UPDATE: Genentech Takes Case Against Roche Offer To Holders

Genentech Inc. (DNA) argued Monday why the South San Francisco, Calif., biotech is worth more than the $86.50-a-share tender offer from majority shareholder Roche Holding AG (RHHBY).

At a meeting in New York, Genentech officials contend its current operating plan will actually provide more value to shareholders than the Roche offer, which expires March 12.

Executives stressed that shareholders will need to make their own decision, but provided them with details about financial projections, pipeline strength and its culture of innovative research that suggest a higher value is warranted and show the level of dischord between the two companies.

"Roche has received this same information, but has chosen to discount the information," said Arthur Levinson, chairman and chief executive of Genentech.

"We believe we have the potential to create significantly more value for shareholders due to the strength of our products, our pipeline, our people and our track record," he said.

The meeting, which was recently moved up from March 20 in order to address investors before the tender expiration, comes amid expectations on Wall Street that Roche's offer will fail to win shareholder support.

Not surprisingly, a committee of Genentech independent directors rejected that tender offer last week after turning down an earlier offer of $89 a share from Roche in July as "substantially" undervaluing the company. Since the summer, the two parties have been at an impasse and disagreed on where to even begin negotiating - Roche stood by its initial offer, and Genentech's independent board proposed beginning at $112 a share.

Genentech shares recently fell 3.3% to $82.69.

As an overview, Levinson stressed that the company is on track to meet or exceed its long-term development goals, called "Horizon 2010", which include being the top seller of cancer drugs in the U.S., 25% annual growth in non-GAAP earnings per share and getting 15 major new products or indications approved.

For the five years after that, Genentech expects 18% annual growth in non-GAAP earnings per share and exceeding $9 a share for 2015. Revenue growth is expected in the "high single digits" through 2018, culminating in U.S. sales of $22.06 billion and total revenue of $26.9 billion.

If all the major studies the company conducts in that time are successful, the company said, U.S. sales could hit $24.6 billion by 2015.

In a presentation that brought applause from the audience, Chief Financial Officer David Ebersman presented Genentech's defense of its financial assumptions and projections as they relate to its disagreement with Roche's valuation of Genentech.

The company's long-range financial plan was adjusted over the summer and presented to Roche in November. The adjustment was made to update the plan and because the previous model wasn't created for use in a valuation analysis, Ebersman said.

He stressed that Genentech has consistently outperformed its financial projections, primarily because the process and assumptions tend to be conservative.

"This conservative bias has been well known to our board of directors and the Roche board of directors for many years," he said.

He also criticized Roche for overestimating Genentech's future tax rates as well as underestimating the productivity of Genentech's research and development spending on future earnings growth.

He also said Roche disagreed with several points in the Genentech financial projection, but after Genentech spent two months explaining and documenting its models, Roche didn't change its opinion on a single point.

"I realized it wasn't in their interests to agree with the assumptions in our plan," Ebersman said.

He also highlighted Genentech's massive contribution to Roche's product pipeline to show the need to Roche to have full control of Genentech after 2015, when Roche's right to license and sell Genentech drugs outside the U.S. will expire and Roche would have to renegotiate.

Ebersman said that 66% of 2008 sales at Roche's pharmaceutical division came from Genentech products.

Levinson said the company stands by its financial projections, in a reference to Roche's criticism of Genentech's financial models as overly optimistic.

"We welcome a debate on this anytime, anywhere and with anybody," he said.

He stressed Genentech's past performance, with revenue steadily growing from more than $1 billion in 1998 to more than $13 billion in 2008, along with 11 consecutive years of double-digit growth in non-GAAP earnings per share.

Other than financial metrics, Levinson stressed the science-based culture of Genentech and its ability to innovate, highlighting that the company had more biotech patents issued in 2007 than the next two organizations combined - the University of California and the U.S. government.

Despite the turmoil in the economy and the Roche tender offer, Levinson assured the audience that recruitment of top scientists remains strong.

In highlighting its development pipeline, Genentech stressed its planned move into infectious disease and neuroscience, presenting a recently published paper in Nature that provided a new theory about the cause of Alzheimer's disease.

The research provides new targets in treating the degenerative condition, and Genentech noted its efforts to develop a "best in class" antibody to fight the disease.

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