* Roche cuts Genentech bid to $42 bln
* Launches hostile offer at $86.50/shr, down from $89
* To use own funds, commercial paper, bonds, bank loan
* Genentech urges shareholders to take no action
* Roche stock up 1.9 pct, Genentech down 3.4 pct
(Adds Genentech response, background, updates shares)
By Sam Cage
ZURICH, Jan 30 Swiss drugmaker Roche Holding
Ag ROG.VX launched a surprise hostile bid for U.S.
biotechnology giant Genentech Inc DNA.N at a price below its
original rejected offer, reflecting tougher financing
conditions and a drop in Genentech shares.
Roche is now making a public tender offer at $86.50 per
share in cash for the 44 percent of Genentech it does not
already own, valuing the deal at $42 billion and replacing its
initial $44 billion bid. [ID:nL3259814]
The move comes just days after the world's biggest
drugmaker, Pfizer Inc (PFE.N), agreed to buy smaller rival
Wyeth WYE.N for $68 billion, backed by a $22.5 billion loan,
indicating debt markets for cash-rich pharmaceutical makers are
far from dead. [ID:nN26367941]
"We are confident that we will have the financing available
when the money is needed," Roche Chairman Franz Humer told
Genentech said a special committee of its board would make
a formal response within 10 business days of starting the
tender offer and urged shareholders to take no action at this
time. But it signaled another rejection in the offing.
"Notwithstanding current market conditions, the special
committee continues to believe that $89 substantially
undervalues the company," committee chairman Dr Charles
Sanders said in a statement, using the initial offer price.
Buying Genentech would give Roche control of all revenue
for blockbuster cancer drugs Avastin and Herceptin, as well as
an attractive portfolio of other medicines, and reflects the
pharmaceutical industry's push to acquire biotech assets to
fill sparse new-product pipelines.
Genentech currently gets U.S. revenue from its medicines,
while Roche sells the drugs outside the United States.
Roche appeared to be turning up the pressure on Genentech,
which analysts said could be trying to delay the process until
anxiously awaited clinical data on Avastin due in April becomes
available. Positive data that could significantly expand
Avastin use would likely drive up the company's value.
Roche's stock rose 1.9 percent to 163.40 Swiss francs.
Genentech shares closed down 3.4 percent at $81.24.
Some Genentech shareholders have already indicated plans to
reject the Roche offer.
"We are not going to tender our shares," said Sam Isaly, a
portfolio manager for OrbiMed Advisors, which holds about 3
million Genentech shares.
While the Avastin data for use in colon cancer patients
following surgery remains a question mark, Isaly said, "We're
willing to take that risk and we think the shares are worth far
more than the current share price."
Analysts and shareholders have said positive Avastin data
could easily push Genentech shares well above $90.
"The majority of the minority shareholders are probably
similar to us," said Sven Borho, another OrbiMed portfolio
Roche, which currently owns 56 percent of the Genentech
outstanding shares and originally bid $89 per share, pitched
its new offer at a premium of nearly 3 percent over Genentech's
Thursday closing price of $84.09. That is 6 percent above
Genentech's price before the initial offer was announced last
year, compared with 29 percent for Pfizer's Wyeth deal.
Roche had initially aimed to acquire the remaining shares
through a negotiated settlement but decided to appeal directly
to shareholders after further talks failed to reach an
agreement, Humer said.
"The plan is to use as financing partly our own funds, and
then obviously bonds and then commercial paper and traditional
bank financing. We will start by going to the bond market
first," he said.
Roche said it will seek a merger with Genentech if at the
end of the offer it owns 90 percent or more of the shares. It
did not give details of the possible length of its tender.
Andy Smith, a fund manager at Axa Framlington Biotech who
holds Genentech shares, was not interested in accepting the
new offer and said he would consider buying more Genentech
stock as long as it remained below the offer price.
"We are in Genentech for the longer term, for the growth
prospects, and Roche is too," said Smith, whose fund owns 2.4
million pounds ($3.43 million) worth of the stock.
Geoff Meacham, an analyst at JP Morgan, was anticipating
shareholder rejection, saying the acquisition could ultimately
be concluded at more than $100 per share.
But Leerink Swann's Bill Tanner believes Genentech
shareholders should sell, calling the stock "fundamentally
overvalued," especially given the possibility that Avastin data
Roche made a fresh round of calls to banks after news of
the Pfizer-Wyeth deal emerged, bankers close to the Genentech
deal told Reuters this week. [ID:nLR531863]
Business leaders meeting in Davos, meanwhile, said they saw
opportunities in the global downturn, though a hard-nosed focus
on cost cutting is the order of the day. [ID:nLU769701]
After the initial Roche offer in July 2008, Genentech
shares rose to a high of $99.05, but later fell back below the
offer price as the credit crisis bit, which gave Roche leeway
to lower its bid.
Greenhill & Co is financial adviser to Roche and Davis Polk
& Wardell is legal counsel for the tender offer, which Roche
expects to commence within approximately two weeks.
The Genentech special committee is represented by Goldman,
Sachs & Co and Latham & Watkins LLP. Genentech is represented
by Wilson Sonsini Goodrich & Rosati.
(Additional reporting by Bill Berkrot, Katie Reid, Sven
Egenter and Paul Arnold; Editing by David Cowell, Matthew Lewis
and Bernard Orr)