By Sam Cage
ZURICH (Reuters) - Swiss drugmaker Roche launched a surprise hostile bid for U.S. biotech group Genentech at a lower price, reflecting tougher financing conditions and a drop in Genentech shares.
Roche Holding AG is now making a public tender offer at $86.50 per share in cash for the 44 percent of Genentech it does not already own, valuing the deal at $42 billion and replacing its initial $44 billion bid.
The move comes just days after the world's biggest drugmaker Pfizer Inc agreed to buy rival Wyeth for $68 billion, backed by a new $22.5 billion loan, indicating debt markets for cash-rich pharmaceutical makers are far from dead.
"We are confident that we will have the financing available when the money is needed," Roche Chairman Franz Humer told reporters.
Buying Genentech Inc would give Roche control of all revenues for blockbuster cancer drugs Avastin and Herceptin, as well as absorbing an attractive portfolio of new medicines, and reflects Big Pharma's rush to acquire biotech assets to fill sparse new product pipelines.
Roche appeared to be raising the pressure on Genentech, which analysts said could be trying to delay the process until key clinical data on its blockbuster cancer drug Avastin due in April -- when positive results could drive up the company's value.
Roche stock rose 1.7 percent to 163.10 Swiss francs by 9:51 a.m. EST. Genentech shares fell 2.9 percent to $81.64.
Roche, which currently owns 56 percent of the Genentech outstanding shares and originally bid $89 per share, pitched its new offer at a premium of nearly 3 percent over Genentech's closing price of $84.09 on Thursday.
It is a premium of 6 percent over Genentech's price before the initial offer was announced last year, compared with 29 percent for Pfizer's Wyeth deal.
Roche had initially aimed to acquire the remaining shares through a negotiated settlement -- an offer rejected by Genentech -- and decided to appeal directly to shareholders after further talks failed to reach an agreement, Humer said.
"The plan is to use as financing partly our own funds, and then obviously bonds and then commercial paper and traditional bank financing. We will start by going to the bond market first," he said.
WILL SHAREHOLDERS BITE?
Roche said it will seek a merger with Genentech if at the end of the offer it owns 90 percent or more of the shares and did not give details of the possible length of its tender.
But Andy Smith, a fund manager at Axa Framlington Biotech who holds Genentech shares, said the new offer was not of interest and he would consider buying more of the stock as long as it remained below the offer price.
"We are in Genentech for the longer term, for the growth prospects, and Roche is too," said Smith, whose fund owns 2.4 million pounds ($3.43 million) worth of the stock. "Some people might take that if they've had lots of redemptions."
Andreas Theisen, analyst at WestLB, reckoned few Genentech shareholders will jump at the offer.
"We believe Roche aimed to stick to its take-out plans, but is also trying to get some extra time until maybe financing conditions improve," Theisen said.
Geoff Meacham at JP Morgan also did not think the majority of shareholders would tender their shares, saying the acquisition could ultimate be concluded at more than $100 per share.
But Leerink Swann's Bill Tanner believed Genentech shareholders should sell as the stock is "fundamentally overvalued," especially given the possibility Avastin data could disappoint.
Helvea analyst Karl-Heinz Koch also reckoned the offer should attract interest from Genentech shareholders, saying 80 percent ownership would be enough to integrate the U.S. company.
OPPORTUNITIES IN DOWNTURN
Roche made a fresh round of calls to banks after news of the Pfizer-Wyeth deal emerged, bankers close to the Genentech deal told Reuters this week.
Business leaders meeting in Davos, meanwhile, said they saw opportunities in the global downturn, though leverage is out and a hard-nosed focus on cost cutting is the order of the day.
The Swiss company declined to give details of how its planned financing would break down.
After the initial announcement in July 2008, shares in Genentech rose to a high of $99.05, but later fell back below the offer price as the credit crisis bit, which gave Roche leeway to lower its bid.
Greenhill & Co is financial advisor to Roche and Davis Polk & Wardell is legal counsel for the tender offer, which Roche expects to commence within approximately two weeks.
(Additional reporting by Katie Reid, Sven Egenter and Paul Arnold; Editing by David Cowell)
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