Genentech dips below Roche offer amid deal nerves

LONDON/LOS ANGELES (Reuters) - Genentech Inc DNA.N shares slid below the offer price from Roche Holding AG (ROG.VX) on Monday as the spreading market turmoil stoked uncertainty about the takeover and the scope for an improved bid.

"When Roche proposed the deal, the cost of borrowing was not where it is now," said David Heupel, a portfolio manager at Thrivent Financial for Lutherans, which oversees $60 billion.

Genentech has traded at a hefty premium to Roche's $89-a-share offer since the Swiss drugmaker unveiled its $43.7 billion offer for the 44 percent of the U.S. biotech group it does not already own back in July.

But on Monday, the stock slid below $88 for the first time since Roche's approach. It closed down 5.9 percent at $85.30 in late trading on the New York Stock Exchange against a peak of $99.05 on August 14.

"Whether it is legitimate or not, there is a perception that Roche would have trouble financing the deal, given current credit market conditions," said Robert W. Baird & Co analyst Chris Raymond.

If the federal government acts to pass the proposed $700 billion bailout of the U.S. financial system, Genentech shares would likely bounce back, he added.

Genentech's board has rejected Roche's offer as inadequate and most investors have been betting Roche would sweeten its offer. But the deepening financial crisis has sown doubt about Roche's room to maneuver.

"Clearly recent market developments have not made the financing of more than $40 billion any easier," Deutsche Bank analysts said in a research note.

Deutsche analysts believe Roche's strong balance sheet and predictable cash flow will still allow it to secure funding for the deal -- even in current difficult markets.

"However, the timing has clearly become more uncertain as Roche may very well choose to use this to its advantage and draw out the process in order to extract the lowest possible bid price," said analysts at the bank.

Raymond said a lot of Genentech shareholders would also prefer to wait, given that interim results are expected next month from a key clinical trial looking at the use of Avastin in colon cancer patients who have had tumors surgically removed.

"It's like a huge call option," he said.

Still, the interim review is unlikely to trigger a public release of data. Final results of the 2,700-patient trial are due next year.

The early-2009 final data "will change the value of Genentech one way or the other," Heupel said. "There is still plenty of time ... nobody seems to be in a rush."

Annual sales of Avastin, sold in the U.S. by Genentech and outside of the United States by Roche, already total more than $2.3 billion in the U.S. alone, and some analysts say they could more than double if the drug showed it could help prevent recurrence of the disease in early-stage cancer patients.

Severin Schwan, Roche's chief executive, told a conference in London two weeks ago he hoped to achieve a negotiated settlement for the takeover and he remained confident of securing financing on attractive terms.

A Roche spokesman in Basel said on Monday there was no change to this position and the company remained committed to a deal.

(Editing by Brian Moss and Andre Grenon)