Punches Continue To Fly In Roche's Fight For Genentech
February 24 2009 - 11:10AM
Dow Jones News
Genentech Inc. (DNA) took another swing at Roche Holding AG
(RHHBY) by rejecting the Swiss drug giant's tender offer of $86.50
a share in what is likely an early round of an increasingly bitter
fight.
At this point, though, most judges' scorecards have Roche
ultimately winning the 44% of the South San Francisco biotech that
it doesn't already own.
How long the boxing match goes, however, remains a mystery. The
next steps are the March 12 expiration of Roche's tender offer and
the highly anticipated data on Genentech's Avastin, coming as soon
as April, which will likely alter the price of the deal.
"It appears to us inevitable that Genentech...will become a
fully integrated part of Roche in a matter of months," Sanford
Bernstein analyst Geoffrey Porges said.
But the hostile air surrounding the two companies, and the wide
disparity on their perceived value of Genentech, suggests a deal is
unlikely soon. There has been minimal contact between the two
companies in recent weeks, and the tone of their respective filings
with the Securities and Exchange Commission is anything but
friendly.
"We do not expect many shares to be tendered to Roche by their
deadline. At that point the offer expires, and investors will be in
limbo until the Avastin adjuvant data is disclosed," Porges
said.
Following that data, which tests Avastin's usefulness in
preventing relapse of colorectal cancer following surgery, Porges
expects Roche to resume contact with the independent directors and
offer between $95 and $105 a share upon positive data, or $82 to
$85 on negative data.
A Roche spokesman wouldn't comment on the Genentech board's
rejection or Roche's next move, but said the matter is now in the
hands of Genentech shareholders.
The independent board's rejection Monday wasn't a surprise, as
it already rejected an $89-a-share approach from Roche in July as
"substantially" undervaluing the company. Since the summer, the two
parties reached an impasse and disagreed on where to even begin
negotiating - Roche stood by its initial offer, and Genentech's
independent board proposed beginning at $112 a share.
The delay has brought the drama closer to the release of the
Avastin adjuvant data that Genentech previously had expected in
mid-year.
The trial's success could produce billions of dollars more in
annual sales of the drug, which had 2008 sales of $2.69 billion,
but its failure could translate to slowing growth. The study is run
by a third-party cooperative, and there is no indication that
either company is aware of how the trial is progressing.
In the near term, Genentech moved up its annual investor meeting
to March 2 from March 20. Officials weren't available to comment on
the reasons for the move, although it's expected that the company
will argue why it's worth more than Roche's offer.
As Roche has taken its offer directly to shareholders, the
earlier Genentech meeting allows the company to make its case
directly to those same investors before the tender offer's
deadline.
Genentech is expected to highlight its product pipeline and
potentially update its long-term financial projections, both of
which are key to its value argument with Roche. Though Genentech
holds the meeting every year, any new comments on a potential Roche
deal will clearly be the focus.
"In our opinion, Roche may raise its tender offer price in the
next few weeks," Deutsche Bank analyst Mark Schoenebaum said in a
note to clients. Even if the adjuvant trial fails, Schoenebaum
noted, a deal for Genentech at $95 a share would add to Roche's
profits.
Many analysts expect a higher bid, and Roche hasn't given any
indication that it won't raise the price. In fact, its recent
success in selling $16 billion in bonds has reassured some
investors that Roche can now raise its offer.
Genentech's stock price, recently up 59 cents to $85.14, is
reflecting that optimism as it has been at its highest levels since
Roche disclosed its tender offer in late January, despite the
pressure on the broader markets.
The stock hit $99.14 after the first bid was announced in July
but collapsed in September amid anxiety about whether Roche could
raise the funds needed to close the deal.
Roche's American Depositary Shares, meanwhile, fell Tuesday to
their lowest point since May 2005 and recently traded at $29.38,
down 2.4%.
-By Thomas Gryta, Dow Jones Newswires; 201-938-2053;
thomas.gryta@dowjones.com