Roche Bids for Rest of Genentech (Update)

The offer is worth nearly $44 billion and is valued at $89 a share.
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Updated from 8:31 a.m. EDT

Swiss drug company

Roche

made an offer Monday to take over the stake it doesn't already own in biotech behemoth

Genentech

(DNA)

for $89 a share, or $43.7 billion.

Many observers on Wall Street expect Genentech investors to view the bid as low, but some also see it has a preliminary approach. As evidence, shares of South San Francisco, Calif.-based Genentech, which closed Friday at $81.82, were surging past the Roche price in trading Monday, lately rising 13% to $92.50.

Wall Street speculators point out that Genentech's upcoming interim data on cancer drug Avastin in the adjuvant setting, if positive, could be worth $20 a share on its own. "This is a multi-billion dollar opportunity as nearly every treated newly diagnosed colorectal patient will be an Avastin candidate," explains Summer Street Research's Tony Caserta.

Consider that Genentech guides to 25% EPS growth through 2009 -- "25X the street estimate of $3.88 in 2009 gets you $97 a share, without the adjuvant results," wrote Caserta.

Roche said Monday that it has already incorporated the positive data into the $89-a-share price. The Swiss company urged Wall Street to consider its action of taking Genentech private differently than other big biotech deals.

"I firmly invite you to respect that we already own Genentech in the sense that we already have control ... it's not an acquisition where you have to pay a high premium for change of control," said Roche CEO Severin Schwan.

"We are very confident that this is an attractive offer for the minority shareholders, so there's no reason to speculate about alternatives," he said.

Still, investors haven't forgotten that Roche ended up paying a 20% premium to its initial offer for Ventana -- and questions about whether that outcome is indicative of Roche's willingness and/or expectation to negotiate arose on Monday's call.

"Ventana was a full-fledged acquisition and Genentech is going private, so we won't pay a full premium," reiterated Schwan.

Roche owns roughly 55.9% of the largest biotech by market cap. The proposal for the remaining 44.1% is an 8.8% premium to the company's closing price on the last trading day of the prior week and a 19% premium to the price a month ago.

Shares of Genentech have traded between $65.35 and $82.50 in the past year.

For Roche's part, the acquisition is expected to generate pretax cost savings of roughly $750 million to $850 million annually and add to earnings per share in the first year after the deal closes.

"In our view, the financial/operational synergies are clear," wrote JPMorgan analyst Geoffrey Meacham in a research note to investors. "That said, we believe the offer substantially undervalues Genentech's pipeline, particularly the Avastin opportunity for adjuvant colon as well as breast, prostate and

non-small cell lung cancer."

Roche said on the post-announcement conference call that the $89-a-share price was fair; however, Meacham expects the company to raise the price.

Lehman Brothers analyst Jim Birchenough said that comparable deals support a Genentech counterproposal of $120 a share and estimates an ultimate purchase price of roughly $105 a share.

Roche expects Genentech's board to establish a committee of independent directors to evaluate the proposal with outside financial and legal advisers. The company proposes that the Genentech Founders Research Center will operate as an independent unit within Roche Group.

Based on the 1999 agreement between the companies, a majority of the non-Roche shareholders of Genentech must authorize the merger.