Roche Offers to Buy Out Genentech for $43.7 Billion

Swiss drugmaker Roche Holding offered to acquire all outstanding shares in its U.S. partner Genentech for $43.7 billion in cash to reinforce its position in cancer medicines.

Roche, which already owns 55.9 percent of Genentech, said on Monday it would offer $89 per share to buy up the remaining stake, but markets bet on an offer higher than the current 8.8 percent premium to the previous closing share price.


Shares in Genentech , the world's largest biotech company by market value, jumped 13.5 percent to $92.90, while Roche's stock closed 4.8 percent lower at 171 francs as investors worried about the cost of the move, its largest ever acquisition, and the possibility of having to pay more.

"We would expect Roche will have to make a significantly higher offer if it is to acquire Genentech," analysts at Cazenove said in a note.

The modest premium offered by Roche compares with an average of 63 percent for recent pharmaceutical buys of biotech companies, according to Credit Suisse.

Basel-based Roche also said its first-half net profit fell 2 percent to $5.62 billion (5.73 billion Swiss francs), hit by a loss of sales of influenza drug Tamiflu and the weak U.S. dollar, but beating forecasts.

"The takeover of the innovative oncology powerhouse could really pay off for the Basel company in the mid-term. The timing looks opportune given the current low U.S. dollar," Wegelin analysts said in a note.

Roche's last major U.S. acquisition, snapping up Ventana Medical Systems earlier this year, was only secured with a sweetened offer worth 19 percent more than its initial bid.

It is essential for Roche "to have a stronger and more effective market presence, if we are to not only maintain but extend out position in the face of growing challenges and pressure on prices," Roche Chairman Franz Humer told a news briefing.

Genentech said it expected that a special committee of its independent directors to determine what action to take with respect to the Roche proposal.

Cash Pile

The Genentech bid is the latest in a string of acquisitions of promising biotech assets as large pharmaceutical companies snap up new drugs to fill sparse new product pipelines.

It is the third major deal for biotech assets in the last month alone, after Novartis's buyout of research partner Speedel and GlaxoSmithKline's insomnia licensing deal with Actelion.

Roche would gain control of all revenues for big-selling Genentech cancer drugs Avastin and Herceptin, as well as absorbing an attractive portfolio of new medicines.

Roche expects the combination to generate annual pretax cost synergy benefits of about $750-$850 million and to add to earnings per share in the first year after closing.

The company confirmed its full-year forecast and said it was still committed to increasing its dividend pay-out ratio for the next three years.

It will fund from its large cash pile plus debt. Chief Financial Officer Erich Hunziker said Roche was talking to several banks and saw no problems in putting together "attractive" financing for the deal.

UBS analysts estimated Roche may need to raise $15-$20 billion in debt to finance the deal and expected it could do that "fairly easily" without major changes to its debt rating.

Greenhill & Co is Roche's financial adviser on the deal and Davis Polk & Wardwell is legal counsel. Roche did not give further details of how it will fund the buy or how it would achieve the expected synergies.

Weaker Profit Beats Foreast

Big pharmaceutical companies have benefited in recent weeks from safe-haven status as investors flee embattled sectors such as financials, but they still face problems as competition from generic drugs rises and are ever keener to buy into new drugs.

Many pharmaceuticals makers, including Europe's two largest Glaxo and Sanofi-Aventis , face slowing earnings growth due to the loss of exclusivity on key drugs, pricing pressures and more complicated paths to market.

Roche and local sector peer Novartis both trade at almost 14 times forecast 2009 earnings, a premium to competitors Glaxo, Sanofi and AstraZeneca thanks to their promising new drugs.

Roche's first-half sales fell 4 percent to 22.0 billion francs, hit by loss of income from government stockpiling of Tamiflu. Total drug sales fell 6 percent to 17.28 billion francs.

Roche had been expected to post net profit of 5.57 billion francs and sales of 22.04 billion, according to a Reuters poll.

"The numbers are okay, but not outstanding. It's not enough to warrant a premium to the sector," a trader said.