Genentech (DNA, $93.88, up $12.06) rallied 15% on news that Swiss pharmaceutical giant Roche announced a $44 billion bid to buy the remaining 45% of the company that it does not own. The offer is for $89.00 a share but the market is clearly pricing in a higher bid. Here’s another developing story of an American company quite possibly getting acquired because of the weaker dollar. It would cost $1.59 to buy one euro with today’s exchange rate so it’s easy to see why Roche is making a play for Genentech.

We’ve been down this road before and it’s likely the offer will get raised. Genentech just reported outstanding earnings and the sales potential for its cancer treatment Avastin is enormous. For the quarter, the company reported a profit of $782 million, or $0.73 a share on revenue of $3.2 billion. Avastin made up $650 million of those sales which topped Wall Street’s expectations.

Avastin sales are burning up the track because of the increased use to treat breast cancer. The drug is also beng used to treat various stages of colon and lung cancer as well. If the company can expand on the approval for additional therapies then the stock will look super cheap at these levels and Roche knows it.

The two sides are having an “informal” meeting today and the early word is Roche will have to offer a higher price between $90 and $95 per share. I say Genentech is worth a least $125 but a deal will likely come in around $100. At least I would hope so. Genentech is sitting at all-time highs on the announcement but the stock was clearly headed for greener pastures without Roche’s full support or buyout offer.

The call option chains don’t list many calls over a 100 strike price but there was plenty of action in the pits. The August 95 calls (DWNHS, $1.50, up $1.25) soared 500% while the September 100 calls (DWNIT, $0.65, up $0.45) jumped 225%. It may be too late to get into any trades because the unknown will be what price Roche is really willing to pay. A $100 price would be nice and the August 95 could have a little juice left in them if that were the case. However, the options expire in three weeks and the trade does not give us good odds.

Rick Rouse
Rick@OptionsMentoring.com