Roche Bids For Rest Of Genentech

Switzerland's Roche has made a $43.7 billion bid for the 44% stake that it does not already own in the California biotechnology company Genentech.

The $89.00-per-share offer represents about a 9% premium over the closing price of Genentech's stock last Friday and a 19% premium over the average share price during the last month. Morgan Stanley stock analyst Steve N. Harr believes the offer price is "inadequate and likely to rise." He thinks Roche will need to up the ante by 15 to 20% to win the approval of Genentech's shareholders.

The surprise move is a reversal in strategy for Roche, which paid $2.1 billion for its majority stake in 1990. At the time, it agreed to let the biotech company operate independently to maintain its "enterprising spirit." Roche forged a similar relationship with Japan's Chugai in 2001. The Swiss firm has since benefited from selling its partners' products outside the U.S. and Japan.

Indeed, Genentech has grown by leaps and bounds since Roche's initial investment. Its sales mushroomed from about $400 million in 1990 to $11.7 billion last year, thanks to a steady stream of blockbuster cancer drugs. In fact, Genentech now has more staff in South San Francisco than Roche does at its Basel headquarters.

But productivity at Genentech has dropped in recent years; the company hasn't launched a new product since 2006 and has been relying on new uses for old drugs to drive growth. Roche believes sharing intellectual property, technology, and partnerships will encourage innovation. It also expects the combination to enable cost-cutting in the range of $750 million to $850 million per year.

Roche Chairman Franz B. Humer told reporters at a press conference at Roche's Basel headquarters that he struggled with the decision for weeks, knowing that it would be seen as a turn in strategy. However, Humer said, he saw that "we could create substantial synergies by combining those functions where critical mass and cost are decisive factors in the context of global competition in the pharmaceutical industry."

Despite the shift, Roche wants to maintain Genentech's "unique research culture." Humer said Genentech's South San Francisco site would operate as an independent research and early development center and also serve as the headquarters of combined U.S. commercial operations. Meanwhile, Roche's five disease biology areas will continue to operate fairly autonomously.