Culminating months-long rigorous negotiations and various speculations, Swiss drug giant Roche Holding AG (RHHBY.PK, RHHVF.PK) announced Thursday its agreement to acquire the remaining 44% stake in Genentech Inc. (DNA) for a sweetened offer of US$95 per share in cash, or a total payment of about US$46.8 billion. The friendly deal, which is expected to create the seventh largest U.S. pharmaceuticals company, is projected to be accretive to Roche's earnings per share in the first year after closing.
The special committee of Genentech's Board of Directors, who approved the agreement, recommends that Genentech shareholders tender their shares in Roche's tender offer.
On March 6, Roche, which already owns about 55.8% stake in Genentech, had lifted its offer price for the remaining stake in the U.S. biotechnology company, considered to be the founder of the biotechnology drugs industry, to US$93 per share, totaling US$45.7 billion, and extended the offer by one week to March 20. However, the special committee of the board of Genentech urged shareholders not to take any action with respect to Roche's sweetened offer.
Roche, which bought the controlling stake in Genentech in 1990 for US$2.1 billion, had announced its buyout offer for the remaining stake in July 2008, with an initial cash price of US$89 per share, or about US$43.7 billion in total, through a negotiated merger. However, in August that year, Genentech rejected the proposal as too low, but indicated its willingness for a sweetened offer.
However, in a surprise move in January this year, Roche made a new lower offer of US$86.50 per share or total US$42 billion, citing the market turmoil, and reached out directly to Genentech shareholders in a hostile takeover bid. The revised bid also faced a 'reject' recommendation by the Genentech special committee.
However, in early March, Roche sweetened its offer and further extended the deadline. Roche also had noted it would finish the acquisition quickly and would proceed with the necessary financing.
Wednesday, the Wall Street Journal had reported on its Web site about the companies' agreement for a $46.7 billion, or $95 per share price, for the 44% stake. However, the report added, citing people familiar with the matter that deal talks between Genentech and Roche had been delayed over certain Securities and Exchange Commission rules, regarding how long Roche needs to leave the tender open after reaching an agreement with Genentech's board.
A longer period would create a problem for Roche. As per the report, it wanted to sew up the deal before April, when a drug trial on Genentech's new cancer treatment, Avastin, is to be published. Roche is concerned that Genentech's shareholders would hold out for more money if the results are better than expected. Avastin sales reportedly could reach $10 billion, making it the best-selling cancer drug ever.
Roche said now that it will amend its existing tender offer to reflect the increased price and eliminate the financing and certain other conditions to the offer. According to the company, the tender offer remains conditional on the tendering of a majority of shares. Following the completion of the offer, Roche will promptly consummate a second-step merger in which all remaining public shareholders will receive $95 per share for their shares. As of March 11, 2009, about 2.9 million shares have been tendered pursuant to the offer. The expiration date for the revised offer is March 25, 2009.
Both companies have also amended their affiliation agreement to permit all shareholders to receive the same increased price in the tender offer and the merger.
Franz Humer, Chairman of the Roche Group, said, "We are very pleased that we have reached an agreement with Genentech and secured a positive recommendation from the special committee. I am delighted that the intensive negotiations have led to a successful conclusion. Working together, we aim to close the transaction quickly, thus removing uncertainty for employees and allowing us to focus even more intently on innovation and long-term projects."
Arthur Levinson, Ph.D., chairman and chief executive of Genentech, said, "We have had a highly successful partnership with Roche for more than 18 years, and we intend to pursue our shared goal of discovering medications for serious and life-threatening conditions."
Severin Schwan, CEO of the Roche Group, said, "Roche and Genentech saw the potential of a pharma-biotechnology partnership early on and we are now in an enviable position to expand on the success of our longstanding relationship, which has been a source of immense value for patients, employees and shareholders of both companies. We are excited about working with our colleagues at Genentech and look forward to partnering with them to develop a plan for the successful combination of the two companies."
Following the combination, the new entity is expected to generate about US$17 billion in annual revenues, with around 17,500 employees in the U.S. pharmaceuticals business alone, including a combined sales force of approximately 3,000 people.
In the new company, research and early development will operate as an independent center within Roche from its existing campus in South San Francisco, while Roche's Pharma commercial operations in the U.S. will be moved from Nutley, New Jersey to Genentech's site in South San Francisco.
Roche said it has already begun to wind down operations at its Palo Alto facility and will relocate the site's Virology research and development activities to South San Francisco.
Roche's Palo Alto Inflammation group will become part of Nutley research and development organization, and Genentech's Late Stage Development and Manufacturing operations will be combined with the global operations of Roche. Meanwhile, Roche's manufacturing operations in Nutley will be closed and support functions, such as informatics and finance, will be consolidated with those of Genentech.
The combined company's U.S. commercial operations in pharmaceuticals will operate under the Genentech name, leveraging the strong brand value of Genentech in the U.S. market. The company also said the existing U.S. sales organizations of both companies will be maintained, resulting in a very strong presence in several specialty areas.
With the acquisition, Roche could gain a complete control over the sales of Genentech's vast drug list, including blockbusters like lymphoma drug Rituxan, the breast cancer treatment Herceptin, Avastin, which is used against lung cancer as well as colon cancer, and Tarceva. Currently, Roche sells these drugs outside of the U.S., while Genentech markets these in the U.S. Roche derives nearly 40% of its sales from Genentech's drugs.
Roche said it expects the combination to generate about US$750 million to $850 million annual pre-tax cost synergies, which will be largely driven by reducing complexity and eliminating duplicative functions and processes in areas like late stage development, manufacturing, corporate administration and support functions. According to the company, savings from the combination will enable the new company to increase and better focus its investment in innovation.
The combined company will generate substantial free cash flow that will enable it to rapidly reduce acquisition-related debt, invest in further product launches and retain strategic flexibility.
In the transaction, Greenhill & Co. is acting as financial advisor to Roche and Davis Polk & Wardwell is its legal counsel. The Special Committee is represented by Goldman, Sachs & Co. and Latham & Watkins LLP. Genentech is represented by Wilson Sonsini Goodrich & Rosati.
In the pharmaceutical industry, cash-rich drug companies are going behind their rivals to boost their weak product pipelines, to overcome the impact of expiring patents on blockbuster medicines and generic competitors. Monday, pharmaceutical giant Merck & Co., Inc. (MRK) agreed to buy rival Schering-Plough Corp. (SGP) in a US$41.1 billion cash and stock deal. On January 26, drug giant Pfizer, Inc. (PFE) agreed to acquire Wyeth (WYE) for about US$68 billion, in a deal that is expected to create a pharmaceutical behemoth with combined revenue of about $75 billion. Merck's deal with Schering-Plough is expected to be completed in the fourth quarter of 2009, while Pfizer expects to close the Wyeth deal at the end of the third quarter or during the fourth quarter of 2009.
As per early February media reports, French pharmaceutical major Sanofi-Aventis SA (SNY) is eyeing acquisitions to expand and plans to diversify its operations.
DNA closed Wednesday's regular trading session at $92.17, up $0.67 or 0.73%, on a volume of 17.2 million shares, against a 3-month average volume of 5.4 million shares. In the past 52 weeks, shares have been trading in abroad range of $66.80 - $99.14.
RHHVF.PK settled at $125.00 on Wednesday, up $3.00 or 2.46%, and RHHBY.PK closed trading at $30.65, up $1.18 or 4.00%, on a volume of 1.9 million shares.
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