BOSTON (Reuters) - Genentech Inc DNA.N said it has rejected an offer by its majority shareholder, Roche Holding AG ROG.VX, to acquire the 44 percent of Genentech it does not already own, but said it would be willing to consider a sweetened bid.
Genentech, the world’s biggest biotechnology company by market value, said the Swiss drugmaker’s offer of $89 a share “substantially undervalues the company.” But it said it would consider an offer that “reflects the significant benefits that would accrue to Roche as a result of full ownership.”
Investors had expected Genentech to reject Roche’s initial bid, which was made last month and values the stake at $43.7 billion. Genentech formed a special independent committee to review the proposal.
“This is no surprise at all,” said Eric Schmidt, an analyst at Cowen and Co. “People believe the company is worth more and that Roche can afford to pay more. The game of chess has begun.”
Roche, which is poised to become the world’s biggest drugmaker by sales in 2014, said it continues to believe that its offer is “fair and “generous.”
But analysts said Roche will probably increase its offer.
“It may take some time, but I fully anticipate this to go through,” said Jason Zhang, an analyst with BMO Capital Markets, who considers $104 a share a more realistic price. “I think Roche needs it and they’re in a better position to do it than anyone else.”
The likely next step is for the special committee to begin discussions with Roche, a process that could take several months, said Geoffrey Meacham, an analyst at JP Morgan.
“We do not believe Roche was caught off guard by this announcement, and believe an offer of $110-plus will be more reasonable to the special committee and shareholders,” he said.
Genentech’s stand-off with Roche mirrors the one between ImClone Systems Inc IMCL.O, which makes the cancer drug Erbitux, and Bristol-Myers Squibb Co (BMY.N), which has offered to acquire the 83 percent of ImClone it doesn’t already own for $60 a share.
Both sets of negotiations reflect the growing need of big pharmaceuticals companies for new products. Roche is hoping it can cut costs and increase revenue by owning all of Genentech.
Genentech, which is based in South San Francisco, California, and makes the cancer drugs Avastin, Herceptin and Rituxan, had sales last year of $9.4 billion and total revenue of $11.7 billion. It has a market value of $103.3 billion.
Analysts said it is possible the special committee will delay a shareholder vote until the next interim results of a trial of Avastin in the treatment of colon cancer following surgery. The data are expected in November.
“If positive, this would be an incremental revenue driver going forward,” said Christopher Raymond, an analyst at Robert W. Baird, in a research report.
Avastin, Genentech’s biggest drug, with 2007 sales of $2.3 billion, is already approved to treat metastatic colon cancer and some types of lung and breast cancer.
The relationship between Roche and Genentech has long been held up as a model in the industry for how a big pharmaceuticals company should relate to a biotechnology partner.
For roughly 20 years, Roche, which took a majority stake in Genentech in 1990, has supported a hands-off policy towards Genentech that has allowed the biotechnology company the creative freedom to spawn some of the biggest biotechnology drugs in history.
If an agreement is reached, the obvious challenge for Roche will be to maintain that culture even as an integrated company. Genentech said it has implemented an employee retention program to help soothe anxious employees.
Genentech’s shares rose 67 cents to $98.52 in afternoon trading on the New York Stock Exchange. Roche shares were 1 percent higher in Switzerland.
Additional reporting by Lewis Krauskopf in New York and Debra Sherman in Chicago; Editing by Brian Moss and Gerald E. McCormick