Roche Holding AG (RHHBY) has consistently reiterated its
devotion to buying the 44% of Genentech Inc. (DNA) that it doesn't
already own, but the potential early arrival of a key study means
the company may have to decide its next step soon.
If the Swiss drugmaker waits for the data regarding Genentech's
flagship cancer drug Avastin, possibly coming in mid-April, and the
results are considered a success, Roche risks paying significantly
more than the already rejected offer of $89 a share. If the study
fails, it could pay less. Roche can also decide not to take the
gamble, but it needs to move soon to cut a deal with Genentech and
get financing amid tight credit markets.
"I honestly think it could be any day now," Robert Baird &
Co. analyst Chris Raymond said, referring to his expectations for a
higher bid.
If a deal is reached soon, Wall Street generally expects it to
be higher than $95 a share. A successful study could drive
Genentech's value above $100, excluding any premium from a Roche
offer, while its failure may actually bring Roche to lower its
rejected offer from July.
Shares of Genentech, recently at $83.94, have traded below the
offer price since late September, after hitting a high of $99.14.
The drop reflects doubts about Roche's ability to close the deal
amid tight credit markets, rather than concerns related to the
forthcoming study. Roche shares recently fell 1.22% to $36.30.
Neither Roche nor Genentech would comment on the acquisition
offer.
Genentech's next few years will likely be driven by Avastin,
which is approved to treat advanced breast, lung and colorectal
cancer and had 2008 sales of $2.69 billion.
The drug's future trajectory will be determined by its potential
use in the adjuvant setting - when it is administered after cancer
is surgically removed.Currently, Avastin is only used on cancer
that has spread beyond its original site. Its use as an earlier
treatment could add billions of dollars in sales, and the so-called
C-08 study will be the first view of the drug's adjuvant use in
colorectal cancer.
The trial is being run by a third-party cooperative group and
Genentech had expected the data to come in the middle of the year,
but earlier this week disclosed it could be as early as
mid-April.
Most Wall Street analysts see colorectal adjuvant usage adding
at least $1 billion in annual sales. Lazard Capital Markets
recently estimated that adjuvant usage in breast, lung and
colorectal cancer could ultimately bring more than $9 billion in
additional annual sales.
Genentech has acknowledged the importance of Avastin's adjuvant
use to the drug's growth over the next three to five years, but
also asserts that approval isn't essential.
"I think people get understandably focused or even obsessed by
the adjuvant result," said Ian Clark, executive vice president of
commercial operations, in an interview last week. "I'm confident
that we can continue to grow the business even without a positive
adjuvant study."
Back To The Wall
The shorter timeline for the data's release puts Roche in the
position of either raising its bid before such monumental data, or
waiting to see the results and riding the inevitable shift in the
value of the Genentech.
"It's my view that both parties are incentivized to get this
thing done before the data comes out," Raymond said.
Roche recently said that the deal is on track, despite the
ongoing financial crisis, and that it always expected the process
to take a year from the original bid, according to The Wall Street
Journal.
But some believe that Roche always intended to close the deal
before the announcement of the C-08 results, and now the timing
shift has backed it into a corner.
Some speculate that Roche will make a bid before releasing 2008
financial results on Feb. 4.
Besides getting the approval of Genentech's independent board
and from shareholders, Roche will have to line up financing amid
the financial crisis.
The deal would be huge: The original $44 billion offer goes up
$500 million for every dollar added to the original $89-per-share
bid. Analysts expect a deal somewhere above $95 per share, and many
are aiming closer to $105 a share.
The price to Roche is also higher as the U.S. dollar has
strengthened against the Swiss Franc, adding 14% to the original
bid in July, when Roche cited the weak dollar as a motivating
factor for the deal.
Rolling The Dice
If Roche either can't get the deal done prior to the data, or it
decides to take its chances, it is sure to provide a wild ride for
Genentech shareholders.
"If data are positive and Roche has not closed the deal, we
suspect the price of Genentech will become too expensive for Roche
to finance," said Morgan Stanley analyst Steven Harr.
But success is not guaranteed, and negative data will likely
have the opposite effect, possibly making Roche's previous
$89-a-share offer look too expensive.
"I don't know where Roche would come out in valuing Genentech at
that point, but definitely it would be below $89," said RBC Capital
Markets analyst Jason Kantor, noting that the original offer won't
necessarily be on the negotiating table after the C-08 data because
the independent board already rejected it.
Any deal before the data release will likely include a large
breakup fee or some other mechanism to avoid a renegotiation after
the news comes out.
In the meantime, until the data, most on Wall Street don't
expect major changes to Genentech's share price as most investors
are well aware of the risks regarding the deal and the study.
"You are kind of crazy to own the stock if you don't think that
the data is going to be positive," Kantor said.
-By Thomas Gryta, Dow Jones Newswires; 201-938-2053;
thomas.gryta@dowjones.com
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