Roche makes bid for Genentech

SAN FRANCISCO - Biotechnology pioneer Genentech Inc. considered Roche Holdings' $43.7 billion offer for its remaining shares yesterday as investors made clear their feelings that the Swiss pharmaceutical giant should pay considerably more.

But some analysts said Roche, already Genentech's majority shareholder, has leverage to keep the price for the maker of the blockbuster cancer therapy Avastin and other cancer treatments from spiraling much higher.

Genentech's stock price climbed well above Roche's offer of $89 per share in trading yesterday - a bet that the independent directors weighing the Basel-based company's bid will demand more money.

Shares jumped $12.06, or nearly 15 percent, to close at $93.88 after rising to a 52-week high of $94.19 earlier in the session.

Many Wall Street analysts said that Roche's offer did not reflect the profit potential of Avastin or the South San Francisco company's other popular drugs. Roche already owns about 55.9 percent of Genentech.

"We believe Roche is attempting to capture Genentech's significant future growth on the cheap," said Oppenheimer & Co. analyst Bret Holley in a note to investors. Some analysts predicted Roche's offer would have to climb to more than $100 per share to be acceptable to Genentech, and one pegged the stock's value at $120.

Still, an agreement outlined in Securities and Exchange Commission filings for Genentech's 1999 public offering of stock indicates Roche has clout that could help it negotiate a final bid closer to its initial offer.

Under the agreement, a majority of non-Roche shareholders must approve any sale or merger of Genentech with Roche. If shareholders reject the bid, according to the agreement, Roche can hire investment banks to set the price for Genentech's remaining shares.

Rather than gamble on banks setting an even lower price than Roche has already offered, Genentech's board members would likely negotiate an agreement within a few dollars of the $89-per-share bid, said Eric Schmidt, a biotech equities analyst for Cowen and Company.

"That changes the whole dynamic of the negotiation and lowers by a significant amount the premium that's going to have to be paid," said Schmidt, who predicted in a note to investors that Roche's status as majority shareholder would allow it to fend off any competing offers from other bidders.

The decision on Genentech's next step rests with its three board members not directly affiliated with Roche or itself. Genentech declined to comment on any aspect of the offer or how quickly the company would respond except to say in a statement that a special committee of the independent directors "will be convened promptly to determine what action to take."

Among the directors considering the offer is Herbert Boyer, 71, who helped create the biotech industry when he co-founded Genentech in 1976.

Since then, the company has scored repeated successes with some of the most popular biopharmaceuticals on the market. Its top-selling cancer drug Avastin brought in $2.3 billion in sales in 2007, a number analysts expect to see go higher after Avastin's surprise approval in April as a treatment for breast cancer.

Avastin is already approved to treat lung and colorectal cancer and is being tested for colorectal cancer as an adjuvant treatment, or a treatment to prevent cancer from recurring after surgery.

Genentech's Rituxan, which treats rheumatoid arthritis and non-Hodgkin's lymphoma, posted nearly $2.3 billion in sales last year; its popular breast cancer drug Herceptin had sales of $1.3 billion.

Roche shares fell 4.8 percent to close at 171.00 francs ($167.27) yesterday on the Zurich exchange after Roche announced a 2 percent decline in its first half net profit.

Roche, which codevelops and markets Genentech products outside North America, said the takeover would "accelerate the search for new solutions for unmet medical needs."

"The combined entity will be the seventh largest U.S. pharmaceuticals company in terms of market share," Roche said in a statement. "It will generate more than $15 billion in annual revenues."

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