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Monday, February 09, 2009

Genentech Wanted Roche To Pay How Much?


How about $112 a share? No kidding.

That's what Genentech's lead director, Charles Sanders, told Roche chairman Franz Humer to expect back on December 12. That was just before Genentech's financial adviser, Goldman Sachs, got in touch to discuss the drugmaker's proposed bid for the biotech. This little tidbit was revealed in the tender offer Roche filed late Monday with the U.S. Securities and Exchange Commission (please see page 15).

You may recall that, last July, Roche initially offered $89 a share for the 44 percent of Genentech it doesn't already own, but late last month, lowered the price to $86.50. Why? All sorts of reasons, starting with the worsening global economy and comparable public company valuations that decreased and, in the process, lowered applicable multiples Roche used to value Genentech shares.

Genentech's fetching demand ultimately prompted a January 9 meeting in New York between various Genentech and Roche legal and financial advisers, as well as senior Roche R&D execs, to debate the virtues of a rosy financial model the biotech devised in November. Genentech used this to justify its $112 price tag, while Roche claims the financial model was hokum.

The following week, Roche's advisers, Greenhill, sent Goldman a list of "key areas of disagreements, which included, among other things, assumptions regarding annual price increases; pipeline productivity; development costs; the value of the extension of Roche's 'opt-in' rights relating to (Genentech's) products outside of the U.S.; Avastin adjuvant (trial) indications; future revenues for Lucentis, Herceptin and Raptiva, and potential tax benefits." In other words, they disagreed over just about everything.

And so Roche upped the ante by taking a new, lower offer directly to Genentech's shareholders, although some Wall Street analysts believe Genentech could easily be worth $100 or more a share, if upcoming Avastin adjuvant trial data is positive.

Of course, this is Roche's version of events, which the drugmaker is using to explain its alleged frustration with Genentech's board these past few months, as well as its rationale for playing hardball with its newly lowered bid.

What will Genentech do now? Not surprisingly, a special Genentech board committee urged shareholders "to take no action at this time" in this statement. But it won't be long before we know more. That's because the special committee indicated it would take a formal position on the Roche offer "within ten business days, and will explain in detail its reasons for that position by filing a Statement on Schedule 14D-9" with the SEC.

And we can't wait. Maybe the biotech will raise its asking price. And why not? This is poker, after all.

(Image courtesy of flickr user fhwrdh through a creative commons license.)

1 comment:

Outside the Box said...

Ed

It seems to me that Roche are doing the usual "buyer" thing of suggesting that Genentech are being over optimistic about their financial future, and Genentech are standing firm behind their conviction that they are worth well over $100 per share. If oncology pricing moves the way most observers believe it will (i.e. sharply downwards) over the next 10 years, it rather suggests that Roche may be right. Add to that the massive competition coming in oncology over the same time frame (part of the reason prices will fall), and you have a tricky position within which Genentech say they are going to continue to over perform.

That, of course doesn't make it more likely that Genentech share holders will sell, but those projections have got to be worth a very close look.