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Roche has struck a deal with Genentech to buy all outstanding shares for $46.8 billion, or $95 each, ending a long pursuit of the U.S. biotech group and its lucrative cancer drugs.
Roche is paying a high price for the 44 percent of Genentech [DNA
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] it doesn't already own, but it may still have struck the best of this year's three big drug deals, analysts said.
Andrew Baum and colleagues at Morgan Stanley calculate any take-out under $120 a share would have been a net positive for shareholders in the Swiss drugmaker.
After a fierce battle that started last summer, Roche finally clinched the deal after Genentech's board recommended shareholders accept the increased cash offer.
"We believe investors can now breathe a sigh of relief that Roche secured the financing, did not over-pay, and maintained good relations with Genentech," said Sal. Oppenheim analyst Carri Duncan.
Roche had raised its hostile bid to $93 per share from $86.50 last week, which had prompted the restarting of talks between the two companies, Chairman Franz Humer said.
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CNBC.com |
Roche's shares were up 2.1 percent at 148.50 Swiss francs by 1405 GMT, with the DJ Stoxx European healthcare sector index up 0.3 percent, adding to gains in recent days on expectations Roche would get the deal done and improve its performance with Genentech fully embedded.
Genentech rose 2.3 percent to $94.30.
Vontobel analyst Andrew Weiss, who follows Roche, welcomed a price below $100 a share and noted Roche had secured operating cash flow from the part of Genentech it did not already own, access to its pipeline and cash pool of some $10 billion.
Diversifying
Big drugmakers have been seeking to diversify and reduce their reliance on slow-growing traditional prescription medicines, which face patent expiries and falling prices.
Roche's buy, at about 22 times Genentech's forecast 2010 earnings, is more expensive than Pfizer's [PFE
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] agreement to buy Wyeth [WYE
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] for $68 billion, at 14 times 2010 earnings, and Merck's [MRK
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] $41 billion agreed bid for Schering-Plough [SGP
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], a multiple of 12 times.
The moves by Pfizer and Merck to engage in another round of mergers and cost cutting are widely seen as a sign of desperation by companies with flagging franchises.
But Genentech is a very different business because it is at the cutting edge of both biotechnology and cancer medicine, with big sellers like Avastin and Herceptin, and an attractive portfolio of new drugs.
That is exactly the place where all big drugmakers want to be as the flow of traditional drugs from research labs stalls and patents of today's blockbusters expire.
Roche's deal will also yield synergies—some $750-850 million a year before tax, according to the Swiss group—but the big prize is maximum exposure to the fastest-growing section of the global pharmaceuticals market.
The value of that oncology business could be boosted or somewhat diluted, depending on the results of key clinical trial results for Avastin due next month.
Long Battle
Roche's initial bid was rejected last year and the Basel-based company turned hostile after several months, during which the financial crisis raised doubts about financing and Genentech's shares fell below the offer price.
Roche, however, successfully raised $39 billion in the bond market which, together with cash on hand, gave it the financial firepower to get a deal done. The combined group would be the seventh largest pharmaceuticals company in the United States by market share, with around $17 billion in U.S. annual revenue.
Charles Sanders, head of a special committee of Genentech's directors for the Roche deal, said it was a fair offer for shareholders.
Roche's Humer said he did not believe there was a danger of losing Genentech employees—a risk some analysts have voiced—adding the deal would give an enormous amount of security to employees of both companies.
The Swiss group will look at ways of retaining key Genentech staff and will consider a new plan to persuade them to stay. It has no plans for job losses in research and early clinical development and expects to keep the sales forces of both companies, but will look at savings in other areas.
Humer is to meet with Genentech chief executive Arthur Levinson as quickly as possible to discuss whether Genentech management stays on.
"The objective is not here to walk in and cut costs, the objective is to make this one of the best companies in the world in health care," he said. "I have a strong conviction that most if not all senior management will stay on."
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