Updated from 10:30 a.m. EDTRoche's $89-a-share offer for Genentech ( DNA) is notable not just for the fact that it could mark the end of an era for the best biotech in the history of the industry, but for the repercussions it could potentially have on the rest of the sector. First things first: Is the offer too low? The market seems to think so, with shares of Genentech trading up 14.7% to $93.88. I agree. I believe Roche has to up the bid. On its conference call this morning, Roche sounded very firm with the offer, calling it "fair and generous" several times. Roche insisted that a takeout premium isn't justified in this case because the company already controls Genentech with its current 56% stake. In essence, Roche isn't acquiring Genentech as much as taking the company private. The $89-a-share offer represents a 9% premium to Genentech stock's closing price Friday and a 19% one-month premium, but is it a fair offer when you factor in the multibillion-dollar commercial opportunity for Avastin in adjuvant colon cancer? No way. UBS says a successful outcome for the Avastin adjuvant colon cancer trial could be worth $20 a share to Genentech's current stock price. (The next interim analysis from the study is due in the fourth quarter.) JP Morgan biotech analyst Geoff Meacham, in an early-morning note to clients, agrees that the offer is low and that this may just be the start of the negotiating process, with a higher bid to come. Lehman Brothers: Roche's offer is too low. The firm raised its Genentech price target to $105 a share Monday morning based on a reasonable counter proposal of $120 a share by Genentech's independent directors.
"In considering Genentech's potential frame of reference for assessing valuation in an acquisition and formulating a counter proposal, we would suggest that a comparable 30x 2009E EPS multiple to large-cap peer Celgene would support a $120 (-per-share) purchase price, that a more typical 35-60% 30-day premium seen in other acquisitions would support a $104-123 purchase price, that a 50-100% premium to our PharmaPipelines NPV of $70 could support a purchase price of $105-140 and that a comparable 10.7x sales multiple afforded MedImmune by AstraZeneca could support a purchase price of $131," the firm said in a note to clients. "Overall, we believe that $120/share would be a reasonable counter proposal by DNA and that assuming an equitable negotiation would suggest a compromise price of $105/share, in line with a 50% premium to our PharmaPipelines NPV." The End of an Era Roche is saying that it will allow Genentech to operate as an independent entity with minimal interference from headquarters in Basel. In fact, Roche's presence in the U.S. will be rebranded under the Genentech name. (A smart move.) Still, will Genentech, under Roche, be given free rein to continue working with its smaller, biotech partners? What happens to the drug development partnerships with Curis ( CRIS), Immunogen ( IMGN) and Seattle Genetics ( SGEN), for example? If Roche is true to its word, Genentech will be free to pursue its early-stage drug development with the same freedom it has today, which bodes well for the existing partnerships, hopefully. Genentech makes up 39% of the assets in the Biotech HOLDRs ( BBH) exchange-traded fund. What happens when Genentech disappears as a separate, publicly traded company.
The thought of Genentech going away as a separate publicly traded company is very strange to ponder. In many ways, Genentech is the biotech sector, if you get my meaning. Not having that "DNA" ticker symbol around will be very strange -- and sad. A New M&A Trend? Will the Roche-Genentech deal spur further merger activity in the biotech sector? Deals like this can't hurt, and I'd expect some strength in the overall biotech sector as a result, but I'd also be cautious about predicting a broader biotech buyout trend based on Roche-Genentech. As Roche said repeatedly today, there is an existing relationship between the two companies. Roche already benefits mightily from its 56% stake in Genentech, so now it will benefit even more. There existed a certain inevitability to Roche buying the rest of Genentech. Will this induce other Big Pharma companies to gobble up the likes of a Biogen Idec ( BIIB), Gilead Sciences ( GILD) or Celgene ( CELG), or go after smaller, more speculative biotech firms? Perhaps, but it's hard to make a bet on something like that. Such talk has been percolating for years and with a few exceptions, we haven't seen many mega-deals take place. The way I look at it, Genentech on its own was one of the best, if not the best, biotech investment in the sector. Those investors that agreed and owned the stock are now going to profit. So, buy good biotech companies with strong fundamentals and perhaps you, too, will wake up Monday morning to some happy news. Lastly, if Roche successfully buys the rest of Genentech, the New York Stock Exchange should retire the DNA ticker symbol permanently. Hang a flag from the rafters of the trading floor to remember the greatest and most successful biotech firm that ever was.