Roche digs in, Ventana investors bet on higher bid

ZURICH (Reuters) - Drugmaker Roche Holding AG (ROG.VX) is digging in over its $3 billion bid for Ventana Medical Systems Inc VMSI.O, but investors are betting on a sweetened offer.

Roche recently extended its $75-per-share offer for the third time, but most Ventana shareholders are holding out for more, raising the risk that Roche will end up overpaying for an asset it views as a good strategic fit.

Less than 0.2 percent of the outstanding shares in Ventana -- an Arizona-based provider of diagnostic tests -- had been sold to Roche when it extended its tender offer September 20.

"I think at some stage they're going to have to (raise the offer). They don't seem to be able to persuade enough investors to offload stock," said Nick Draeger, a fund manager at Adamant Biomedical Investments in Basel.

"It seems to be a real cat and mouse game," Draeger said.

Ventana shares rocketed after Roche made its initial cash offer in June, pitched at a 44 percent premium to what investors had previously thought Ventana was worth.

It has remained above $75 since and was trading at $87.90 by 9:41 a.m. EDT on Monday, a premium of some 17 percent to the value of the offer.

Ventana says the offer undervalues its business and prospects in the fast-growing cancer-testing market, but is not against a deal in principle.

"The $75 is a non-starter but at some price north we would be happy to talk to Roche and other people," Ventana Chief Executive Christopher Gleeson told Reuters. "We don't see any corporate issues between our companies. This is purely about value."

RICH VALUATION

Roche, Europe's third largest pharmaceutical company by drug sales, is particularly interested in Ventana because it makes diagnostics tests which could speed up detection and profiling of cancer and enhance use of targeted therapies, such as the Swiss company's blockbuster drug Herceptin.

Roche says its offer is full and fair and its new diagnostics chief, Juergen Schwiezer, told Swiss newspaper NZZ am Sonntag that it is not planning to raise its bid.

Ventana could be worth up to $90 per share as a standalone business, some analysts say, and Roche may have to raise its bid -- possibly above $100 -- to ensure success.

But even the current bid values Ventana at higher multiple than other recent similar deals, including Inverness Medical Innovations Inc's IMA.A purchase of Biosite Inc and Qiagen NV's (QGEN.DE) acquisition of Digene Corp DIGE.O, said Bruce Cranna, analyst at Leerink Swann in Boston.

The $75 valuation values Ventana at 8.6 times expected 2008 sales, according to Leerink Swann data, versus 4.6 for Biosite and 6.5 for Digene.

Leerink Swann analyst Bruce Cranna estimates the deal could finally be done at about $92 to $95 per share, where the takeout multiple would be even higher.

The deal could still give Roche value for money as Ventana "is a highly desirable, unique property in diagnostics," Cranna said. Ventana's net profit of $31.6 billion in 2006 is seen tripling by 2009, Reuters data show.

And it would be unlikely to cause major ripples at such a cash-rich firm as Roche, which had some 24.3 billion Swiss francs ($20.6 billion) in cash at the end of 2006.

But Collins Stewart analyst Navid Malik said Roche could be reluctant to raise its bid as it would set a precedent for its own possible future deals.

Equally the Swiss firm remains by far the most likely buyer as other companies do not have the same strategic fit. Ventana's rich valuation at 46 times forecast 2008 earnings also discourages white knight offers, Malik said.

"The only value you can see in this business is to a strategic buyer," he said.