Saturday 14 March 2009

Roche and Genentech: The Knot Is Nearly Tied

Following my report on Thursday evening regarding the acquisition by Merck of Schering-Plough, let us consider briefly the announcement made on Thursday that Roche has succeeded in convincing the board of Genentech to purchase the remaining 44% of the iconic U.S. biotech company that Roche did not previously own. The amount of the offer is $46.8 billion dollars. The tender offer will be in effect until March 25th and is based on $95 per share (in case any of our readers happens to own Genentech shares). The offer is 9.8% above the lowest offer that Roche made for Genentech in a process that began last summer. Roche has held a stake in Genetech for nearly 20 years.

First, some facts: Roche, located in Switzerland, is the world's largest manufacturer of cancer drugs, while Genentech is ... Genentech, a pioneer in the biotech world, and located a continent and culture away, in South San Francisco. The key to the consummation of the offer by Roche and acceptance by Genentech seems to be the Avastin cancer drug. As reported by,
"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. The treatment may become the best-selling medicine in the world within six years, London-based consultant EvaluatePharma said in August."
As an indication of its potential, consider that Avastin garnered $4.52 billion in sales for Roche in 2008. By consummating the deal, Roche will reportedly be able to pare costs (what merger does not claim this?), enhance its income from cancer-related drugs at a time when income for the broader drug business slows, and guarantee that Roche will have access to Genetech's labs after 2015, when a current accord between the two companies comes to an end.

It is this last point that troubles me a bit--let's hope for Roche's sake that the Gententech labs in 2015 will be blessed with same developmental elan that has seems to have marked it throughout its tenure as an independent company. Without having any direct contact with either a Roche or Genetech facility, I can still say from experience with other companies in these respective locations that it the corporate cultures of a Swiss Big Pharma titan and a legendary biotech Silicon company are likely to be quite different from each other.

It will be a challenging test for the two companies to mesh their cultures in a way by which the arrangement is a win-win situation down the line, after Avastin passes from the scene and/or it (other Gententech cancer products )encounters stiffer competition from other cancer drugs. The real test is not today, or even five years from now, but 2o years hence (the time during which Roche has had in interest in Genentech), to measure the ultimate success of the venture.

Genentech - ever upward and onward?

And that is the ultimate rub. The short-term motivation for this spate of 2009 acquisitions in Big Pharma seems to be a confluence of lots of cash ($100 billion according to Bloomberg), and the need to replace $84 billion in sales from products whose patent protection is set to expire (also according to Bloomberg). The ultimate test will be new products, which means continued successful R&D. Whether these acquisitions is the best way to accomplish that goal (which is in truth a never-ending moving target) awaits the long-term verdict of the markets.

Roche and Genentech: one view of the long road?

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