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Roche Investors Should Breathe Easier After InterMune Acquisition

NEW YORK (TheStreet) -- On Sunday, Swiss drugmaker Roche Holding (RHHBY) answered the all-important question investors have always posed to management: What's up with the non-oncology pipeline?

Roche finally responded by announcing it had picked off InterMune (ITMN) , a company that specializes in drugs to treat fatal lung disease. The all-cash deal valued at $8.3 billion is the latest in a string of drug M&A activity as companies look to strengthen and,  in some cases, diversify their current offerings.

Roche stock closed Friday at $36.32, down 0.33%. Shares have gained 6% on the year to date, almost half of the health care sector's 11% gain, according to Morningstar.

Roche's stock has grossly underperformed rivals like AstraZeneca (AZN) and Novartis (NVS) , which have posted gains of 39% and 12%, respectively. Even Johnson & Johnson (JNJ) has rewarded investors with close to 15% returns.

For Roche, whose shares have traded sideways since February, investors have wondered if there was any value left. Despite the relative underperformance in the shares, the stock was still expensive at a price-to-earnings ratio of 20.

Making matters worse, until Sunday, management had done little to differentiate the company from the likes of, say, GlaxoSmithKline (GSK) , a company investors can buy at a much cheaper multiple of 13. And Glaxo pays a 5.3% yield compared to no dividend for Roche.

This deal for InterMune, however, changes the landscape.

In InterMune, Roche saw an opportunity it couldn't pass up, even at a 38% premium to InterMune's most recent closing price. It's not a cheap deal. What I think is more important to consider, though, is the value InterMune will bring -- whether on its own strengths or as a value-add to Roche's reparatory assets in Xolair (used to treat asthma) and Pulmozyme (used to treat cystic fibrosis).

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