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Genentech and Roche Agree on Acquisition Deal; Employees End Up as Big Winners

Written by on Saturday, March 14th, 2009

On Thursday, an agreement on the prospective deal we have been discussing for months finally was reached: Roche formally agreed to acquire Genentech for $95 per share at a total price of $46.8 billion.

Who came out the big winner here?  Well, while Roche ended up with the Genentech pipeline prize, it has been suggested that the real winners are the Genentech employees and of course all of the Genentech investors.

The San Francisco Business Journal reported on the deal as follows:

On paper, Roche appears to have won. The final price of $95 per share is only $6 above the July bid. That’s significantly below the $100-plus estimates of many analysts. . . . The final price also is significantly below the $112 to $115 pegged by a Genentech analysis last fall.

However, the deal on paper really doesn’t take into account the significance of the retention program put in place last fall to keep employees from leaving.

The San Francisco Business Journal reported:

According to the retention bonus plan, if the merger occurs by the end of June and 100 percent of outstanding vested stock options accelerate as part of the merger — which is provided under the merger agreement — employees will receive 50 percent of the retention bonus when the merger is completed and 50 percent one year after the merger is completed.

If an employee is “involuntarily terminated” without cause or resigns for “good reason,” the retention bonus is paid out soon after the employee leaves.

Plus, Genentech employees could pocket millions of dollars more from the sale of their stock holdings to Roche.

What does this mean for most employees?  That this deal will provide a nice windfall for them in an otherwise bleak economy.

For Roche, on the other hand, the real battle now is going to be to find a way to retain Genentech’s best and brightest.  Roche may find that to be a much tougher challenge than negotiating to acquire Genentech.

SF Gate reported on this issue as follows:

Among the minority Genentech investors who will receive billions cashing in their stock under the agreement announced late Thursday are the biotech company’s executives and employees. Their windfall, industry experts say, might liberate many of them to launch their own dream companies rather than stick around.

Veterans of Genentech, a quintessential California trailblazer, might chafe at the more formal culture of a pharmaceutical conglomerate based in Basel, Switzerland, insiders say.. . .  .Members of the tight-knit Bay Area biotech community say Genentech staffers have been circulating their resumes, and suitors such as venture firms have been talking them up about possible new enterprises.

So, all in all, while Roche may have come out the winner on this deal in terms of the price per share and winning the Genentech pipeline, there is a good argument that the real winner is not the acquiring company but the Genentech employees and investors.  We will all have to watch over the long-term to see how Roche fairs down the road, and to see whether this deal really pays off for Roche in the future.

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Roche Reported to Be Close to Deal in Genentech Acquisition

Written by on Tuesday, March 10th, 2009

Roche is reportedly close to reaching a deal over the Genentech acquisition.

The Wall Street Journal reported Monday night that the terms of the current deal under consideration would provide for a share price of $95 per share, which is 6% higher than Roche’s initial offer back in July.

Reuters is reporting that a source close to Roche says that the company would pay as high as $105 per share to close the deal, but that the source currently doubts that this will be necessary.

According to the San Jose Mercury News, sources close to the negotations are saying that this is basically a “done deal.”

So, we may finally be on the verge of losing a Bay Area icon.  Before the first Roche bid back in July, it seemed almost unfathomable to imagine the Bay Area biotech community without Genentech.  Now, it is all but a certainty that Genentech will be absorbed into Roche, and we in the biotech world little by little have grown to accept a community without Genentech.

In looking at this deal, it is impossible not to believe that the declining economy played an important role in the negotiations.  As the value of shares tumble, what shareholder wouldn’t seriously consider the possibility of cashing out?  In this case, shareholders knew they had an eager buyer waiting on the sidelines, so as the economy continued to deteriorate, the willingness to sell likely grew.

Furthermore, both Reuters and the San Jose Mercury News are reporting that Genentech at least seems to be growing weary of the shadow of uncertainty hanging over the company.  There is only so long that you can keep a company in limbo and prevent it from disintegrating.  I expect that Genentech is starting to recognize the impact that Roche’s ongoing acquisition efforts are having over the company generally, and that perhaps some key people over at Genentech are starting feel that it is time to move forward with what is increasingly perceived as the inevitable.

So, the California Biotech Law Blog anticipates that an announcement of a done deal is forthcoming.  We will keep you posted as the developments arise.

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Genentech Investments Affected by Down Market

Written by on Friday, October 31st, 2008

The recent plunge in the stock market is not just affecting the investments of the average investor–it is apparently also affecting the investment portfolios of some biotech and pharmaceutical companies such as Genentech, reported the San Francisco Business Times.

