Would Genentech Be Better Off Left Alone by Roche?

So Genentech (DNA) has told Roche (RHHBY.PK) to get lost – well, to a first approximation, anyway. I think what they’ve actually told them is to go open their Swiss wallets wider. What it comes down to now is how highly Genentech values itself versus how much Roche is willing to pay – the balance between those two will determine how things go. And then there are the large shareholders in Genentech to consider – if their idea of a good price clashes with the figure that Genentech’s board has in mind, then things could get more complicated (and if the US dollar continues to climb against the Euro, that could complicate everyone's calculations, too - at the very least, it's speeding things up).

Personally, I think that Genentech is better off being left alone. But that’s no surprise – I think that in a lot of the M&A deals I’ve seen in the industry, particularly between large companies, I’ve thought that the participants should have stayed home and spent their money elsewhere. A personality defect, to be sure, and clear evidence that I’d never make it at an investment bank.

The reasons I think that Genentech is better off unmolested are probably the same ones that its own employees have. The company seems to have a good research culture going – they’ve been productive and willing to take risks, which is all you can ask of a drug discovery organization. Roche, for its part, isn’t exactly an Evil Empire, but they’re not Genentech. And that, I think, is what gets me about most of these deals. I think that there is no one best way to do drug discovery, since the problems we face are so varied. And that means that the more different approaches there are being tried, the better. We need a healthy ecology in this industry, and the closer we get to a monoculture, the worse off I think we’ll be. I think that Genentech has something to offer all its own, and that it’s in danger of being lost if Roche buys (and Roche-ifies) the place.

Some people out there are worried more than others. Roche doesn’t have as much experience in biologics, so they’ll want to retain the protein groups. (The question is whether they'll want to work for Roche!) But Genentech has also made a push into small molecules in recent years, and medicinal chemistry might be an area that Roche feels it has enough of already – they’re not buying Genentech for small molecules, after all. We’ll see over the next month if they’re buying Genentech at all...

Comments

[skitahoe:]

I certainly agree with all you're saying, however it must also be recognized that Roche is putting money in its own pocket by working to move up the price of DNA. It's a win-win proposition for them.

If they should try a higher bid that also gets rejected, their equity value goes up even more, at this point I doubt they'd want the offer accepted. I haven't done the math, but I suspect they've made several hundreds of millions on their books from the initial offer because of the number of shares they currently hold in DNA and the way the offer moved its price up.

BMY did the same thing with IMCL.

Gary

2008 Aug 19 09:08 AM

[pitboss33704:]

DNA clearly doesn't need Roche - it's the other way around from what I can see .. DNA is in a win-win-win situation or as we say in the South , it's " sitting in the catbird's seat " - at least for now ......

2008 Aug 19 10:24 AM

[The Sceptic:]

If this is just a ploy by Roche to toy with DNA to get the book value up, it will fall flat on its face when the final rejection comes.

I have an idea/suggestion - It will be a stretch for DNA to arrange for finances to buy the entire 56% of its equity that Roche owns. But it might be possible to buy out a much smaller % - say 7% - to bring Roche's ownership from a controlling one to minority ownership. Ofcourse it will take some negotiations to do that but if Roche is not willing to pony up another 20 bucks. This would be a win-win deal for both Roche and DNA ... it will bring new resurgence to the company's employees as well as the share prices.

2008 Aug 19 01:36 PM

[Saul Sterman:]

Roche has to buy DNA now as it loses its exclusive marketing rights in 2015. As time goes on the price seems to go up.

See: DNA - Genentech Inc: Roche Buyout Valued at $113 to $118
www.crossprofit.com/ar...
by Steven Davidoff (New York Times) / CrossProfit

2008 Aug 19 04:09 PM

[turd furgeson:]

Genentech should say "no thanks" and buy their independence back.

2008 Aug 19 06:40 PM