Genentech Holders Likely To Accept Reported $95/Share Roche Bid

Genentech Inc. (DNA) shareholders appear willing to accept an offer for $95 a share from Roche Holding AG (RHHBY), rather than face the risk of looming data on cancer drug Avastin that could dramatically alter the deal's value.

Though Genentech recently made its case for a higher valuation, which a special committee of its directors determined in December to be a minimum of $112 a share, many shareholders say they are willing to accept a lower offer ahead of the data and amid a volatile broader stock market.

A deal at $95 a share values Genentech at $46.7 billion. Despite tight credit markets, Roche has raised about $40 billion in recent weeks through various bond offerings to finance the deal.

Roche officially is offering $93 a share through a tender offer, which expires next week, but The Wall Street Journal has reported that the companies are close to agreeing on a deal at $95 a share. Genentech shares rose 67 cents Wednesday to $92.17, while American Depositary Shares of Roche gained 2.4% to $30.65.

Shareholders, despite expressing pleasure with a deal at $95, said they weren't sure if they would tender their shares at $93 each.

At $95, the deal would represent a 16% premium to Genentech's share price of $81.82 at the time of the original offer in July, and the price isn't far off from the stock's all-time high of $100.20 in 2005 and its year high of $99.14 from August.

With the exception of recent days, the stock only traded above $90 for a few brief periods in 2005 and for two months in 2008. In July 1999, Roche offered shares of Genentech, which it had recently bought out, at $12.12. All historical share prices are from FactSet Research and are adjusted to reflect three 2-for-1 stock splits at Genentech between 1999 and 2004.

Shareholders are willing to take the $95 because of uncertainty about the data, coming as soon as mid-April, regarding Avastin's usefulness as an adjuvant treatment, when it is used to prevent relapse of colorectal cancer following surgery.

Genentech believes the data will be positive and allow it to expand Avastin's label, potentially producing billions more in annual sales of the drug. Avastin, used to treat advanced breast, lung and colorectal cancer, had 2008 sales of $2.69 billion.

Roche, which already owns 56% of Genentech and sells Avastin overseas, is hopeful of the study's success but has downplayed its importance and believes that additional data will be necessary to expand the label.

But shareholders are more concerned that the study will fail, causing Genentech's valuation to decrease, and Roche to lower its bid. Anxiety about the study prompted shareholders to push the Genentech committee to begin talking with Roche about reaching a friendly deal before the data.

Prior to raising the offer to $93 a share last week, Roche Chairman Franz Humer visited U.S. investors and apparently made clear that Roche would raise that bid if Genentech was willing to negotiate.

A friendly offer makes it easier for Roche to quickly close the deal with the minority shareholders without having to raise the price for those unwilling to tender their shares.

Unlike a normal merger, an affiliation agreement between the companies dictates that Roche cannot force Genentech shareholders to accept the tender offer if Roche's holdings reach 90%, and those who hold out could get a higher price.

But the timing of such a friendly merger agreement is crucial because if the Avastin data is successful, and shareholders haven't voted to approve the deal, they could vote down the agreement in order to make Roche pay more.

If that occurs, the Genentech committee will appoint two investment banks that will provide an appraisal of Genentech's value, which is the minimum that Roche can pay shareholders, according to the affiliation agreement.

"If you told me that the adjuvant trial was a success, I definitely wouldn't tender at $95," one shareholder said.

-By Thomas Gryta; Dow Jones Newswires; 201-938-2053; [e-mail]