CASE ANALYSIS TWO

This case is about the acquisition initiated by the Swiss pharmaceutical Roche Holding
AG on U.S. biotechnology leader, Genentech in 2008. However, as the world equity
market had declined over 45% and large numbers of investment banks had failed, CEO of
Roche had to decide the price to mount a hostile tender offer to the shareholders of
Genentech.

At first, Roche Holding AG made an offer to acquire all the remaining outstanding shares of
Genentech for $89.00 per share (44.1%). 6 months later, during the period of turmoil in
world market, Genentech’s share price continued to decline. Thus, Roche announced a
reduced price of $86.50 which led to further reduction in Genentech’s share price to $80.82.
Some analysts believed that the stock was overvalued and if the trail of new drug showed
negative results then the share price will further reach level of $60. On the contrary some
analysts believed that Roche is trying to snatch the deal at lower price as they were
expecting increase in share price to $95 after the announcement of colon cancer data.

From my perspective, even though this is not a good tome for the acquisition because of the
fluctuating market condition and Genentech’s new drug test result has not come out yet.
Also, as can be seen in (EXHIBIT 1), Roche’s debt and interest expense will both increase
with acquiring Genentech, which will take Roche more time to pay the principal and interest
and leave Roche no capacity to meet its financial commitment, resulting in a lower rating.

But in the long term, the advantage of the acquisition absolutely outweighs the
disadvantages. Roche’s three best-selling drugs which accounts for 57% of its sales(EXHIBIT
4) — the cancer medicines Avastin, Herceptin and Rituxan — all come from Genentech. And
many of the late-stage clinical trials being conducted by Roche involve Genentech products.
Roche’s main growth could come from expanded uses of Avastin. Besides, Roche holdings
has owned a majority of Genentech since 1990, and it says cost savings, expected to be
$750 million to $850 million a year, are not the main goal of the deal; the goal is to improve
coordination on product development. And Roche now has first dibs on marketing rights
outside the United States for drugs developed by Genentech. That arrangement was set to
expire in 2015, another reason Roche wanted to own the whole company. Also, a tender
offer can provide several advantages to Roche. For example, investors are not obligated to
buy shares until a set number are tendered, which eliminates large upfront cash outlays and
prevents investors from liquidating stock positions if offers fail, so no matter the acquisition
is a success or not, the stock price of Roche is not going to be negatively affected.

What’s more, despite experiencing the financial crisis, the Roche Holdings has a rather
stable growth pace (EXHIBIT 2), so does Genentech (EXHIBIT 3), so the share price after
acquisition should be very promising. And from the bond price generated from the case
(EXHIBIT 6), it’s still quite competitive among peers (EXHIBIT 5), so I believe it Roche can
raise enough funds as expected. In terms of duration (EXHIBIT 6), short-term bonds are also
outstanding among peers, but durations for bonds of more than ten years will appear to be
slightly weaker, so companies may need to reconsider its pricing.
 EXHIBIT 1
DEBT/EBIDTA
Shareholder Cash and Interest Current
Total debt EBITDA
equity equivalents expense rating

Roche Holding 41,569 4,051 4,870 16,751 213 0.24 AA-

Roche + Genentech
41,569 36051 4,870 16,751 1803 2.75 BBB
(Pro Forma)

EXHIBIT 2

ROCHE HOLDINGS RATIO ANALYSIS (MILLIONS, SWISS FRANCS)

LIQUIDITY 2006 2007 2008

NET WORKING CAPITAL 28,203 28,380 26,500

ASSET MANAGEMENT
ASSET TURNOVER 0.58 0.62 0.63
PROFITABILITY
OPERATING MARGIN 0.26 0.30 0.30
PROFIT MARGIN 0.18 0.20 0.19
ROA 0.11 0.12 0.12
DUPONT ROE 20% 21% 20%
SOLVENCY
TIMES INTEREST EARNED (EBIT/INTEREST) 25.9 18.6 29.2
DEBT-TO-EQUITY 0.89 0.72 0.71
DEBT-TO-TOTAL ASSETS 0.47 0.42 0.42
LONG-TERM-DEBT RATIO 0.14 0.08 0.06
TIMES INTEREST EARNED (EBITDA/INTEREST) 78.6
LEVERAGE MULTIPLIER 1.89 1.72 1.71
 EXHIBIT 3

