Why does Genentech want to merge with Roche

7 posts / 0 new
Last post
pharmtao
pharmtao's picture
Why does Genentech want to merge with Roche

Does anyone understand why Genentech wants to merge with Roche?  Genentech is the best-performed biotech company and its stock is doing so well.  I understand why some companies want to buy Genentech but I can't find a reason why Genentech wants to sell itself.  I guess the board members want to sell it to make a fortune.

Arvind Singh Pundir
Arvind Singh Pundir's picture
in the corporate world there

in the corporate world there are several internal obligations you dont know as a common man for example take the case of SATYAM in india what happened to its reputation and balancesheet  so never know whats inside as it looks from outside........

Ivan Delgado
Ivan Delgado's picture
Hi pharmtao,

Hi pharmtao,
Genentech does not want to be acquired by Roche; they simply cannot help it. You may know that Roche invested in Genentech way back when Genentech was not such a successful company. Actually, before this acquisition, Roche already owned 40% of Genentech. In other words, Roche made a great investment early on (gave money to Genentech to get itself going) and now they are cashing in.
Genentech has fought this acquisition for a while, claiming that Roche was taking advantage of the weak economy to buy them out cheap. This is why Roche had to raise their offer for Genentech stock multiple times. In the end, the price Roche is paying for Genentech, almost $47 billion, is half the market capitalization of Genentech (almost $100 billion). And what is more important (to most people at least): Genentech's net income last year was $3.5 billion. In other words, it would take over a decade for the stake holders to make the same $47 billion. A fair amount of the increase in capitalization was due to Genentech's stock going up thanks to Roche pushing to buy them out (the old: they are interested so it must be worth more). In the end there are many ways of looking at this, but ultimately the purpose of every company is to make money for the stake holders, and when enough of them feel that a deal is worth more than the money generated by the company, then they sell (just look at what happened to Anheuser Bush and InBev!). 
I agree with you, it does not make any sense for Genentech (or Anheuser Bush, or any of hundreds of companies) to sell out. Likely you are thinking: if I owned Genentech, I would never sell the company. Genentech a solid company whose revenue has been growing every year and has great prospects. But in the end it comes down to what the owners (stake holders) want. And in an economy like this, I can imagine that a lot of these investors think that they can put their money in other businesses that will generate more money to them than Genentech. Alternatively these same investors may need the money now for other reasons, and selling is one way of getting it.
When something like this happens (like when Invitrogen bought Applied Biosystems for $6.7 billion dollars, even though Invitrogen was half the size of Applied Biosystems), all one can wonder is what are the reasons things like these happen that we do not see or do not know. In my experience one big reason is money. When you have large cash reserves you are protected, but when you do not have the cash then you are vulnerable. In the Invitrogen case, Invitrogen had tons of cash while Applied Biosystems didn't. In the case of Genentech money may have been an issue.
Cheers

Jason King
Jason King's picture
I was at a talk given by

I was at a talk given by Franz Humer a few months back. He used to be Roche's CEO. He made it quite clear that in his opinion, Genentech would do better if it were allowed to function out with the big pharma environment of Roche (at arm's length). Clearly they have had a big stake in Genentech for a while but I think that by buying up the rest, they just want to prevent a competitor gaining too much stock.

The main message of Humer's talk was that innovation flurishes within smaller firms but that having a "big brother" is essential when drugs get to phase IIb. It would be a shame if Roche has changed this strategy in the wake of Dr. Humer's leaving.

I was going to suggest that a price:earnings ratio of 13 was actually very good for a technology company that is making good profits now and has great future potential, but then I saw that the 3.5 bn figure is (net) income. Is that a pre-tax profit ? (ie. Income-costs).

If Genentech are making good profits then the company (Roche) could be paying a nice dividend, so if the 3.5 bn is profit then the investors get a good deal on the aquisition, a dividend each year and the potential of a rising share price.

