Swiss pharmaceutical giant Roche agreed Thursday to pay $46.8 billlion in cash to buy the 44 percent of California-based biotech pioneer Genentech that it doesn't already own, ending a long corporate struggle between the companies.
The deal, which values the whole of Genentech at more than $100 billion, underscores the lengths drugmakers are willing to go to shore up weak pipelines of new drugs.
The $95-per-share deal brings Roche, whose best-known products include the flu treatment Tamiflu and the tranquilizer Valium, all of the sales of Genentech's highly profitable cancer drugs as well as its promising research pipeline and scientific corporate culture.
The deal, approved by Genentech's board, offers $95 per share for the 44 percent of South San Francisco, Calif.-based Genentech Inc. that Basel-based Roche Holding AG doesn't already own.
It is the latest in a burst of megadeals among drugmakers, following Merck & Co. Inc.'s announcement Monday that it would acquire Schering-Plough Corp. and Pfizer Inc.'s pending acquisition of Wyeth.
A dearth of new products and push for cost savings are driving the rush to combine. The deal values Genentech as a whole at $100.1 billion when including the portion of the company already owned by Roche. That nearly matches the $109.1 billion combined total for Merck's and Pfizer's acquisitions.
Roche expects to save $750 million to $850 million per year by eliminating duplication but has not yet given a figure for potential job cuts.
The agreement ends Roche's hostile bid for Genentech. Genentech's board rejected Roche's initial friendly bid of $89 per share in July. Roche then surprised the company and Wall Street with a lowered $86.50-per-share bid on Jan. 30, aimed directly at shareholders.
The Swiss drugmaker then increased that bid to $93 per share last Friday. Roche recently said it raised $36 billion in financing and can obtain the rest through debt or with available cash.
Hanging over the negotiations have been study data expected to be released in April on the effectiveness of Genentech's Avastin in treating early-stage colon cancer. The drug, Genentech's best-selling product, is already approved for various types of breast, lung and colon cancers. Some analysts said a positive study could increase the value of Genentech shares.
Avastin is one of the best-selling biotechnology drugs in the world. Like other biotech drugs, it is made using living cells instead of chemical compounds, which is the process for traditional pharmaceuticals. The process though is more complicated and often more costly, which makes biotech drugs more expensive than traditional chemical treatments. Avastin, for example, can cost about $50,000 per year.
With the government looking to help control prescription drug prices, consolidation could turn out to be a good thing for the industry, said Morningstar equity analyst Damien Conover. The move allows for sales force and other cuts, which could help maintain margins if drug prices decreased, he said.
"The other piece is if you are bigger you tend to have more negotiating power," he added.
Roche said the combined company would be the seventh-largest U.S. pharmaceutical company in terms of market share and would generate about $17 billion in annual revenue with a payroll of around 17,500 employees in the U.S. pharmaceuticals business alone.
"We believe this is a fair offer for Genentech shareholders, and the committee is pleased to come to a successful conclusion of this process," said Charles Sanders, chairman of the special committee of Genentech's board of directors.
Franz B. Humer, chairman of Roche, said he was pleased that the two sides could agree.
"Working together, we aim to close the transaction quickly, thus removing uncertainty for employees and allowing us to focus even more intently on innovation and long-term projects."
Roche said its Pharma commercial operations in the U.S. will be moved from Nutley, N.J., to Genentech's site in South San Francisco, which will become headquarters of the combined company's U.S. commercial operations in pharmaceuticals and operate under the Genentech name.
It said this would take advantage of "the strong brand value of Genentech in the U.S. market."
Investors remained concerned over how the culture at Genentech, which is known for cutting-edge research and as a place where scientists can flourish. It is key component to the company's success, several have said.
"This is where I see it as being a little negative," Conover said, referring to the buyout. "A lot of scientists will stay because of funding with Roche, but a lot of entrepreneurial people may decide to move on."
Roche said potential management changes are still under discussion, which leaves unanswered questions surrounding the future role of Genentech Chief Executive Arthur D. Levinson.
Levinson joined the company in 1980 as a senior scientist and worked his way up to CEO in 1995. In that role, he helped shift the company into a blockbuster drug powerhouse and one of the top producers of cancer treatments in the world.
The weak economy and consolidation within the sector, though, could stave off an exodus. Leerink Swann analyst Bill Tanner said it will be a matter of how well Roche maintains the environment.
"They may have some cover now that pharmaceutical companies are cutting back," he said.
Levinson could play an important role in keeping morale high at the company after the buyout, he added.
"He's a very enthusiastic and excitable guy. To me it would make a lot of sense to keep him there as a figurehead if you're trying to maintain the culture," Tanner said.
Research and early development will operate as an independent center within Roche from Genentech's campus in South San Francisco, it said.
Genentech, founded in 1976, has worked closely with Roche for two decades.
Roche acquired a 60 percent interest in Genentech in 1990. It bought out the rest of the shares nine years later but then reduced its stake through three public offerings between July 1999 and March 2000.
Roche shares closed 1.1 percent higher at 147.10 Swiss francs ($126.80) on the Zurich exchange. At midday, Genentech shares rose $1.86, or 2 percent, to $94.03.