Here's How to Play the Biggest Takeover in Biotech
By Dr. George Huang
February 13, 2009
Biotech's biggest buyout just turned ugly.
Last summer, Swiss drug giant Roche offered $89 per share for Genentech, the king of biotech.
Roche already owns 56% of Genentech. But it wants full control of a trio of Genentech's top-selling cancer drugs – Avastin ($2.8 billion per year), Herceptin ($1.5 billion), and Rituxan ($2.7 billion). So in July, Roche offered $89 per share to buy the company outright.
Genentech's board dismissed Roche's bid as too low… so Roche went hostile.
Figuring investors are desperate for cash, Roche abandoned direct negotiations with Genentech and on Monday took its buyout offer directly to shareholders… dropping its bid to $86.50 per share. (The stock is trading around $83 right now.)
Roche also disclosed that Genentech's board of directors wanted an outrageous $112 per share. Genentech's board retaliated with a press release asking shareholders to take no action.
I'm betting the drama will continue well into the summer. Here's why…
In April, Genentech will unveil data from an important clinical trial of its top-selling cancer drug, Avastin. The trial is evaluating Avastin's effectiveness in treating early-stage colorectal cancer patients after surgery. Good data could bring an additional $1 billion in annual Avastin sales.
If the trial is positive, Genentech shares will likely soar into the $90s. But negative data could send shares tumbling into the low $70s.
Institutional investors own about 85% of Genentech. They're going to want to see the data before making a decision. So I expect few shares to be tendered to Roche by the March 12 deadline. And we'll probably see a continued war of words in the months ahead.
In the end, though, Roche will prevail with its Genentech buyout by 2010. If the Avastin trial is negative, shareholders will probably collect about $90 per share. A positive trial could mean a price tag in excess of $100.
When the credit crisis hit back in November, the market became skeptical of Roche's ability to fetch the $20 billion financing needed to complete its original deal at $89 per share. Genentech shares dipped below $80 each and I urged Growth Stock Wire investors to take the gift from the market.
If you bought Genentech shares then, you're sitting on roughly a 9% profit in just three months. (By selling "naked puts," my FDA Report readers collected 75% gains.)
If you own Genentech shares, sit tight. No matter what happens with the Avastin data, Genentech is worth about $90 a share to Roche. You can pocket at least another 8% gain from here.
If you don't own Genentech shares, establishing a position under $80 (around 20 times this year's earnings) in the greatest biotech of our time should prove plenty profitable.
Good investing,
George Huang
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Earnings today... Abercrombie & Fitch, Brookfield Asset Management, PepsiCo, Wyndham Worldwide. |
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+70.06% |
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316.93 |
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-27.74% |
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2.73% |
-0.03 |
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| Company |
Sym |
Industry |
| Ultra Gold PS |
UGL |
gold ETF |
| Orchids Paper |
TIS |
tissue paper |
| Amer Ital Pasta |
AIPC |
pasta |
| SIGA Technologies |
SIGA |
biotech |
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| Company |
Sym |
Industry |
| Procter & Gamble |
PG |
consumer prod |
| BB&T |
BBT |
bank |
| H.J. Heinz |
HNZ |
food products |
| Kimberly-Clark |
KMB |
personal products |
| Apartment Invest |
AIV |
residential REIT |
| Eastman Chemical |
EMN |
chemicals |
| Kellogg |
K |
food products |
| Disney |
DIS |
entertainment |
| Lexmark |
LXK |
printers |
| BT Group |
BT |
telecom |
Host Hotels |
HST |
hotel REIT |
Gannett |
GCI |
newspapers |
Avery Dennison |
AVY |
paper products |
Hanesbrands |
HBI |
clothing |
Callaway Golf |
ELY |
gold products |
New York Times |
NYT |
newspapers |
3M |
MMM |
conglomerate |
Cadbury |
CBY |
candy |
Revlon |
REV |
cosmetics |
LaSalle Hotel |
LHO |
hotel REIT |
Unilever |
UN |
conglomerate |
FLIR Systems |
FLIR |
infrared |
Toronto-Dominion |
TD |
bank |
Hill-Rom Holdings |
HRC |
hospital beds |
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