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Roche’s controversial USD 89 a share bid announced last week to acquire the remaining stake it does not own in Genentech, could move faster than the estimated three to eight months which some analyst reports have suggested, sources familiar with the situation told dealReporter.
One source familiar with the situation said a deal between the two should move quicker because there is only one potential buyer which already controls the company. ”I don’t think it will drag out. One way or the other, it will be resolved in the next month or one and a half months,” he said.
A second source, who also claims to have spoken to ”well informed” people around the situation said Roche could potentially announce its financing strategy within the next two weeks.
Additionally, both companies are lining up further investment banks. On Thursday Genentech announced it has formed a special committee and has retained Goldman Sachs to act as its financial advisor, and Latham & Watkins as its legal counsel. Wilson Sonsini Goodrich & Rosati is representing Genentech.
Roche announced that it retained investment banking advisor Greenhill & Co, and its attorneys are Davis Polk & Wardwell. A Roche spokesperson declined to identify banks involved in the financing of the deal.
The second source noted that the list of other investment banks that could get involved are UBS, Credit Suisse, JPMorgan and Citigroup, some of which could act as lenders or work alongside the three independent directors convened by Genentech.
The directors evaluating Roche’s proposal include Herb Boyer, co-founder of Genentech; Debra Reed, CEO of San Diego Gas & Electric and Southern California Gas Co; and Charles Sanders, former chairman and CEO of GlaxoSmithKline.
A Genentech spokesperson said the independent directors will assess the proposal in consultation with financial and legal advisors.
”We expect that the independent directors will promptly review the offer and respond to Roche,” she said.
However, the sources were mixed on whether Roche will face constraints on raising the cash needed to acquire the remaining 44% stake in Genentech. Some believed that considering Roche’s operating cash flow of USD 15.86bn in 2007, and with sales of USD 45.1bn and EBITDA of 16.7bn, raising capital should not be problematic.
Alternatively, a third source familiar with the situation said finding USD 45bn in cash would be a stretch in the current market. ”Nobody wants to be a hero right now. Maybe people step up to finance USD 10bn of the total, but they’re not going to step up for more than that,” he said. He added several banks might join the fray to work with Roche’s financing.
There is a strong probability that the independent directors will vote down the deal, in favor of a higher price, the sources concurred. The second source noted that Boyer has close ties to the company and a strong relationship with Arthur Levinson, the company’s CEO, who has behind closed doors shown apprehension by the offer.
”Boyer is the dominant member of that special committee and he is the guy who picked [Levinson] as CEO, he is close to [Levinson]. And if [Levinson] doesn’t like this deal that means the special committee is going to fight very hard,” he emphasized.
At present the sources said Levinson is disappointed that Roche is forcing this on Genentech, but at the same time Roche is disappointed because Genentech has been saying it is a wholly independent company. ”Roche likes this vision of a big family,” he added.
The second source said from speaking to a number of top Genentech shareholders, they are expressing disdain towards the current proposal and expect a price tag north of USD 100 per share.
An industry investor priced a deal at USD 100-105 per share. However, a second industry investor speculated that by observing Roche’s conservative nature, the offer will likely be raised to between USD 95 and USD 100 per share. Roche declined to comment on price speculation.
An ex-Roche executive pointed out that a likely culture clash could arise among employees at Swiss-based Roche and California-based Genentech if the tie up goes ahead. Still, he noted ”if Roche is smart, it won’t take long with the process, because the longer the process drags on, the best talent will leave.”
As for Genentech’s products, questions have been raised over whether the acquisition price will reflect the anticipated results from Avastin in the adjuvant colorectal cancer setting (C-08 trial) – Genentech’s lead oncology therapy designed to inhibit angiogenesis.
The proposed deal contemplates risk adjusted fair value for Avastin’s pending adjuvant interim results expected in 4Q2008, the second industry investor said. This news service has shown through physician interviews that Avastin in the adjuvant colorectal cancer setting is associated with an increased risk for gastrointestinal side-effects, and the adverse event profile needs careful evaluation as the drug will be used in a much healthier patient population.
However, Sue Hellmann, President of Product Development at Genentech defended its safety profile in a recent earnings call by stating that the interim safety data presented at ASCO ”on our adjuvant colon cancer study, C-08, looked encouraging and we expect the final analysis of this study to be in 2009.”
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