By Rich Miller
July 21 (Bloomberg) -- Ben S. Bernanke and Henry Paulson are under pressure to embrace the big-government policies of America in the 1930s, or Sweden in the 1990s, to contain the conflagration engulfing the U.S. housing and financial markets.
Investors in South San Francisco, California-based Genentech would get $89 a share in cash, 8.8 percent more than the July 18 closing price, Roche said today. The Basel, Switzerland-based company already owns 56 percent of Genentech.
Roche today reported a decline in first-half profit as sales of the Tamiflu pill fell because governments stopped stockpiling of the medicine, one of only two drugs available to treat pandemic influenza. The proposed acquisition would be Roche's biggest ever and would result in the U.S.'s seventh-biggest drugmaker in terms of market share. Genentech, the world's second-biggest biotechnology company, has provided Roche with its best-selling Rituxan, Avastin and Herceptin cancer therapies
``This makes a lot of sense,'' said Beatrice Kunz, a portfolio manager at Clariden Leu in Zurich who helps manage $147 billion in assets, including shares of Roche. ``The weak dollar and the fact that they are not paying a huge premium make this rather attractive.''
First-half net income fell to 5.73 billion Swiss francs ($5.58 billion) from 5.86 billion francs a year earlier, Roche said today in a separate statement. Analysts surveyed by Bloomberg had a median net income estimate of 5.55 billion francs. Roche, which doesn't report quarterly profit, pushed up its earnings release from July 24. Group sales decreased 3.6 percent in the first half to 22 billion francs. Revenue from Tamiflu declined 71 percent to 327 million francs.
`Very Smart'
``Roche has always been very smart in acquisitions,'' Romain Pasche, a fund manager at Vontobel Asset Management in Zurich, said before the announcement. ``This conviction is reinforced by the fact that they have some of the best top-line growth in the industry and don't really need to do this acquisition. They would do it only if it really makes sense for shareholders.''
The purchase would be the biggest in the pharmaceuticals sector since Pfizer Inc.'s 2003 purchase of Pharmacia Corp. for about $64.3 billion in stock, according to Bloomberg data. The deal would be the biggest in the industry this year. The second- biggest so far this year is Teva Pharmaceutical Industries Ltd.'s July 18 bid to buy Barr Pharmaceuticals Inc. for $7.46 billion.
Outlook
Roche confirmed its outlook for an increase of almost 10 percent for group sales, with above-market rate growth in both its pharmaceuticals and diagnostics divisions. The forecast excludes sales of Tamiflu to governments and corporations. Roche said it expects core earnings per share to remain at least in line with the record level achieved in 2007.
The Genentech purchase would result in pretax savings of $750 million to $850 million a year and would add to EPS in the first year after closing, Roche said.
Roche is being advised by Greenhill & Co. and plans to finance the transaction through a combination of its own funds and debt. Roche's Chairman Franz Humer said he's confident the company can raise the necessary debt financing.
``We talked to a consortium of banks beforehand and I am sure the financing will not be a problem while at the same time leaving us with enough cash for further smaller and mid sized deals,'' he said in a Bloomberg interview.
Roche fell 2.5 percent to 175.2 Swiss francs as of 9:17 a.m. in Zurich trading. The shares had declined 8.2 percent this year, outperforming the Bloomberg Europe Pharmaceutical Index of 19 companies, which has declined 12 percent. Genentech rose 5 euros, or 10 percent, to 56.10 euros ($88.98) in German trading today.
Review
The Genentech board of directors is likely to establish an independent committee to review the offer, Roche said. Genentech board members who are employees of Roche won't participate in the evaluation of the proposal. The deal will likely be subject to approval by a majority of the owners of Genentech shares not held by Roche, the Swiss company said.
The offer is ``highly unlikely to succeed,'' at this level, Cazenove analysts James Millett and David Adlington wrote in a research note today. ``We would expect Roche will have to make a significantly higher offer if it is to acquire Genentech.''
Genentech's independence has always been ``a big plus,'' Clariden Leu's Kunz said. ``If the wrong people now start leaving, there may be some problems,'' she said.
Independent
Humer said the company would continue to run under the Genentech name and retain an independent research organization.
``The diversity will remain,'' he said. ``This is not about cost cutting but rather creating synergies. We will be saving infrastructure costs.''
The U.S. company raised its 2008 forecast July 14 as Avastin gained from the new use in breast cancer. Genentech said second- quarter profit rose 4.7 percent and revenue increased 8 percent to $3.2 billion, led by U.S. sales of Avastin. The medicine, first approved in 2004 for colon cancer and for lung malignancies two years later, is being studied against 20 tumor types worldwide.
Avastin sales in the U.S. rose 15 percent to $650 million, about $7 million more than analysts had projected. Rituxan, a treatment for non-Hodgkin's lymphoma and rheumatoid arthritis that Genentech markets with Cambridge, Massachusetts-based Biogen Idec Inc., generated $651 million, a 12 percent increase. Sales of Tarceva, used to treat lung and pancreatic cancers, gained 17 percent to $119 million.
Profit Increase
Genentech said 2008 profit, excluding certain costs, will be $3.40 to $3.50 a share, up from a prior forecast of $3.35 to $3.45. The company is world's second-biggest biotechnology company in sales after Amgen Inc., which is based in Thousand Oaks, California.
Genentech won clearance from U.S. regulators to market Avastin for the three-fourths of women who don't have a gene mutation that raises their risk of invasive breast cancer. The added approval should boost Avastin's worldwide sales to $4 billion by 2011, said Maged Shenouda, an analyst with UBS in New York, in a note. Avastin generated $2.3 billion last year.
To contact the reporter on this story: Dermot Doherty in Geneva at ddoherty9@bloomberg.net
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