2008 GENENTECH

LIQUIDITY 2006 2007 2008

NET WORKING CAPITAL 3694 4835 6978

ASSET MANAGEMENT

ASSET TURNOVER 0.63 0.62 0.62

PROFITABILITY

OPERATING MARGIN 0.35 0.36 0.38

PROFIT MARGIN 0.23 0.24 0.26

ROA 0.14 0.15 0.16

DUPONT ROE 22.75% 23.66% 22.41%

SOLVENCY

TIMES INTEREST EARNED (EBIT/INTEREST) 20.55 18.92 67.59

DEBT-TO-EQUITY 0.57 0.59 0.39

DEBT-TO-TOTAL ASSETS 0.36 0.37 0.28

LONG-TERM-DEBT RATIO 0.19 0.17 0.13

TIMES INTEREST EARNED (EBITDA/INTEREST)

LEVERAGE MULTIPLIER 1.57 1.59 1.39

 EXHIBIT 4

Percentage of product
Rituxin
21%
Other
43%

Avastin
18%

Herceptin
18%
Rituxin Avastin Herceptin Other

EXHIBIT 5

Yield to Maturity Rate for comparable BBB firms

Calculated based on the exhibit 11 of the case

Years
Amount
remaining S&P
Company Issue date Maturity issued Coupon Price YTM Duration
to rating
(millions)
maturity
Altria (US) 2/3/2009 2/6/2014 5 BBB 525 7.75 105.835 6.31% 3.83
Altria (US) 2/3/2009 2/6/2019 10 BBB 2,200 9.25 104.612 8.55% 5.79
Altria (US) 2/3/2009 2/6/2039 30 BBB 1,500 10.2 105.079 9.68% 8.28
Imperial
Tobacco
2/10/2009 2/17/2022 13 BBB 1,000 9 107.062 4.88% 8.82
(Pound
sterling)
Imperial
Tobacco 2/10/2009 2/17/2016 7 BBB 1,500 8.375 101.048 8.17% 3.35
(EURO)
 EXHIBIT 6

US Bonds

Time to Settlement Maturity Amount Coupon LIBOR Yield Total/Anticipated Bond Coupon Duration
Maturity Date Date (USD Type Rate Spread Bond Yield Price PMT
billions) (AA-) (USD) (semi-
annual)
1 yr 2009/2/11 2010/2/11 3.00 Floating 2.12% 2.11% 4.23% $1000 $21.15 0.5
rate

2 yr 2009/2/11 2011/2/11 1.25 Floating 2.12% 2.01% 4.13% $1000 $20.65 0.5
rate

US Treasury Rate
3 yr 2009/2/11 2012/2/11 2.50 Fixed 1.35% 2.17% 3.52% $1000 $17.60 2.86
rate
5 yr 2009/2/11 2014/2/11 2.75 Fixed 1.87% 2.26% 4.13% $1000 $20.65 4.52
rate
10 yr 2009/2/11 2019/2/11 4.50 Fixed 2.85% 2.26% 5.11% $1000 $25.55 7.44
rate
30yr 2009/2/11 2039/2/11 2.5 Fixed 3.595 2.42% 6.01% $1000 $30.05 9.18
rate

Euro Bonds
Amount Yield Bond Coupon
Time to Settlement Coupon Total/Anticipated
Maturity (EUR LIBOR Spread Price PMT
Maturity Date Type Bond Yield
billions) (A+) (USD) (annual)
Floating
1 yr 2009/2/11 2010/2/11 1.50 2.12% 2.11% 4.23% $1000 $32.82
rate
Euro Benchmark
Fixed
4 yr 2009/2/11 2013/2/11 5.25 2.81% 2.22% 5.03% $1000 $39.03
rate
Fixed
7 yr 2009/2/11 2016/2/11 2.75 3.35% 2.43% 5.78% $1000 $44.85
rate
 Sterling Bonds
Amount UK Yield Bond Coupon
Time to Settlement Coupon Total/Anticipated
Maturity (EUR Sovereign Spread Price PMT
Maturity Date Type Bond Yield
billions) Rate (A+) (USD) (annual)
Fixed
6 yr 2009/2/11 2015/2/11 1.25 2.34% 5.13% $1000 $35.73
rate 2.79%