Roche Can Go a Little Higher
JANUARY 30, 2009, 2:44 P.M. ET
By JOHN JANNARONE and SEAN WALTERS
online.wsj.com
Roche has raised the stakes -- by lowering the price. The Swiss pharmaceutical maker's latest offer for biotech firm Genentech is unashamedly hostile after its softer approach went nowhere. But the bid is also 3% below the $89 per share cash price it pitched last July for the 44% of Genentech it doesn't already own.
Cash is certainly appealing for Genentech shareholders in today's turbulent markets. Approaching them directly should get the ball moving. But the question they need to ask themselves is how much higher Roche will -- or can -- go?
In terms of desire, Roche wants full control of Genentech in order to extract significant cost savings and bolster its drug pipeline. Ideally it wants to get in ahead of the results of a clinical trial for Genentech's key Avastin treatment due mid-April. If positive, Jefferies analysts estimate the drug could boost Roche's earnings per share by as much as 9% in 2013, assuming its current equity stake.
Genentech shareholders need to take a bet on the outcome. But if they push Roche too hard, there is nothing forcing the pharmaceutical giant to bid against itself for a company it already controls. And even with positive Avastin results, Genentech's shares could conceivably end up lower if Roche has by then walked away.
Perhaps the key question is how much higher Roche can go. Recent demand for bond issuance has been strong, and Roche is confident it can raise the necessary funds. It has "in principle" commitments from banks for a bridge loan of more than $25 billion in addition to $14 billion of gross cash on its balance sheet. That just covers the $40 billion cost of buying out minority shareholders at the current offer price.
But the loan would need to be refinanced relatively quickly through bonds and commercial paper. That is possible right now given relative stability in the bond markets. But it could become a real headache if risk appetite disappears again. To give a sense of how widely Roche has searched for cash for the deal, it even went to the likes of Pimco in December in an attempt to persuade the bond investor to help fund the deal directly.
Pfizer's recent agreement to buy Wyeth adds to the pressure. A portion of its $22.5 billion of loans is being refinanced now, potentially soaking up some investor appetite for pharmaceutical paper.
For every $1 per share that Roche increases its current offer, it needs to come up with an extra $465 million. Roche played an ultra-aggressive card in cutting its original offer and bypassing Genentech's special committee. To win over minorities, it will probably have to raise it again -- above the original $89 bid. But don't expect more than a few dollars. After all, since Roche first bid, the Nasdaq Biotechnology index has fallen by 15 %.
Write to John Jannarone at john.jannarone@wsj.com and Sean Walters at sean.walters@dowjones.com
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