Roche’s Acquisition of Genentech

By Group 2Amol GhorpadeAnurag BhatiaBasant RajvaidhyaMadhusudan Sharma

Agenda• Background Information– Roche & Co.– Genentech

• Roche seeking to acquire the 44% of Genentech– Reasons– Advantages– Risks

• Responsibilities towards minority shareholder• Range of Equity value for Genetech as a Standalone

company• Analysis of comparable companies• What Franz Humur do?

Background Information

Roche & Co.• A pharmaceutical company based in Basel• Founded by Fritz Hoffman-La Roche in 1896• Pharmaceutical research institutes:

– Roche Institute of Molecular Biology, New Jersey– Basel Institute of Immunology, Basel

• Companies acquired:– Nicolas, a non-prescription drug company (1991)– Syntex, a bioscience company (1998)– Boehringer Mannheim, a diagnostics leader (1998)

• Humer, CEO (1998-2001), became Chairman of the board in 2001

• Financial stress in 2001 and 2002 ($2.9 bn loss)• Innovation & Strong sales of diverse portfolio of drugs• Revenues = $43.2 bn, Net Earnings = $10.3 bn (2008)

Genentech• Found in 1976 by venture capitalist Robert

Swanson and scientist Herbert Boyer• Combined scientific excellence with business

acumen and patent their discoveries• Raised $35 million in 1980, first biotech company

to go public• Share price went from $35 to $88 within the first

hour of trading• Between 1998 and 2008, operating revenue

increased to $13.4 billion• Vertically integrated – researching, producing and

selling its products

Roche seeking to acquire the 44% of Genentech it does not own

Reasons• Genentech was increasingly coming into direct

competition in U.S. markets• Genentech established R&D activities outside

the U.S.• Genentech begun to encroach on Roche’s

traditional territory by developing small molecular products

• Merger of two companies would create new opportunities

• Strategic analysis of Synergies - $750 mn to $850 mn annual savings

Advantages of Owning 100% of Genentech• Largest Biotechnology company in the world• Complete ownership of technology, R&D

projects and patents held by Genentech• Extract $9.5 bn of Genentech’s cash and cash

equivalents• Extend their contract to distribute Genentech

best selling drugs and eliminate the risk of losing the contract

Risks

• Lawsuits from minority shareholders• Loss of human resources in critical areas such

as R&D• Availability of funds for bridge loans• Paying higher premium than real value of

synergies• Bad test results

Roche’s responsibilities towards Minority Shareholders

• Roche should not share Genentech’s intellectual property

• Roche should try to explain all positive effects of the merger

• Roche should inform employees that how would synergies benefit them

• Roche should clear fear of loss of jobs• Employees should continue to have power to

make decisions

Range of Equity Value using DCF

Analysis of comparable companies

• Analyst’s expectation of Genetech’s value was $84.99/share which was $3/share less than Roche’s offer

• Comparable companies have synergy value greater than the premium paid.

• Roche valued Genetech at multiples close to that of Gilead sciences which was much above the actuals

• Considering the recession that started at the end of 2008, Roche still valued the multiples above the actual multiples for Genetech in year 2008-09

What Should Humer Do?

Risks & Payoffs

• Raising the offer price close to $112:Risk There is no guarantee that special committee

would agree to compromise & Roche will not be able to go back to $89

Payoff Market conditions are volatile and Special

Committee may agree to an offer closer to their own offer

Risk & Payoff

• Tender offer between $67 to $83, with synergies offer can be given between $80.7- $96.07

Risk Can be considered as hostile move Can demoralise key employees Minority shareholders can speculate on the price

Payoff Tender offer will circumvent special committee and break the deadlock

Risk & Payoff

• Wait & Watch for the clinical trials of the superstar product of Genentech

Risk Trials may be successful which may further

drive the prices

Payoff Trials may be unsuccessful which may hit the

investors confidence in Genentech

Recommendation

• Loss of investors confidence in Genentech is not good for Roche in long term (post-merger)

• Negotiate with the Special Committee for the price between $80.7- $96.07 before the results of the second round of trials are out

• Inconclusive results of the first trials and uncertainty about the results of second trials can be leveraged

• Both parties will share the risk of either price going up or down according to the trial test result

THANK YOU