IHS Global Insight Perspective | |
Significance | Roche has made a second bid for the remaining 44.2% of shares in its subsidiary Genentech, offering a new, lower price of US$86.50 per share, compared with the original offer of US$89 per share. |
Implications | The timing and size of the offer have been designed to capitalise on any uncertainty among Genentech shareholders—at whom the latest deal is directly aimed—ahead of the anticipated release of clinical trial data on Avastin in disease-free survival in patients with resected Stage II or III adenocarcinoma of the colon. |
Outlook | Genentech's strong financial performance could well see shareholders turn down the offer and hold out for something better. However, Genentech would also gain significantly from greater backing and closer ties with Roche, and an eventual acceptance of a merger remains likely. |
Swiss pharmaceutical company Roche has made a surprise second bid for the outstanding public shares of its U.S. subsidiary Genentech, offering some US$86.50 per share. In a sudden shift of strategy by Roche, the new offer has been made directly to Genentech's shareholders, and is lower than the US$89-per-share acquisition bid proposed by the Swiss firm last July (see Switzerland: 21 July 2008: Roche Offers US$43.7 bil. to Take Full Control of Genentech; Operating Income Falls 7% in H1).
As it stands, Roche owns some 55.8% of Genentech's outstanding shares, but its planned acquisition of the remaining 44.2% would not imply a complete consolidation. Instead, Genentech would remain as an independent unit within the wider Roche group, retaining its name in order to keep the benefits of strong brand recognition in the United States. Roche business units including its U.S. headquarter in Nutley, New Jersey, and its R&D base in Palo Alto, California, would then be relocated to Genentech's existing campus in South San Francisco, California, triggering a wider shake-up of Roche's U.S. operations.
Roche's decision to offer a lower share price in its latest bid is a bold move, given that a special committee set up by Genentech's board of directors turned down its original offer flatly in August, claiming it was too small (see Switzerland: 14 August 2008: Genentech Rejects Roche's Acquisition Bid). Genentech's share price on the New York Stock Exchange closed at US$84.09 yesterday, giving Roche's new offer a premium of just 2.9%. Roche has made it clear that its efforts to negotiate with Genentech's directors have ended in a stalemate, and that it is now hoping to appeal directly to minority shareholders and persuade them to agree to a sale.
Outlook and Implications
Shareholders may well be wondering what advantage there would be to a full merger with Roche, as the U.S. biotech is already performing strongly and looks set to continue doing so (see United States: 16 January 2009: Genentech Total Revenues Up 14.44% in 2008). The company is expecting up to four U.S. FDA approvals before the year is out, and is hoping to submit up to 10 further marketing applications. Roche would argue that Genentech stands to gain from its wider funding and resources for Research and Development (R&D), as well as synergies to be made in marketing and intellectual property. However, the main benefactor from the proposed merger would be Roche, which last July said it could gain pre-tax synergy savings of US$750–850 million through the acquisition.
A potential spanner in the works for Roche is the fact that Genentech is planning to release clinical data from the C-08 trial—conducted by the National Surgical Adjuvant Breast and Bowel Project (NSABP)—in April, some months ahead of schedule. In a filing to the U.S. Securities and Exchange Commission last week, Genentech revealed that the Phase III study is designed to assess the effect of FOLFOX6 (5-fluorouracil, leucovorin and oxaliplatin) chemotherapy, with or without Genentech's blockbuster drug Avastin (bevacizumab), on disease-free survival in patients with resected Stage II or III adenocarcinoma of the colon. The trial could be completed as early as April if the required number of disease-progression events, as defined by the study’s statistical analytical plan, have been achieved by then.
Positive results from this trial would be a major boost to Genentech, and would see the biotech's share price jump accordingly. This would almost certainly force Roche to ramp up the value of its original offer, which it had been widely been expected to do until today (see Switzerland: 12 January 2009: Roche Could Sweeten Genentech Bid). Recognising that it has a window of opportunity, Roche appears to be playing on shareholder uncertainty relating to the NSABP C-08 trial results, as well as the U.S. recession and ongoing concerns over psoriasis drug Raptiva (efalizumab; see United States: 18 November 2008: Genentech to Work with FDA on Raptiva Labelling Following Second PML Case).
This risky strategy showcases Roche's determination to consolidate the remainder of Genentech, and reinforces the idea that the old strategy of keeping acquired companies at arm's length will no longer necessarily apply. Given its strong performance on the financial and R&D side of things, Genentech's shareholders would be well within their rights to turn down this lower offer and hold out for something better; gauging shareholder confidence is tricky, but recent indications from the company suggest that it should be fairly high. That said, Genentech would also gain significantly from greater backing and closer ties with Roche. As such, an eventual acceptance of a merger still remains likely.