The merger deal between Genetics Institute Inc. and AmericanHome Products Corp. looks very similar to the 1990 mergerbetween Genentech Inc. and Roche Holding.
But analysts scrutinizing the proposed transaction on Fridaygenerally concluded that Genentech shareholders got a betterdeal.
Genentech (NYSE:GNE) was trading at $21-$22 before themerger, and Roche paid an average price of $31 per share, saidanalyst Denise Gilbert of Smith Barney.
In contrast, at the closing, AHP will pay about $40 for eachshare of GI (NASDAQ:GENI), a narrow premium above the stock'sFriday closing of $39.25.
Given a choice, Gilbert said she'd go with Genentech becausethe return to investors is higher based on its Friday price of$29.50 and the $42.50 for which Roche could buy the rest ofthe stock today. That amounts to a 44 percent gain. The mostAHP will pay when its deal with GI closes in early 1992 is$50, putting the return at 27 percent.
Joe Edelman of Prudential Bache does the arithmeticdifferently, but comes to the same conclusion. He estimatesthat at its present price, GI would give the same rate of returnas Genentech would if Genentech were selling at $35.
Edelman downgraded his rating on GI to a "hold" from a "buy."The deal indicates that GI "doesn't have much confidence thatit can deliver on what it's got," he said. Referring to themaximum take-out price for the stock, he added, "What they'resaying implicitly is their stock won't be worth more than $85by 1996."
But Gilbert said it's still a great deal for GI and itsstockholders. "My intrinsic value for the company is the low$20s, and the price AHP is paying is about $40," she said.
"GI built up its R&D infrastructure so fast it kept having tolicense out rights to future products to get money, so theywere mortgaging their future," Gilbert said. She raised herrating from an "avoid" to a "hold."
David Webber of Alex. Brown & Sons disagreed. "The terms forGenetics Institute and its stockholders are underwhelming," hesaid. "On a net basis, there's a very small premium being paidto GI shareholders."
When the deal was announced on Thursday, Webber noted, 100shares were worth $3,788. Under the terms of the deal, ashareholder would receive $2,000 in cash for the shares plus60 new shares. If the market price is $40 at closing, the newshares will be worth $2,400.
The total value of cash and new shares would be $4,400, a$612 increase from the value of the stock on Thursday.
"With the deal essentially being transacted at the marketprice," concluded Webber, "it seems as if GI has given up itsindependence for $300 million, and perhaps that money couldhave been found in other ways."
Analysts agreed on the assets each side brings to the party.
"American Home's strong point is they have cash, and I presumethat's what made the deal work," said Linda Miller ofPaineWebber. GI had $60 million in the bank as of the secondquarter ended May 31.
"Genetics Institute has superb science and large manufacturingcapability in recombinant proteins," said Edelman. "AmericanHome has stated they want to get more into thepharmaceutical side of their business. This gives them thatbasic research and technological capability, even if they nevermake a biotech product."
One question is why AHP chose to make a single majoracquisition instead of a series of smaller deals.
Webber said it "could be that molecular biology capability is soessential now for drug discovery that the acquisition of astrong research group could be key to building a strong drugcompany."
"You get infrastructure with multiple products," Gilbert said."For the dollars you put in, you're assuming you'll get a greaterreturn and you yourself don't need to manage clinical trials."
"AHP's $666 million could have bought a lot of R&D andlicensing agreements," said Miller. "But it takes a lot morework to identify technology on a piecemeal basis."
In addition, said Edelman, "it may be that a lot of stuff hasgotten cherry-picked. In a perfect world it would be best tolicense, but there's competition. This way, if GeneticsInstitute comes up with a great new drug, you can presumeAmerican Home will have a right of first refusal."
-- Karen Bernstein BioWorld Staff
(c) 1997 American Health Consultants. All rights reserved.