Roche seen likely to raise bid for Genentech

By Deena Beasley

LOS ANGELES (Reuters) - Roche Holding AG (ROG.VX) may need to raise its $43.7 billion bid for the Genentech Inc DNA.N stock that it does not already own, but an eventual deal is likely, analysts and investors said on Monday.

The Swiss drug maker already holds a 56 percent stake in Genentech, maker of top-selling cancer drugs including Avastin, Herceptin and Rituxan.

Roche, which sells those drugs outside of North America and Japan, has offered $89 a share for the remainder of the U.S. biotechnology company. That's a premium of about 9 percent to Friday's closing share price, but the stock rose as much as 15 percent on Monday.

"I think the market is telling you that they view the offer as an inadequate reflection of Genentech's value," said Jay Markowitz, research analyst at T. Rowe Price Associates, which owns about 16.5 million shares of Genentech.

As precedent, he and others cited Novartis AG's (NOVN.VX) 2006 acquisition of Chiron. The Swiss buyer, which already held a 42 percent stake in the San Diego-based company, eventually raised its bid after independent directors at Chiron rejected initial overtures as too low.

Roche itself sealed its buyout of Ventana Medical Systems earlier this year by raising the initial takeover offer by 19 percent, even after repeatedly saying it would hold firm on the price.

"Clearly people understand that there is head room for them to do more on the (Genentech) transaction," said Deutsche Bank analyst Michael Leuchten during a conference call held by the investment bank.

"Probably they will have to do more if they are serious about it," he said.

That's because the two companies' 1999 agreement requires minority shareholder approval of any takeover of South San Francisco, California-based Genentech. If that didn't happen, two investment banks would be hired to conduct separate valuations, and Roche would be faced with paying the average of those assessments, according to Deutsche Bank.

Roche could still walk away, but the company clearly sees a takeover of Genentech as a better use of cash than buying back shares or paying dividends, Leuchten said.

"We believe this offer substantially undervalues Genentech," Bernstein Research analyst Geoffrey Porges said in a report on Monday.

He currently values Genentech at $95 a share, but said that excludes key opportunities including potential use of Avastin in cancer patients who have undergone surgery to remove their tumors.

Potentially market-moving data from an ongoing trial of post-surgery colon cancer patients treated with Avastin is expected late this year.

BMO Capital Markets analyst Jason Zhang also said he does not expect Roche to pull off the Genentech deal at the price offered.

"Although there is not a perfect formula for biotech acquisitions, some of the recent deals pushed the price-to-sales-multiple to 10, exemplified by AstraZeneca's (AZN.L) acquisition of MedImmune," he said in a research note. The Anglo-Swedish drug company acquired Gaithersburg, Maryland-based MedImmune last year for more than $15 billion.