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Derek Lowe The 2002 Model

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Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: Twitter: Dereklowe

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July 25, 2008

Should Genentech Be a Part of Roche?

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Posted by Derek

Now for some belated Roche/Genentech comments: the first thing that I found surprising about this was that there was some surprise involved. Even though a move to buy the rest of Genentech has always been a possibility, the actual timing of the announcement seems to have been unexpected out in South San Francisco. But it probably had to be that way.

What alternative was there? Roche wouldn’t have made some announcement along the lines of “You know, we’re thinking about buying the rest of Genentech sometime pretty soon”, because that would have made the deal even more expensive as everyone piled into the stock. Regulation FD would mean that they really couldn’t give a heads-up to Genentech’s management without telling the world – after all, these are two separate companies, so it’s not an internal matter. So this had to be done just like any company making a bid for any other – with the difference being that Roche already had a head start on a majority of Genentech.

The second thing that occurred to me, though, was “why, and why now?” The first half of that question is answered, as are most “I wonder how come. . .” queries are, with the word “money”. Genentech has been coining the stuff, and Roche would like to have all that revenue instead of just part of it. “Why now” comes down to money, too. The two companies were due to renegotiate their revenue sharing in 2015, and Roche apparently decided (among other factors) that the US dollar was about as cheap as it was going to get. You could turn the question around and ask why Roche took the whole don't-own-it-all approach in the first place. (They did own it all for a while, but put Genentech back out into the market in 1999).

I always assumed that they were worried about messing up whatever it was that had Genentech doing so well in the first place. If true, that showed an admirable level of self-knowledge on Roche’s part. Too many other companies seem to assume that the outfits that they buy will be just fine under the new letterhead – even better, probably, now that they’ve been bought by such a fine bunch of people! But it certainly doesn’t always work out that way. The challenge is to keep the acquired company, and its culture, from dissolving into the larger one like a sugar cube. (The alternative is to just buy companies for their physical or IP assets, not giving a hoot for who might be working there, and we’ve seen plenty of that, too).

But Genentech is a mighty big sugar cube, and it’s a long way from the rest of Roche’s operations. I’d guess that the folks in Basel are planning (hoping) that Genentech will go on just like it has, just with a few accounting adjustments (like all the money ending up on Roche’s books). There are probably a lot of reassuring messages going out to the Genentech people about how gosh, we already had a majority interest in you, so this is just sort of a formality, and it’ll probably save lots of money besides, you know, so just keep right on doing what you’re doing. . .

We’ll see. The Swiss are not known for their delicate managerial touch. One solution that's been talked about would be (once Roche has Avastin et al. safely booked) for them to spin out a new version of Genentech as a publicly traded company again - 1999 all over again. And we'll see if Genentech even goes for the offer - there's a lot of doubt about that, at least at the price the Roche is offering. They've apparently opted out of the provisions in the 1999 agreement about how Roche could buy them, so all sorts of things are now possible. . .

Comments (27) + TrackBacks (0) | Category: Business and Markets


1. burt on July 25, 2008 8:00 AM writes...

Having one fewer Pharmaceutical company in the world can NOT be a good thing for anybody except the deal makers on the Board.

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2. Don B. on July 25, 2008 8:57 AM writes...

I do not think the comment about "Swiss management" is fair. Compare it to the "management" actions of a company headquartered in NYC that used to have research operations in a lot of localities including Ann Arbor, Michigan.

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3. anon on July 25, 2008 9:12 AM writes...

"I do not think the comment about "Swiss management" is fair. Compare it to the "management" actions of a company headquartered in NYC that used to have research operations in a lot of localities including Ann Arbor, Michigan."

I wonder how many buses it would take to do a Med Chem picnic at that company these days. I guess Groton might still need a few?

On the subject of Roche/DNA-- how big is Roche Palo Alto, and how well-manged are they?

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4. friend of anon on July 25, 2008 10:06 AM writes...

