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Swiss Drugmaker Roche Offers $43.7 Billion for Control of Genentech

July 21, 2008

By Steve Johnson, San Jose Mercury News, Calif.

Jul. 21–In a blockbuster move that could bring an end to the corporate independence of a Bay Area biotechnology legend, Swiss drug giant Roche is proposing to take complete control of South San Francisco-based Genentech for nearly $44 billion.

Roche, headquartered in Basel, Switzerland, already owns 56 percent of Genentech, the world’s biggest biotech company in terms of stock value and second biggest in revenue to Amgen of Thousand Oaks. Under a deal it announced today, Roche offered to buy all of Genentech’s remaining stock for $89 per share, or about $43.7 billion.

Although Genentech’s operations would remain in South San Francisco under the proposed deal, it would cease to be a separate company, according to a statement issued by Roche. The proposal will be reviewed by Genentech’s three board members who aren’t employed by Roche and must be approved by Genentech’s non-Roche shareholders.

If approved, the transaction would create the seventh biggest drug-making entity in the United States in terms of stock value, Roche said.

“Roche’s significant investment in Genentech over many years has helped it to focus on innovation and long-term projects, leading to some of the most important breakthroughs in the treatment of cancer and other life-threatening diseases,” Roche Chairman Franz Humer said in the company’s statement. “Combining the strengths of Roche and Genentech will create significant value and result in benefits for patients, employees and

shareholders.”

Genentech spokeswoman Caroline Pecquet responded that “it’s too early to speculate on what this proposed transaction may mean for Genentech.” But she added that Genentech is committed to “let innovative science lead us to breakthrough medicines to help people with life-threatening diseases.”

Pecquet also noted that Genentech’s three non-Roche board members “were not aware nor expecting this proposal from Roche,” and learned of it on Sunday.

Genentech’s stock, which closed Friday at $81.82 a share, rose nearly $11 in early trading today and at least one analyst predicted the company’s board would reject Roche’s bid and hold out for a better offer.

In a note to its clients, brokerage firm Lazard Capital Markets said Roche’s offer to maintain Genentech’s research and development operations in South San Francisco “could make the transaction more palatable to Genentech management.”

However, it added, “if a transaction takes place, it likely would be at a higher price.”

Investment bank Cowen and Co. agreed, in a note to its clients.

“We view Roche’s bid as somewhat of an initial ‘low-ball’ offer and expect Genentech’s board will be able to negotiate a modestly higher purchase price.”

Nonetheless, Cowen’s note added that “Genentech’s negotiating leverage is reduced due to Roche’s majority ownership.”

Founded in 1976 by venture capitalist Robert Swanson and biochemist Herbert Boyer, Genentech earned nearly $2.8 billion in profit last year, largely on the strength of its cancer medications. The company also sells treatments for a variety of other ailments, including psoriasis, arthritis, asthma and the eye disorder called wet age-related macular degeneration.

Under Roche’s proposal, the Swiss company said it would move its U.S. drug operations from Nutley, N.J. to South San Francisco, along with its virology research operation in Palo Alto. It added that the combined operations “will reflect the Genentech name.”

But Genentech’s late-stage drug development and manufacturing functions “will be combined with the global operations of Roche” to achieve what Roche called “operational synergies and cost avoidance.”

It’s unclear whether that would mean some of Genentech’s 11,000 employees — about 8,250 of whom are in San Mateo County — would have to move to other facilities operated by Roche, which has about 80,000 employees worldwide.

When Roche acquired most of Genentech’s stock in 1990, it prompted some of Genentech’s top talent to leave the company, fearing the biotechnology pioneer would be dismantled and its creativity stifled. But over the years, experts say, Roche generally has allowed Genentech to run its operations without much interference.

Matthew Gardner, president of the South San Francisco-based trade group BayBio, said it’s too early to know what it mean to the Bay Area and the industry if Roche bought all of Genentech. But given how Roche has allowed Genentech to flourish in the past, he said, Genentech might well retain its reputation as an innovator if the deal ultimately is approved.

That would be important, he added, given that Genentech is “an irreplaceable piece of the biotech fabric of northern California.”

Contact Steve Johnson at sjohnson@mercurynews.com or (408) 920-5043.

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