Jan. 30 (Bloomberg) -- Genentech Inc., developer of the cancer drug Avastin, told its shareholders to ignore a hostile $86.50-a-share acquisition bid from Roche Holding AG that was lower than the Swiss drugmaker made six months ago.

Roche’s offer goes directly to shareholders, replacing an $89-a-share bid previously rejected by the Genentech board, Roche said today in a statement. Genentech, based in South San Francisco, California, urged shareholders to “take no action,” and said it will respond to Roche within 10 days.

Roche, which owns 55.8 percent of Genentech, wants to gain full control of Avastin, the world’s best-selling cancer treatment, as pharmaceutical companies seek new products to replace those losing patent protection. Pfizer Inc.’s $64.2 billion planned takeover of Wyeth, announced Jan. 26, will be financed in part with a $22.5 billion loan package that signals credit markets may be easing.

“Roche wants to buy some time until finance conditions have improved,” said Andreas Theisen, an analyst at WestLB AG in Dusseldorf with an “add” rating on Roche. “Maybe at some later point Roche can beef up the offer.”

Roche, based in Basel, Switzerland, will begin a tender offer within two weeks. The company gained 3.1 Swiss francs, or 1.9 percent, to 163.4 francs to give it a market value of 142 billion francs ($122 billion).

Genentech fell $2.85, or 3.4 percent, to $81.24 at 4 p.m. in New York Stock Exchange composite trading. That puts the company’s market value at $85.5 billion. Genentech’s shares have fallen less than 1 percent since the closing price on July 18 before Roche made its initial bid.

‘Opportunistic Step’

Genentech “is disappointed that Roche has taken this unilateral and opportunistic step in an attempt to take advantage of current market conditions,” said Charles A. Sanders, chairman of a special board committee established by Genentech to negotiate a deal. “The special committee has been actively engaged with Roche to assist Roche in making a proposal that recognizes the value of the company and reflects the significant benefits that would accrue to Roche as a result of full ownership.”

Roche spokesman Alexander Klauser said Roche has had “numerous discussions” with the Genentech committee over six months. “In light of the lack of progress we decided to make an offer directly to Genentech shareholders,” he said.

Samuel Isaly, managing partner at Orbimed Advisors LLC, who oversees the Eaton Vance Worldwide Health Sciences Fund, said he wouldn’t tender shares at the offered price.

‘Tender at $140’

“We are not going to tender our shares at $86.50,” Isaly said in a telephone interview today. “We would tender them at $140.” Orbimed held 3.1 million Genentech shares at the end of September, while Eaton Vance had more than 1.4 million, according to regulatory filings.

The offer is subject to the majority of outstanding shares being tendered and is conditional upon Roche obtaining sufficient financing. The Swiss drugmaker said the transaction will be financed with a mixture of cash, commercial paper, bonds and bank loans.

“We are confident that we will have the financing available when the money is needed,” Chairman Franz B. Humer said on a conference call.

Roche may need to pay a yield premium of at least 3 percentage points more than the mid-swap rate, or about 3.5 percentage points over comparable government bonds to sell 5-year bonds in euros, according to Jerome Benathan, who manages the equivalent of about $860 million of fixed income at Swisscanto Asset Management in Zurich. To borrow in dollars would mean Roche paying 3.5 percentage points or more over midswaps, equivalent to about 4 percentage points more than Treasuries, he said.

Credit Ratings

Benathan began selling his holdings of Roche bonds in November because he expected the company’s credit ratings to come under “pressure,” and that it would issue new bonds, he said in a telephone interview today.

“The company’s a good name in a sector people still view as defensive so if they pay a sensible amount they’ll get it away,” he said.

Pfizer’s takeover of Wyeth had no influence on the decision to pursue a hostile bid, Humer said on the call. The Swiss drugmaker said in July the weakness of the dollar against the franc played a role in the timing of its offer. The U.S. currency has since strengthened about 13 percent against the franc.

Greenhill & Co. is acting as financial adviser to Roche and Davis Polk & Wardwell is legal counsel. Genentech’s special committee said in July that it hired Goldman Sachs Group Inc. and Latham & Watkins LLP as its legal counsel. Wilson Sonsini Goodrich & Rosati is representing Genentech’s management.

Three-Member Committee

Genentech formed a three-member board committee in July to review Roche’s initial bid. The special committee includes independent directors Sanders, who is chairman of Vertex Pharmaceuticals Inc. and Icagen Inc.; Herbert W. Boyer, a co- founder of Genentech; and Debra L. Reed, president and chief executive officer of San Diego Gas & Electric Co. and a Genentech board member since August 2005, Genentech said.

Genentech’s board said it wouldn’t recommend the deal unless it received favorable backing from the committee.

“It’s probably a tactical move on Roche’s part to get the committee to come back to them on what they consider to be more reasonable terms,” said Morton Pierce, chairman of the mergers and acquisitions group at Dewey & LeBoeuf LLP in New York.

Typical Defenses

Because of Roche’s majority stake, Genentech probably can’t pursue the typical defenses against a hostile bid, such as finding another buyer at a higher price, or adopting a so-called poison pill to force a negotiated transaction, Pierce said.

Genentech may have to hope that Roche will be forced back to the negotiating table, either to avoid the risk that a hostile bid would alienate Genentech employees, or that a lawsuit challenging the price would succeed, Pierce said.

The cost of hedging against losses on Roche’s debt jumped 65 basis points to a record 250, according to CMA Datavision prices for credit-default swaps.

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. An increase signals a deterioration in the perception of credit quality.

Drugmakers are seeking a way out of the deepening global recession that threatens prices and increases the pressure to speed more products to the market at a time when some of the industry’s biggest medicines are losing patent protection.

Income Boost

Full ownership would help Roche, which has held a stake in the U.S. company for almost 20 years, boost income from Genentech’s products and ensures access to its labs after an existing accord expires in 2015. Genentech products, including the Rituxan and the Avastin cancer medicines, account for about 40 percent of Roche’s revenue.

Avastin is approved to treat colon, lung and breast tumors and is being tested in more than 400 clinical trials involving 40,000 patients worldwide. Avastin may become the best-selling medicine in the world within six years, according to London-based consultant EvaluatePharma. The drug generated 3.7 billion francs in sales for Roche during the first nine months of 2008.

The shift to a hostile bid signals a protracted tussle that may run beyond the second-quarter announcement of new Avastin data, according to Carri Duncan, an analyst at Sal Oppenheim.

“This is going to drag on for months as many shareholders will wait for the final outcome data for Avastin” against colorectal cancer, she said in a telephone interview.

To contact the reporters on this story: Dermot Doherty in Geneva at ddoherty9@bloomberg.net; Angela Zimm in Boston at azimm@bloomberg.net

Last Updated: January 30, 2009 17:30 EST