Roche's $46.8 billion Genentech deal outshines others

By Sam Cage

ZURICH (Reuters) - It is buying up less than half of Genentech Inc DNA.N for a whopping $46.8 billion, but Switzerland's Roche Holding AG (ROG.VX) may have clinched the best of this year's three big drug deals.

Roche said on Thursday it had agreed to acquire the 44 percent of shares in the U.S. firm it does not already own for $95 each, ending a long pursuit of the U.S. biotech group and its lucrative cancer drugs.

Even if clinical trial results with Genentech's cancer drug Avastin disappoint next month, the purchase of the world-leading U.S. biotech group makes sound financial sense.

Analyst Andrew Baum and colleagues at Morgan Stanley reckon any deal under $120 a share would have been positive for shareholders in the Swiss drugmaker.

On the face of it, Roche is paying a high price.

Its Genentech offer is equivalent to 22 times forecast 2010 earnings, against the 14 times Pfizer Inc (PFE.N) agreed to pay for Wyeth WYE.N in its $68 billion deal, and 12 times agreed by Merck & Co Inc (MRK.N) for Schering-Plough Corp SGP.N under this week's $41 billion tie-up.

But Genentech is a very different business.

It is at the cutting edge of both biotechnology and cancer medicine -- exactly the place where all big drugmakers want to be as the flow of traditional drugs from research labs stalls and patents of today's blockbusters expire.

Moves by Pfizer and Merck to engage in another round of mergers and cost cutting are widely seen as a sign of desperation by companies with flagging franchises.

Big drugmakers have been seeking to diversify and reduce their reliance on slow-growing traditional prescription medicines, which face patent expiries and falling prices.

Roche's play for the remainder of Genentech will also yield synergies -- some $750-850 million a year before tax, according to Roche -- but the big prize is maximum exposure to the fastest-growing section of the global pharmaceuticals market.

AVASTIN GROWTH

Avastin, a new kind of drug that starves tumors of blood supply, is widely expected to be the world's biggest selling drug in just a few years.

The combination of big cancer products like Avastin and Roche's own Herceptin, plus promising pipeline products, will give an enlarged Roche the earning power to fund expanded research and development at a time when rivals are struggling.

Roche finally clinched the deal after Genentech's board recommended shareholders accept the increased cash offer.