Ivan Delgado
Ivan Delgado's picture
Parvoman makes a good point

Parvoman makes a good point in that having a big brother (one of the very few companies out there with the pockets to support phase II+ tests) is important and sometimes even necessary for later phase trials. Yet obtaining the funds from this same big brother without having to be bought out is not unusual. I agree 100% with Humer that innovation flourishes in smaller organizations and that being part of Roche, even if Roche somehow gives Genentech a lot of freedom, will stifle a great culture at Genentech. Maybe I am wrong and if I am great for both parties.
As for P/E ratios, I think one has to be very careful. P/E ratios are only relevant within an industry (in other words, if the ratio is higher than the industry average great, even if it is lower than that of other companies in other industries). Also, the P/E ratio is highly dependent on how accountants at the company calculate earnings. If you've seen what has been going on in the US in the last 1-2 years (or for decades for that matter), you've seen a slew of examples of how companies manipulate their earnings to make their P/Es look better. P/Es are a good place to start, but I always try to look at other measures, especially liabilities and trends.
Ultimately I think Roche got a great deal, even at this price. Genentech is a jewel of a biotech company and a rare one indeed. Hopefully the transition will be a good one and not lead to bad blood. 

samm
samm's picture
I thought the analysts were

I thought the analysts were actually describing this as a hostile takeover of sorts - Roche had the cash, Genentech had the patents / pipelines.

Ivan Delgado
Ivan Delgado's picture
I think the first thing to

I think the first thing to point out is that a "hostile takeover" is not necessarily a bad thing. All it means is that the buyer either goes around management/the board, or continues pushing for the sale until it happens. Plus, all you need is a majority vote for the takeover to occur (not as simple as that, but close). I went back and read about Roche's initial investment in Genentech (20 years ago) and found that Roche's stake in Genentech was not 40% but 56%! Clearly Roche made an amazing investment 20 years ago before Genetech had developed Avastin and Tarceva (a great bet if you ask me) and now is able to leverage this investment to buy out the rest of the company. When you own this much of a company you can block any competing bidder so the game invariably becomes: "how much it will it take for me to buy you out?".
Many takeovers are perceived as hostile (even though only a tiny fraction of them truly are) because there is always a significant number of people involved that do not want the sale to occur (typically people whose jobs are most at risk, but not necessarily the case) and speak louder than those that have no opinion or welcome the takeover. Alternatively simply being loud about how undervalued your shares are is a perfectly acceptable negotiating tool to get the most out of your shares. Ultimately it is quite possible that the only reason why this sale occurred is because Roche made that critical initial investment and knows that due to the world economic crisis there is no better time (i.e. the cheapest price they will ever pay, in part thanks to a weak dollar) to buy out Genentech. Anybody that goes to a car dealer these days knows that it is a buyer's market everywhere, and unfortunately Genentech is no exception. 
The interesting issue is going to be: will Roche's investment pay off? Save money says that it will many times over (a single drug can generate billions of dollars, and Genentech has a pipeline of 100+ candidates), but we all know that getting a drug through the whole process to FDA approval is a tricky at best. Genentech has proven more than once they know how to do this, but this is no guarantee of success. All it would take for this takeover to look like a bad investment is for the intellectual power at Genentech to jump ship. If Roche fails to keep Genentech independent under the Roche name (the accepted recipe for drug development success), then it is bad news for Roche.
This looks like a great marriage to me. Nationalism aside (yet another American company bought out by a foreign company), if everybody wins in the end how could that be a bad thing? As commented in the BioFind Rumor Mill a couple of days ago: "While culturally there are giant differences, in general they are very good people and very good scientists. I enjoy working with them at Roche in Indy. I suspect Roche is going to let Genentech run business as usual. But you'll have to keep profits at an all time high because this wasn't a cheap purchase". Just to put this in perspective, if you calculate what Roche paid for Genentech and the number of employees at Genentech, Roche paid $4.2 million per employee. Not bad :).
 
 
samm wrote:

I thought the analysts were actually describing this as a hostile takeover of sorts - Roche had the cash, Genentech had the patents / pipelines.