Genentech shares surge on Roche's $44 billion offer

ByJulie Schmit, USA TODAY

— -- Shares of biotech leader Genentech dna soared 15% Monday on expectations that drugmaker Roche RHHBY will have to raise its bid of $89 a share for the 44% of Genentech it doesn't already own.

Roche's $43.7 billion all-cash offer, issued Monday, represents an 8.8% premium to Genentech's closing price Friday.

Genentech closed at $93.88 Monday.

Wall Street analysts say the bid will have to go to $95 to $100 to get a deal done. "It will get done but at a higher price," says Christopher Raymond, Genentech analyst at Robert W. Baird.

Lazard Capital Markets analyst Joel Sendek isn't so sure.

In a note to investors Monday, he predicted that the entrepreneurial and successful Genentech will reject a bid — even if it goes higher — and urge shareholders to follow suit. He says a full takeover by Swiss-based Roche would, at best, dilute Genentech's culture and, at worst, be "a recipe to destroy it."

Genentech, the maker of cancer drug blockbusters Rituxan, Herceptin and Avastin, said Monday it would form a committee of independent directors to assess the offer.

Given terms of Roche's earlier investment in Genentech, Roche needs 50.1% of Roche's other shareholders to approve a deal. If they don't, Roche can ask two investment banks to set a price for the remaining shares and do a deal that way, says Cowen and Co.'s Genentech analyst, Eric Schmidt.

Roche's 56% ownership also provides it with veto rights over any other potential bidder. Schmidt expects a "compromise" to be reached. Roche says the deal would let the two companies share technologies and expertise and improve operational efficiency. It also said Genentech would continue to operate as an "independent" research and development center.

Roche, one of the drug industry's best performers, has already profited handsomely by Genentech's research and creativity. In 1990, Roche spent $2.1 billion for a majority stake in what was then a struggling biotech pioneer.

Five years later, Roche received the option to commercialize any Genentech product outside the USA. Five of Roche's top 10 products come from Genentech, and its products account for 40% of Roche's revenue.

Genentech has likewise prospered, amassing $11.7 billion in 2007 revenue and 32% growth in earnings per share from 2006 — far higher than the drug industry norm. Its drug pipeline is also one of the best in biotech, analyst Raymond says.

If a deal is done, Roche has promised to retain Genentech's culture. It also would boost Genentech's size by giving it Roche's U.S. pharmaceutical operations, including a workforce of 7,000. Genentech employs 11,000.

Sendek says the lure of managing a bigger operation is unlikely to woo Genentech management to support the deal.

He says they'd rather concentrate on their home-grown products than deal with Roche's weaker portfolio. Sendek also says Genentech has in the past resisted big mergers because it says it struggles to hire people that fit well with its culture.

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