According to the San Francisco Business Times, Genentech held preferred stock in Fannie Mae, Freddie Mac, and Lehman Brothers Holdings, and had to take a $67 million third quarter charge for these investments. Genentech’s investment income for the year will reportedly be 50% of what it was in 2007, which was $197 million.

The San Francisco Business Times reports that other biotech and pharmaceutical companies which have been affected by investment losses include Biogen Idec. Inc. and Lexicon Pharmaceuticals, Inc.

While most in the industry would expect that biotech stock prices would be affected by a plunging stock market, it may very well come as a surprise to many to discover that any of these biotech and pharmaceutical companies are so heavily invested in the market themselves.  The San Francisco Business Times article explains that cash-rich companies like Genentech are invested largely in short-term investments due to the high cost of drug development and the need to manage all the cash that is required for the drug development effort.

Upon reading this article, the question comes to mind: how, if at all, will the drop in Genentech’s investment portfolio affect Roche’s acquisition talks with Genentech?  Could a drop in cash on hand could make a new acquisition offer more attractive to Genentech?

In my opinion, the industry expectation is that there will at some point be a Roche acquisition of Genentech, so perhaps this market downturn will not have much of an impact on any deal.  At the same time, it seems likely that Genentech’s investment losses will have some impact on how the talks progress, as a 50% portfolio loss is certainly not inconsequential to any investor–even Genentech.

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Both Roche and Genentech Remain Silent on Status of Acquisition Talks

Written by on Thursday, October 23rd, 2008

Both Roche and Genentech are continuing to remain silent on the status of the Roche-Genentech acquisition talks.  For now, employees and investors are left hanging as Genentech’s future continues to be uncertain.

Analysts apparently had hoped to get an update this week during Genentech’s earnings call about the status of the acquisition,  but they were unsuccessful, according to Seeking Alpha’s Mike Huckman.

Huckman wrote regarding the earnings call as follows:

[Roche officials would] only say they remain “totally committed” to the Genentech offer and wouldn’t make any comments or answer any questions about a “negotiated agreement” or its ability to finance the deal. . . .

So many analysts, investors and reporters dialed into the Roche call yesterday morning after it had started that one company official later repeated for the benefit of the latecomers that it wasn’t going to show its hand. Some analysts and investors were banking on a new treatment to force Roche to come back with a much higher offer, but it didn’t pan out Sunday night when Genentech announced the test of Avastin as an add-on drug for colon cancer will continue through the end.

Analysts were similarly unsuccessful in the case of the Genentech earnings call earlier this month, although the subject of the acquisition was at least raised there.  Following the Genentech call, at least one analyst, Eric Schmidt of Cowen and Co., still decided to upgrade Genentech shares from an equivalent of “Buy” to a “Hold.” Schmidt stated in the Genentech call as follows:

While management refused to discuss the Roche situation, we believe a deal is inevitable, and that an agreement would be facilitated by a recovery in the credit markets. We believe large-cap investors seeking economically resilient growth at a reasonable valuation will find Genentech shares attractive.

So, the question remains: will they or won’t they do the deal?

I personally agree with Schmidt that the deal is going to eventually happen–that Roche will come up with a share price that will make it worth Genentech’s while to sell.  It is not so much a question of if but when. . . .

The California Biotech Law Blog will continue to keep you posted as any new developments regarding the deal emerge.

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Genentech Launches Employee Retention Program

Written by on Monday, August 25th, 2008

Genentech has launched an employee retention program aimed at retaining employees following the recent bid by Roche to acquire Genentech.

The Mercury News reported that Genentech’s plan is to spend $371 million in cash on retaining its personnel, which the company had planned to spend instead on its employees in a previously established stock option program.  The prevailing wisdom is that spending the money now on cash will be much more attractive than spending the money on stock options to be cashed out in the future.

Will this program help to discourage the departures of personnel who would otherwise choose to leave the company, in light of the uncertainty now about its future?

In all likelihood, the answer to this question is “no.”  Given the current state of the economy and the collapse of the housing market, the average Genentech employee will probably be concerned enough about his or her future to start looking for a new salaried position.  Also, many of Genentech’s employees are already well enough off as a result of the company’s successes over the years to not be swayed by a retention package.  Moreover, the conventional wisdom is that Roche will ultimately be successful in its bid to acquire Genentech, which means that many employee jobs may prove to be on the cutting block wiithin the very near future.

Still, you have to admire Genentech’s attempts to slow down the flow of departing employees out the  company doors.  I feel confident that most observers would agree that spending $371 million on retaining employees in the face of a likely acquisition is an impressive effort to ensure that the company can continue to operate, regardless of what happens with the acquisition effort.  And, of course, such an effort may have the other important effect of maintaining the company’s value as the acquisition talks move forward.  The California Biotech Blog will continue to watch this issue as it unfolds and will report on whether or not these efforts by Genentech prove to be successful.

