What's Genentech Really Worth?

On Friday, Genentech was an interesting biotech business embarking on a major clinical trial of cancer "wonder drug" Avastin. It has been trading to the upper end of its 12-month range, but thought to be a little vulnerable to negative news flow on the safety and efficacy of Avastin. One could be a little suspicious of the recent gains (and perhaps the SEC should be taking a quick look) but that isn't the point I want to make.


Until today's $40 billion plus bid from Roche I don't remember too many analysts putting a $100 price target on the shares, not a lot of $90 pitches either until last Thursday when Citi analyst Dr. Yaron Werber suggested $91!

Now that Roche has made a bid for the stake it doesn't already own everybody has decided Genentech must be worth a heck of a lot more. Partly that is down to the organic growth strategy that Franz Humer pursued in the past. People figure that if Roche is prepared to abandon that strategy in this environment then there must be big rewards from the deal.

When we spoke to Franz this morning he was coy on the timing of the offer and wasn't giving too much away on the benefits. The market has been left to fill in the blanks and has decided that the early data from the 450 trials underway on 30 different cancers must be giving very positive feedback.

According to the New York Times earlier this month, that could lead to Avastin being "prescribed to hundreds or thousands of additional people." Genentech's second-quarter numbers already revealed sales are speeding up because of greater use for breast cancer.

Roche has a tricky hand to play from here. The market is talking up the prospect for a rival bidder. That is not impossible, but would require some chutzpah given Roche's existing stake. What the market really wants is more information on the prospect for the Avastin trials but of course that data is not available. The speculation is that Roche may be looking to get this offer tied down before the full outcomes from the trial are reported.

In which case we will probably see the $89-a-share offer raised before the ink is dry on this deal.

Final thought: it has to be an encouraging sign to see an offer of this size being made when capital markets are still as troubled as they appear to be.

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