By Deena Beasley - Analysis
LOS ANGELES (Reuters) - Roche Holding AG ROG.VX may be gaining momentum in its quest to acquire the 44 percent of Genentech Inc DNA.N it does not already own as the two sides come closer to a friendly transaction.
Roche last week offered $93 a share — a 7.5 percent price jump — in a tender offer made directly to shareholders, but a source familiar with the situation said on Monday that the two sides were discussing whether $95 a share, an increase of about 2 percent, would be acceptable for a non-hostile deal.
“For me, whether it’s $93 or $95, I think our job as investors is done,” said Andy Smith, fund manager at Axa Framlington Biotech, where Genentech makes up about 4 percent of $65 million in assets. “I expect Genentech to be acquired by Roche within the next month or so.”
But some die-hard shareholders are less sanguine, and questions have also emerged about whether Roche’s tactics have soured Genentech employees to the point where future morale could be hurt. Roche lowered its original buyout offer of $89 a share in July to $86.50 after Genentech rejected it, and raised it again after being spurned by shareholders.
A source close to Roche said the company could pay as high as $105 for the California-based biotech company but it doesn’t think it needs to go that high to clinch a deal.
“Another $1 or $1.50 a share and they ought to be able to get this deal done,” said the source, referring to the $95 per share price that is under discussion. “But it’s unclear if they’ll need to even go that high.”
Deutsche Bank analyst Mark Schoenebaum on Tuesday lowered his rating on Genentech to “hold” from “buy,” on the basis that the stock is trading close to where a final deal will be done.
Shares of Genentech fell 1.22 percent to close at $91.50 on the New York Stock Exchange.
“I once said that I wanted $140 but that was before the market came down,” said Sam Isaly, portfolio manager of OrbiMed Advisors, which holds about 3 million shares of Genentech. “We would be unlikely to tender at $93, but every couple dollars makes it more likely that we would part with our stock.”
Schoenebaum said in a research note that a friendly bid at $95 a share would remove any barrier to Roche taking out all minority shares.
“We imagine Genentech will seek a ‘lockup’ price for shareholders searching for a payout in this harsh stock market cycle that has been particularly difficult for healthcare investors,” he said, adding that Roche is likely to give up an incremental $2 a share in order to wrap up the process.
Switzerland-based Roche has been trying since July to acquire the portion of Genentech it does not already own.
Genentech rejected Roche’s initial offer of $89 per share last July, suggesting $112 to be a fair price. But as market conditions deteriorated and with talks with Genentech’s board stalled, Roche decided to go hostile, taking a lower offer of $86.50 directly to shareholders.
Roche last week sweetened its offer to $93, admitting that only 500,000 shares had been tendered, while nearly 465 million remained outstanding.
Several sources expect a deal to be reached before the release next month of data from a study on Avastin, Genentech’s most important cancer drug, that could, if positive, significantly boost the company’s share price.
“I think it probably will get resolved before (the April Avastin data),” Isaly said. “They (Roche) have the money. What are they going to do, give it back?”
Roche has raised some $36 billion from bond issues and has more available from its own cash pile.
Isaly said he doubted that Genentech, which has said publicly it would accept a takeout price of $112 a share, would agree to a bid of $95 a share.
“I do have to decide what to do with my shares so I have to be reactive,” he said.
Isaly also said the antagonism between the Roche and Genentech management teams is growing, “I think they’re beginning to dislike each other, which makes it very hard to work together,” he said.
Matt Loucks, a portfolio manager for Sit Investment Associates, which holds about 348,000 Genentech shares, said Roche has “kind of botched the whole process.”
“They (Roche) are not endearing themselves to (Genentech) employees,” he said.
Reporting by Deena Beasley; Additional reporting by Bill Berkrot, Sam Cage and Jessica Hall; Editing by Richard Chang