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Fallout Continues on Roche Bid for Genentech

Written by on Monday, August 18th, 2008

Despite Genentech’s rejection of Roche’s $43.7 billion offer last week, coverage of the fallout from the "failed" bid continues as industry observers speculate on Roche’s next move. 

According to a report by the Silicon Valley Business Journal and San Francisco Business Times, Reuters has forecasted that the final purchase price of Genentech will be $53 billion or $107.50 per share.  According to The Pink Sheet Daily, such a high price could prove to be problematic for Roche, who may be forced to make operational cuts as a direct result of the deal.

Speculation is also growing as to whether or not Genentech is going to be able to keep its talent in anticipation of a potential acquisition by Roche.  SF Gate reported that, as anticipated by analysts, there already is a flurry of recruiter activity erupting at Genentech as a result of the initial Roche bid.  The Pink Sheet Daily noted that it will be difficult to retain Genentech’s current talent, as many of the senior-level people will have no financial incentive to stay.   Of course, it goes without saying that the general atmosphere of uncertainty and the anticipated change of culture will likely start driving employees out the doors of Genentech.  However, observers seem to agree that Roche has likely worked the loss of key Genentech employees into the equation in deciding to pursue a bid to acquire the company. 

The Genentech/Roche deal is viewed as just the first of  a new wave of big pharma acquisitions of biotech companies to come in the near future, as pharma companies continue to explore opportunities to replenish their pipelines.  Seeking Alpha explained as follows:

Big Pharma is feeling the need to find new products with blockbuster potential as several important drugs approach the expiration of their patent protection. . .  . Many large pharmaceuticals have lots of cash on their balance sheets, making acquisitions an affordable option. The weaker dollar has also made U.S. companies look more attractive to biotech and pharmaceutical firms abroad. Another major factor is the difficult process of receiving FDA approval. This lengthy and grueling process provides an additional incentive to buy companies that have already received FDA approval on their drugs, ensuring smooth pipeline production going forward.



Potential buyout targets to keep an eye on: Amylin Pharmaceuticals (AMLN), United Therapeutics (UTHR),  Alexion Pharmaceuticals (ALXN), Onyx Pharmaceuticals (ONXX), Vertex Pharmaceuticals (VRTX).

To date, there has been no word on Roche’s next move or when it is likely to take place.  How high will Roche go with the next offer?  The California Biotech Law Blog will keep you posted on any developments.

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Genentech Declines Roche $43.7 Billion Acquisition Offer

Written by on Thursday, August 14th, 2008

Following up on our July 24th posting about Roche’s bid to acquire Genentech, it is now official: Genentech has declined Roche’s $43.7 Billion Acquisition offer.

A Genentech press release explained the decision as follows:

The special committee of the Board of Directors of Genentech, Inc. announced that, after careful consideration, it has unanimously concluded that Roche’s proposal to acquire the shares of Genentech not owned by Roche for $89.00 per share substantially undervalues the company. Therefore, the special committee does not support the proposal. However, the special committee would consider a proposal that recognizes the value of the company and reflects the significant benefits that would accrue to Roche as a result of full ownership.

The Genentech press release further indicated that the special committee also approved the "implementation of a broad-based employee retention program to address any employee concerns created by the Roche proposal."

Will Roche increase its offer, now that its opening bid has been rejected? If so, what will it cost for Roche to close the deal? 

My expectation is that Roche will make another offer and that the next offer will be larger than the first.  However, it is an open question as to how much money Roche will have to pay to get the deal done.  According to Seeking Alpha, the final sale price is likely to be over $105 per share and could even be as high as $130 per share.   Either way, there is no question that Roche is going to have to come up with more money to get the deal done. 

The California Biotech Law Blog will continue to keep you posted as any new developments regarding the Roche-Genentech talks arise.

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Roche Makes $43.7 Billion Bid to Acquire Genentech

Written by on Thursday, July 24th, 2008

The buzz in the biotech world this week has been squarely focused on Roche’s surprising move to launch a $43.7 billion bid to acquire Genentech.

Of course, Roche already owns fifty-six percent (56%) of Genentech, so the acquisition would actually result in Roche owning the remaining forty-four percent (44%) of the company.  The offer would pay Eighty-Nine Dollars ($89.00) per share.

Steve Johnson for the Mercury News reported on the Roche bid as follows:

Although Genentech’s operations would remain in South San Francisco under the deal, it would cease to be a separate company, according to a Roche statement. The proposal will be reviewed by three Genentech board members who aren’t Roche employees, and must be approved by Genentech’s non-Roche shareholders.

