Updated from 12 a.m. EST
to pay $112 a share to acquire the remainder of the biotech company, a request well above Roche's $89-a-share offer in July and one that the Swiss pharmaceutical giant rejected as too expensive.
New details concerning Roche's attempt to fully acquire Genentech, including the higher asking price demanded by a special committee of Genentech's board, were disclosed Monday night in documents filed by Roche with the
Securities and Exchange Commission
Roche filed the documents with the SEC as part of its hostile tender offer for Genentech priced at $86.50 a share. Roche is going directly to Genentech shareholders, bypassing the company's board, in an attempt to wrest control of the 44% of Genentech it doesn't already own.
Roche's hostile tender offer expires at midnight on March 12 and will be successful if the company can acquire 90% of Genentech's freely traded shares.
Genentech's special board committee on Monday night asked shareholders not to take any action on Roche's tender offer, adding that a formal response will be announced within 10 days.
The tender documents filed by Roche offer a rare glimpse behind the scenes of a takeover attempt that has riveted investors ever since Roche first disclosed its bid last July. The documents also show how far apart both sides remain on the question of Genentech's value, despite months of face-to-face meetings.
Roche also indicated Monday the intent to exercise a right under its existing agreement with Genentech to obtain majority representation on the company's board.
According to the Roche documents, the company began working on plans to acquire the rest of Genentech in May 2008, two months before the offer was made official.
From July through December, executives from Roche and Genentech and their financial advisers met numerous times, with Roche pressing Genentech to accept the $89-a-share offer as fair based on the company's own long-term financial forecasts.
Genentech steadfastly rejected Roche's offer and refused to make a counteroffer until Roche came back with a higher bid. On Sept. 17, Roche Chairman Franz Humer called Dr. George Sanders, Genentech's lead director, to express "his disappointment that Goldman Sachs
Genentech's financial adviser was not engaging in meaningful valuation discussions," the Roche documents state.
On Dec. 12, representatives of Goldman Sachs and Greenhill, Roche's financial adviser, met in New York. At the meeting, Goldman presented an analysis that valued Genentech a $112 to $115 a share. Goldman told Greenhill that Genentech's special board committee would be willing to talk to Roche about a transaction at $112 a share, according to the Roche documents.
A price tag of $112 a share was $23 a share more than Roche had originally bid and represented a potential acquisition price of more than $50 billion.
In subsequent meetings and phone calls through the end of January, Roche rejected Genentech's offer and neither side was willing to negotiate further, according to the Roche documents. This led Roche to launch its hostile tender offer at $86.50 a share.
Roche says it crafted its original offer of $89 a share in part by using a profit-and-loss statement prepared in June 2008 by Genentech for internal use that forecasted revenue, expenses and cash flow out to 2018.
According to that document, which Roche included as part of the tender documents filed Monday night, Genentech forecast 2009 total revenue of $13.5 billion growing to $24.3 billion in 2018.
Analysts currently expect total revenue at Genentech to reach $14.1 billion this year, according to Thomson Reuters.
In November, Genentech presented Roche a revised long-range financial forecast with significantly higher estimates for total revenue and cash flows. For instance, in the November document, which Roche also disclosed in Monday's filing, Genentech forecast 2009 total revenue of $14.1 billion growing to $38.8 billion in 2018.
"Roche believes that the June
financial forecast represents a more realistic estimate of the Company's
Genentech's long-term prospects as compared to the November Financial Model," Roche stated in Monday's tender offer documents.
Other revelations in the Roche tender documents include:
- Roche assigned a 55% probability of success to the ongoing phase III study of Genentech's Avastin as an early treatment for colon cancer patients immediately following surgery. Genentech was only slightly more optimistic, giving the "Avastin adjuvant" study a 61% chance of success, according to the documents.Data from this Avastin adjuvant study in colon cancer are expected in mid-April, with analysts generally assigning a higher probability of success than either Genentech or Roche. A positive study could add $1 billion in Avastin sales, on top of the drug's existing sales, which reached $2.7 billion in the U.S. in 2008. On a related note, Roche also said it believes this single Avastin adjuvant study in colon cancer may not be sufficient for the drug's approval and the company forecast lower Avastin adjuvant sales than Genentech, according to the Roche documents.
- Roche and Genentech disagreed on future corporate tax rates, with Roche believing that Genentech would have to pay higher taxes of around 35% despite tax-saving efforts to move much of the company's manufacturing overseas. Genentech's valuation model assumed lower tax rates.
- Genentech assumed that its success rate in moving drug candidates successfully from its pipeline to the market would be twice that of the drug industry as a whole. Roche called that assumption "unrealistic."
- Roche said the global financial crisis that accelerated since the original July bid for Genentech was one reason for lowering its offer by $2.50 a share to $86.50 a share.
"These adverse developments have caused us to revise certain key assumptions in our determination of the fair value of the Company
Genentech," Roche wrote in its tender documents. "In particular, we believe that the recent economic developments are not a temporary 'blip' resulting in a short-term reduction in market prices, but rather a prolonged general economic downturn that may adversely affect the Company's long term prospects."
Genentech shares closed Monday flat at $82.70.
At the time of publication, Feuerstein's Biotech Select model portfolio was long Genentech.
Adam Feuerstein writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback;
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