Washington Editor

Roche Holding AG has offered $43.7 billion, or $89 per share, to buy the 44 percent it does not own already of Genentech Inc., the world's largest biotech.

If the merger is completed, Basel, Switzerland-based Roche would gain worldwide control of Avastin (bevacizumab), which Genentech markets in the U.S., and other cancer drugs like Herceptin (trastuzumab) and Rituxan (rituximab).

Roche currently has first rights to market any of Genentech's drugs outside of the U.S.

The news sent shares of South San Francisco-based Genentech (NYSE:DNA) up $12.06 Monday, an increase of 14.7 percent, to close at $93.88.

With shares trading over the $89 per share offer, analysts predicted that the firm's independent shareholders would seek a higher price. Some analysts speculated that positive results from an ongoing Phase III trial of Avastin in colon cancer could push Genentech's stock well above $100.

The $89 per share offer, which represents an 8.8 percent premium from Friday's stock close and a 19 percent one-month premium, is "somewhat of an initial low-ball offer," said analyst Eric Schmidt, of Cowen & Co.

However, Schmidt said that while he expected Genentech's board to negotiate a modestly higher purchase price, Roche's majority ownership in the biotech and its governance agreement with Genentech "are likely to keep any additional premium somewhat in check."

Analyst Michael Aberman, of Credit Suisse Securities LLC, said that although it is likely that Roche has room to move the price up, since the offer does not constitute a "true acquisition," with Roche already a majority shareholder, "we do not believe it will garner a biotech acquisition premium."

Genentech declined comment Monday, but issued a statement saying it expected a special board committee consisting of three independent directors to convene to determine what action to take on the Roche proposal.

Franz Humer, Roche's chairman of the board, called the $89 per share offer "full and fair."

Roche has held the majority ownership of Genentech since 1990, he noted Monday during a media briefing. Humer insisted that the Genentech offer is "not a departure from what until now has been a very successful strategy."

"It is a big step toward achieving our goal of becoming the world's leading health care company," Humer declared.

Closer cooperation with Genentech, he said, would strengthen Roche's ability to innovate and create the "medically differentiated products and services that are the core of the essential focus our business."

Roche's decision to fully acquire Genentech was not an easy one, Humer insisted, adding that he personally struggled with it for weeks.

"Mega mergers or large-scale acquisitions are not the right way for Roche, and I am still convinced that such transactions destroy rather than create value and immobilize a company's innovative potential for years," he said.

However, Humer was adamant that a Roche acquisition of Genentech is "a different matter."

"We have shared a history of partnership that goes back almost 20 years," he said. "It has always been based on deep, mutual respect for each other's strengths and achievement. Roche has much to thank Genentech for, and thanks to Roche, Genentech has developed into the biotech industry's foremost company. Without that, it would not have been possible."

When Roche first acquired its majority interest in Genentech, the California biotech had about 2,000 employees, with about half working in R&D, Humer noted.

"During its partnership with Roche, Genentech has been able to develop several breakthrough medicines, primarily in oncology, but also in other areas," he said, noting that Genentech now has about 11,000 employees.

Under an acquisition, Genentech's research and early development would continue to operate independently from Roche's other research units, Humer said.

He noted that Roche has restructured its R&D group to create five largely autonomous units, called disease biology areas, which he said are free to set their own goals, portfolios and priorities.

"Genentech's research and early development operations will remain separate from our DBAs, maintaining their own processes and leadership structures and above all, their own culture, the Genentech culture," Humer declared.

Roche CEO Severin Schwan told reporters that his firm's Palo Alto, Calif. virology R&D activities would relocate to Genentech's South San Francisco campus, while the Palo Alto inflammation group would become part of Roche's Nutley, N.J. R&D group.

"It is particularly important for us to maintain our research philosophy," Schwan said.

Genentech will be working on the same indications as Roche, he noted, adding the overlap in oncology and inflammatory work "is not a disadvantage."

"I would say that is part of the core of our strategy, that we tackle problems from different angles, and that we strengthen the diversity within the group," Schwan said.

Roche's pharmaceutical commercial operations in the U.S. will be moved from Nutley to South San Francisco, under the merger, he said, adding that the firm will shut down its manufacturing activities at the Nutley site.

Schwan insisted that the existing U.S. sales organizations of both companies would be maintained under the acquisition.

The merger of Roche and Genentech "will create one of the health care sectors' strongest companies together," Humer said. "We will be banking on true innovation."