TRENDS & PERSPECTIVES
It may not happen tomorrow, but analysts expect that Roche (Basel, Switzerland) will prevail and acquire the rest of its U.S. biotech partner Genentech (San Francisco). One analyst, Eric Schmidt of Cowen & Co. (New York City), called Roche’s acquisition of Genentech inevitable.
Roche currently owns 56% of Genentech from which Roche’s three biggest-selling cancer drugs (Rituxan, Herceptin, and Avastin) have come. Roche bought its majority stake in Genentech in 1990. In July, Roche offered $89 a share for the remainder of Genentech. Genentech’s board of directors rejected the $43.7 billion offer, saying it substantially undervalued the company. Toward the end of November, Roche said in a statement that it still “was committed to the transaction” and that it “aimed to reach an agreement with Genentech.”
The credit markets have fallen apart since the summer when Roche made its offer, and shares of Genentech, as well as other biotechnology firms, have declined. Genentech is currently trading around $80 a share. The credit crunch makes it harder for Roche to complete the transaction.
“In today’s environment, I think it would be somewhat difficult for anyone to borrow $44 billion, or a portion thereof, even a company as creditworthy as Roche,” Schmidt said. However, he said, the credit markets should thaw sooner rather than later, enabling the companies to complete this deal at an agreeable price.
Why does Roche remain dogged in its pursuit of Genentech? Schmidt believes Roche has several motives, primarily economies of scale and efficiencies.
“Roche has had a majority stake in Genentech for the last 18 years or so. Why consolidate that ownership now? I would think that cost savings is first,” Schmidt said. “There are a number of things that these companies do that overlap and combining those could make for a more efficient organization overall and result in savings that could benefit both sets of shareholders.”
Also, Schmidt said, Genentech has grown up, and Roche has matured as well. “The companies aren’t as culturally different as they once were. So bringing together the two companies now is going to be much less of a cultural clash than it would have been when they were integrating a smaller biotechnology company with a large pharmaceutical company,” Schmidt said.
Schmidt does not believe that IVDs will play a large role, if any, in Roche’s plans. “Genentech doesn’t have much in IVDs, and, while Roche might benefit through a little bit of future product development, that’s going to be small,” he said. “99% of the value in Genentech is within its pharmaceutical business, and that is clearly what Roche is hoping to optimize.”
Roche’s pursuit of the remainder of Genentech is different from its recent battle for Ventana Medical Systems (Tucson, AZ), Schmidt said. In 2007, Roche pursued Ventana because it wanted its Her2 diagnostic test, which is used to determine which patients are best suited for Herceptin, the blockbuster drug for Roche and Genentech.
Roche acquired Ventana after nearly seven months and extending its offer five times. The deal, valued at roughly $3.4 billion, was completed in February 2008.
At the time, the acquisition was seen as yet another element in Roche’s attempt to become a top company in oncology testing and therapeutics.
Manfred Scholz, PhD, president of Scholz Consulting Partners (Medford, MA), agreed the time has come for Roche and Genentech to complete their merger.
“Roche is foremost a drug company,” Scholz said. “Although the relationship with Genentech has worked well in the past, there are significant constraints on the cooperation between the companies. It does make sense to take ownership of a business that is critical to providing sources of future income.”
While Roche and Genentech have different cultures, Scholz said, other companies have taken on such challenges on a smaller scale. Two examples are Takeda Pharmaceutical Co. (Osaka, Japan) and Millennium Pharmaceuticals (Cambridge, MA), and Novartis (Basel, Switzerland) and Chiron (Emeryville, CA).
Scholz noted that Roche and Genentech share prices have suffered much less than most companies during the worldwide credit crunch of the last few months. Still, he said, completing the purchase under current conditions would likely require Roche to sell one or more of its operating units. Roche’s IVD business units are probably the most valuable of its assets to sell, he said.
As of June 30, 2008, Roche had a net cash balance of about $8.3 billion. Selling its diagnostics division could help finance the Genentech acquisition, Scholz said.
The strategic synergies for Roche’s pharmaceuticals and diagnostics divisions are overrated, Scholz said. Only a few new drugs will require companion diagnostics, he explained. That’s why Scholz thought that “Roche would be better off to select companion diagnostics, if needed at all, from a supplier pool.” That pool could of course include its diagnostics division under new ownership, Scholz said.
Neither analyst could say when a Roche-Genentech deal might be complete. Scholz thought it might be sooner rather than later. “It could happen in the first quarter of 2009,” he said, “and it likely would be synchronized with another transaction in the same fiscal quarter.”
