Switzerland's largest drugmaker Roche plans to acquire the world's second larget bitechnology firm US Genentech Inc, in an all-cash $89 per share deal valued at $43.7 billion, even as it reported a decline in first-half profit as sales of Tamiflu, one of only two drugs available to treat pandemic influenza.
Roche said that its first-half net income fell to 5.73 billion Swiss francs ($5.58 billion) from 5.86 billion francs last year.
In 1990 Roche had acquired a 55.9-per cent in the San Francisco-based Genentech, the largest maker of cancer drugs in the US, and would be Roche's largest ever acquisition. Genentech has provided Roche with its best-selling Rituxan, Avastin and Herceptin cancer therapies and the deal will create the seventh-largest drug firm by market share in the US.
The $89-per share offer to buy up the remaining stake, represents a one-day premium to Genentech shareholders of 8.8 per cent to the company's closing share price on Friday and a one month premium of 19.0 per cent.
Roche expects the transaction to deliver annual pre-tax synergies of $750 -$850 million; and says the expected EPS to be accretive in the first year after closing. It said the transaction will have no impact on Roche's sales and Core EPS targets for 2008 and the company would raise its dividend pay-out ratio for the next three years as it had previously committed.
The combined entity will generate more than $15 billion in annual revenues, Roche said. It is expected to generate substantial free cash flow that will enable it to reduce acquisition-related debt rapidly, invest in further product launches and retain strategic flexibility.
Commenting on the proposal, Franz Humer, chairman of the Board of Roche, said, ''Our long and successful participation in Genentech has resulted in one of the biggest success stories in the healthcare industry. Roche's significant investment in Genentech over many years has helped it to focus on innovation and long-term projects, leading to some of the most important breakthroughs in the treatment of cancer and other life-threatening diseases."
He said the transaction would create a unique opportunity to evolve Roche's hub-and-spoke model into a structure that "allows us to strengthen the focus on innovation and accelerate the search for new solutions for unmet medical needs."
Humer said combining the strengths of Roche and Genentech would create significant value and result in benefits for patients, employees and shareholders.
After the acquisition, Roche plans to run Genentech as an independent research and early development centre and become headquarters of combined US commercial operations.
''We will take the necessary steps to nurture Genentech's innovative and unique science-driven culture," said Severin Schwan, CEO of Roche. "The Genentech Founders Research Centre will operate as an independent unit within the Roche Group to safeguard a diversity of different approaches and to foster the long-term flow of novel breakthrough medicines.
"At the same time, we will be better able to share technologies and expertise in pharmaceuticals and diagnostics across the Group and broaden the mutual access to the external innovation networks of both companies," Schwan added.
He said as Genentech had grown from a research-focused biotech venture into an integrated pharmaceutical organisation, the transaction would also unlock synergies by leveraging the scale of the combined operations in the US and improving operational efficiency.''
Genentech will operate within Roche from its existing campus in South San Francisco, retaining its talent and approach to discovering and progressing new molecules.
Roche's Palo Alto Virology research and development activities will relocate to South San Francisco, while its Palo Alto inflammation group will become part of Roche's Nutley, New Jersey research and development arm.
Nutley will host two global 'disease biology areas' (oncology and inflammation) as well as key functions in metabolism and will remain an important pillar for the US and Roche's global organisation.
With Genentech's site in South San Francisco and Roche's New Jersey-based campus, the US will be home to the biggest research and development centres within the Roche Group.
Roche's pharma commercial operations in the US will be moved from Nutley to Genentech's site in South San Francisco. The combined company's US commercial operations in pharmaceuticals will reflect the Genentech name, leveraging the strong brand value of Genentech in the US market.
The existing US marketing operations of both companies will be maintained, resulting in a very strong presence in several specialty areas.
The structure of the combined company will allow for a diversity of approaches in research and early development, while also strengthening cross-fertilisation between the companies, leading to enhanced overall innovation within the Group.
Roche's recently adopted disease biology area approach, which allows five diverse groups to manage their innovative portfolios, will be maintained and strengthened. This, together with recent moves into RNAi (Ribonucleic Acid interference) and delivery technologies, as well as licensing activities, continues to provide a stimulating environment for the creation of medically differentiated medicines.
Genentech's late stage development and manufacturing operations will be combined with the global operations of Roche, achieving substantial scale benefits, operational synergies and cost avoidance.Roche's manufacturing in Nutley will be closed and support functions, such as informatics and finance, will be consolidated.
The transaction will over time significantly enhance cooperation and cross-fertilization among all research hubs inside and outside of the combined company, says Roche. Sharing of technologies (eg RNAi, novel protein architectures), assets (e.g. chemical libraries), intellectual property (e.g. antibody production), unique capabilities (e.g. exploratory development, modeling and simulation) and know-how of the combined research organization will strengthen the Group's ability to innovate. Genentech and Roche have many complementary strengths and assets and joining their respective experience and knowledge will be mutually beneficial.
The separate research and early development unit in South San Francisco led by Genentech will be given the operational freedom to maintain a high level of creativity and independent decision making. Genentech will also have access to the full strength of Roche's worldwide development organization, thus significantly enhancing its ability to leverage international clinical trials and expertise.
The combined company will have one of the strongest emerging product pipelines in the industry, with a number of exciting compounds in development across key therapeutic areas.
By reducing complexity and eliminating duplicative functions in areas like development, manufacturing, corporate administration and support functions, the combination will result in well-aligned structures and lean processes.
Bringing these functions into the Roche global structures will reduce complexity at Genentech's South San Francisco site, concentrating Genentech's focus on innovative research and early development and science.
Genentech is expected have the proposal evaluated by independent outside financial and legal advisors as and Genentech Board members are employees of Roche, they will not participate in the evaluation of the proposal. Roche is contemplating implementing the transaction through a cash merger between Genentech and a Roche subsidiary, pursuant to which all currently outstanding shares and options of Genentech other than shares owned by Roche would be converted into cash.
The precise terms of the transaction, as well as the conditions to its consummation, will be determined through negotiations with the independent directors. It is anticipated that, in addition to customary conditions, the merger would be subject to the approval of holders of a majority of the Genentech outstanding shares not held by Roche.