If approved, the transaction would create the seventh-biggest drug-making entity in the United States in terms of stock value, according to Roche executives, who noted that Genentech now accounts for about 22 percent of Roche’s revenue.

By eliminating duplication, the combined companies could save up to $850 million a year, Roche executives said. The transaction also could eliminate current trade-secret roadblocks that now hinder their ability to share research data, they said.

According to the Mercury News, the deal is unlikely to close for the current offering price, and Roche may have to offer as much as One Hundred Dollars ($100.00) per share to finalize the deal.

As a member of the Bay Area biotech community, it is hard to envision South San Francisco without Genentech at the helm.   Many of the most successful players in the biotech world got their start at Genentech, and the company has had a very historic role in the growth of the biotech industry, both in the Bay Area and around the world.   That historic role, however, may soon be relegated to a new role in the history books–and we all may have to get used to a world without Genentech as we know it.

What will the entity formerly known as Genentech look like if Roche is successful with the acquisition?

Well, according to The In Vivo Blog, the acquired Genentech is likely to lose its culture, although it may or may not lose the majority of its talent–this will likely depend on whether CEO Art Levinson stays or goes.  For its part, The In Vivo Blog is prediciting that Levinson will make his departure, particularly given the manner in which this bid attempt was handled.  Certainly, there was no effort by Roche to preserve the collaborative spirit that had previously existed between the two companies.

Given this huge loss, will the Genentech acquisition really prove to be a good move for Roche?

Well, perhaps the acquisition will save Roche money.  This seems to be the overriding justification.

The In Vivo Blog reported as follows:

It’s likely Roche took a look at the price of its current Genentech relationship–with its manufacturing transfer prices, up-front fees and royalties, and most importantly no ability to leverage its investment in the US marketplace where the economics of oncology marketing look more and more like primary care–and figured those costs outweighed the innovation it would lose if Genentech’s world class talented departed as a result of a takeover. Just as no primary-care force can afford to sell a single product, Roche can’t afford a US oncology operation selling only Xeloda.

Moreover, Roche is clearly not convinced that Genentech’s productivity would have continued at the rates it has in the last decade. And there are plenty of people who agree. “We all know that Amgen is now a Big Pharma. We talked about it eight years ago. But I think Genentech has now sneaked over that line too,” says the CEO of one of Genentech’s peer Big Biotechs.

The East Bay Business Times agreed with this assessment:

The Basel-based drug maker said it expects to increase research productivity and cut costs by combining operations . . . .

“The transaction will also unlock synergies by leveraging the scale of the combined operations in the U.S. and improving operational efficiency,” said Roche chief executive Severin Schwan.

In the end, however, it seems likely that Roche will end up losing much of what is special about Genentech over the course of the transaction.  However, apparently this is a gamble that Roche is willing to take.

The California Biotech Blog will continue to follow the developments regarding this deal as they come to light.

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Gilead Sciences Resolves Dispute with Roche

Written by on Monday, November 21st, 2005

Foster City-based Gilead Sciences, Inc. has resolved its dispute with Roche, which arose out of the companies’ 1996 Development and License Agreement for the flu drug Tamiflu. The settlement, which resulted in an amendment to the 1996 Agreement, provides for Gilead to accept a revised royalty structure, with a co-promotion option, and $80 million in additional royalty payments for prior Tamiflu sales. The new royalty rate will be 14% for the first $200 million in Tamiflu sales, 18% for the next $200 million, and 22% for sales above $400 million.

The dispute arose in June, 2005 when Gilead delivered a notice of termination to Roche for the 1996 Agreement, seeking to gain back all rights to Tamiflu. The biotech company had alleged that Roche had failed to pay Gilead some $18 million in royalty payments incurred pursuant to the 1996 Agreement. The companies had entered into arbitration proceeding to resolve the dispute.

As a result of Gilead’s resolution of this dispute, Forbes reports that Gilead may look for an acquisition for the pulmnology, pediatric, or specialty infectious disease markets. Forbes author Kerry Dolan wrote in today’s article Biotechnology: Gilead’s Half-Empty Pipeline :

[T]he Foster City, Calif., company also has a problem shared by much of Big Pharma–an awfully thin pipeline. . . . For Gilead to keep growing between now and then, several analysts are betting that it will make an acquisition–either of a whole company or of specific drugs in development from other companies. . . . The challenge here: Gilead competes not with biotech companies but with deep-pocketed Big Pharma. So it may have to pay richly for any acquisition it undertakes.

Clearly, the challenge for Gilead in the coming months will be how to enhance its current pipeline that has very new products on one end of the spectrum and massive products on the other. Thanks to this settlement, Gilead now has new funds to take its pipeline to the next level–the real test will be what Gilead will be able to do with its windfall.

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