Genentech (DNA, $86.34, up $1.94) will be in the headlines a lot this week and there may be an opportunity for a couple of trades. News surfaced late Friday that Switzerland based Roche is preparing a fresh offer for Genentech which it already owns a 56% stake in. The stock was up another $2.66 in after-hours trading to $89.
We have been here before with these two companies and we did rather well playing the news back in the summer. Genentech will report earnings this week and will be presenting at the annual J.P. Morgan health care conference which runs today through Thursday. About 300 companies will be present but Genentech could steal the show.
Here are a few excerpts from the blog back then.
From July 27, 2008:
“Genentech (DNA, $96.00, up $1.35) continued higher throughout the week as it awaits word from a “special committee” that is evaluating the $44 billion bid to buy the company. Swiss pharmaceutical giant Roche is on the other end of that bid and is also waiting for an answer to its $89 a share offer.”
From August 13, 2008:
“Genentech (DNA, $98.53, up $0.68) will not win an academy award for its efforts in “evaluating” take-over offers but give the company credit for at least trying. The “special committee” that has been evaluating the $44 billion bid from Roche said this morning that the deal “substantially undervalues” the company and has been rejected.
This was no surprise as Genentech went on to say it “would consider 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.” The language Genentech is using is sounding like a friendly deal could happen but it’s clear the company is holding out for a $100+ offer.
The August 95 calls (DWNHS, $3.60, up $0.85) continue to do well from an entry price of $1.50 and I mentioned you could ride them through Friday. However, we had set a stop of $3.00 so we were taken out yesterday. The August options expire Friday so make sure if you are still in the trade to close it before the trading session ends.
The September 100 calls (DWNIT, $2.95, up $0.45) were profiled at $0.65 and we have set a stop of $2.00-$2.25. The options closed at $2.50 yesterday so let’s make the $2.25 stop a firm one. I want to allow some room for volatility but I really don’t want the stop to kick in on this one. Genentech continues to set new highs and we want to ride the wave as long as we can.” —
This was six months ago and not much has changed as far as Roche acquiring Genentech except its stock price. The shares went on a slow fade and we were eventually stopped out of the trades but not before some healthy returns.
Roche’s new bid, which is expected to be about $95 a share is not much of a premium and would be another slap in the face to Genentech’s board. Roche is playing dirty and there is talk of a hostile takeover. Roche is giddy about Genentech’s top three drugs: Avastin, Rituxan, and Herceptin and $120 a share is more like a fair offer. I doubt we see it but those three drugs took in sales of over $1.7 billion last quarter as overall revenue came in at $3.4 billion.
Genentech’s pipeline is a force to be reckoned with and Roche knows this. Genentech is expected to report earnings of $0.96 and year-end earnings should come in at $3.40 to $3.45 a share. Despite a solid quarter, Genentech actually missed estimates last time out. No worries. I say let’s ride the Genentech wave higher and here are a few options that will be active.
The January 90 calls (DWNAR, $0.95, up $0.40) traded 10,000 contracts on Friday and expire this Friday. This will be the riskiest of the call options I list so stay away from them. With so many major announcements expected, the February and March call options will provide the same luxury with a little less risk.
The February 95 calls (DWNBS, $0.95, down $0.20) look good up to $1.25 while the March 95 calls (DWNCS, $1.70, down $0.10) look good up to $2.00.
Rick Rouse
Rick@OptionsMentoring.com
