Genentech, maker of top-selling cancer drugs including Avastin, Herceptin and Rituxan. Roche, which sells those drugs outside of North America and Japan, has offered $89 a share for the remainder of the U.S. biotechnology company. That's a premium of about 9 percent to Friday's closing share price, but the stock rose as much as 15 percent on Monday. "I think the market is telling you that they view the offer as an inadequate reflection of Genentech's value," said Jay Markowitz, research analyst at T. Rowe Price Associates, which owns about 16.5 million shares of Genentech. As precedent, he and others cited Novartis AG's (NOVN.VX) 2006 acquisition of Chiron. The Swiss buyer, which already held a 42 percent stake in the San Diego-based company, eventually raised its bid after independent directors at Chiron rejected initial overtures as too low. Roche itself sealed its buyout of Ventana Medical Systems earlier this year by raising the initial takeover offer by 19 percent, even after repeatedly saying it would hold firm on the price. "Clearly people understand that there is head room for them to do more on the (Genentech) transaction," said Deutsche Bank analyst Michael Leuchten during a conference call held by the investment bank. "Probably they will have to do more if they are serious about it," he said. That's because the two companies' 1999 agreement requires minority shareholder approval of any takeover of South San Francisco, California-based Genentech. If that didn't happen, two investment banks would be hired to conduct separate valuations, and Roche would be faced with paying the average of those assessments, according to Deutsche Bank. Roche could still walk away, but the company clearly sees a takeover of Genentech as a better use of cash than buying back shares or paying dividends, Leuchten said. "We believe this offer substantially undervalues Genentech," Bernstein Research analyst Geoffrey Porges said in a report on Monday. He currently values Genentech at $95 a share, but said that excludes key opportunities including potential use of Avastin in cancer patients who have undergone surgery to remove their tumors. Potentially market-moving data from an ongoing trial of post-surgery colon cancer patients treated with Avastin is expected late this year. BMO Capital Markets analyst Jason Zhang also said he does not expect Roche to pull off the Genentech deal at the price offered. "Although there is not a perfect formula for biotech acquisitions, some of the recent deals pushed the price-to-sales-multiple to 10, exemplified by AstraZeneca's (AZN.L) acquisition of MedImmune," he said in a research note. The Anglo-Swedish drug company acquired Gaithersburg, Maryland-based MedImmune last year for more than $15 billion. A multiple of 10 times revenue would equate to a price of $118 per share for Genentech, Zhang calculated. "Given that Roche already owns 56 percent of Genentech and it is unlikely any other big pharma company would bid for it, Roche will not have to pay the highest price," he said. "Therefore, we think a price increase to around $100 may get the deal through." Deutsche Bank analyst Mark Schoenebaum said recent takeover deals involving biotech companies with larger capitalizations have been done at one-day stock price premiums of about 25 percent. Roche has said it would take steps, including moving its U.S commercial headquarters from New Jersey to Genentech's San Francisco area offices, to make the takeover palatable to the California company's management, but some analysts expect resistance. The deal "causes an irrevocable breach in relations between Genentech and Roche," and many of Genentech's top scientists would likely move on if the company became a research subsidiary of Roche, Porges said. Genentech shares were up $10.80, or 13.2 percent, to $92.62 on the New York Stock Exchange, after climbing as high as $94.05 earlier. (Reporting by Deena Beasley; editing by Gerald E. McCormick and Lisa Von Ahn)
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