Roche Palo Alto is about a thousand people. Roche has already let them know that they will be closing the site. I think they plan to move a few folks to Genentech and move some others to NJ, but the bulk of the Palo Alto employees will likely be "released".

As for the management, the few chemists I know working there weren't very satisfied.

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5. haywarmi on July 25, 2008 11:29 AM writes...

My understanding is (from this front page article in the Star Ledger on Tuesday this will be a pretty permanent move since the US HQ will move to SF and production will leave Nutley.

In my experience Roche is not a "Typical" big pharma company in that they have been involved in some buisiness ventures not pursued by their big pharma rivals, like buying Boerhinger out a decade ago and the whole diagnostics thing. I would say this is their way of staying nimble and are probably hoping that Genentech's way of doing research will rub off on them rather than just bolstering their pipeline.

Any company that would fund a place like the Roche institute of molecular biology must have some appreication of staying in front of technological developments, even if they closed us down during our prime!

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6. 2mrklr on July 25, 2008 11:41 AM writes...

Presumably (and I think it is a pretty fair presumption) Roche is after the protein therapeutic expertise of Genentech, and not the fledgling small molecule effort. It will be interesting to see if the small molecule effort will be reinforced in South San Francisco (including transfer of folks from Roche Palo Alto) or will be "consolidated" within the Basel and Nutley sites. This may be one of those areas of "synergy" where consolidation can lead to cost-cutting (sounds like the Palo Alto site is already the first victim). In the press release I noticed that Nutley will "host" the oncology therapeutic area, but I don't know how to interpret that. One interpretation is that small molecule cancer therapeutics will be centered there. Anyone have any insight?

It will also be interesting to see how the retention of key employees will play out. South San francisco isn't the hardest palce to find a new opportunity, and presumably a lot of people enjoyed working at genentech not only for the scientific atmosphere but for the stock options in Genentech. Options in Roche don't seem to have the same upside potential.

On the bright side, I can imagine a lot of new start-ups being formed with talent exiting Genentech. Hopefully some will have use for medicinal chemists as well.

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7. Jose on July 25, 2008 1:46 PM writes...

Ah, being a med chemist, rather like being a French aristocrat in ~1793 and waiting for your place in line....

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8. fred on July 25, 2008 2:02 PM writes...

"Ah, being a med chemist, rather like being a French aristocrat in ~1793 and waiting for your place in line..."

Apt analogy, given Lavoisier's demise.

A big question is life is always whether a condition is a long term trend, or part of the "business cycle". Chemistry certainly appears doomed right now, but there are more good "druggable targets" than good drugs, still, by a large margin. The trouble with the industry rests much more with management than with the scientists. Unfortunately, management makes the decisions. There is a way out of this mess. If the VC system gets back on its feet, you can get to a situation of more start-ups. Start-ups may not be pound for pound more innovative than Big Pharma, but they operate with WAY less management overhang.

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9. CMC guy on July 25, 2008 3:10 PM writes...

Jose- I too like your analogy

fred although likewise feel troubles more due to poor management than science we all share for lack of execution. Industry needs quality, diverse and knowledgeable leadership.

Most start-ups don't know beans about real development and thus screw up getting to that stage. Not sure VCs effective answer either as once they seemed to care (at least tacitly) about science/technology as a mean profit however now attitude is to get the biggest pile return in the quickest manner which is counter to what is required for most drug efforts.

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10. 2mrklr on July 25, 2008 3:49 PM writes...

CMC Guy - if you like Jose's analogy, then I don't think you can say there's a lack of "execution" :-)

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11. srp on July 25, 2008 8:08 PM writes...

With respect to the persistent anti-management tone of the comments on this blog, I am reminded of an old chestnut from the rag trade. A common business structure was to have two partners--an Inside Man who was in charge of producing garments and an Outside Man who was in charge of sales and marketing.

Outside Man: Schmuck! How come you only make what we can't sell? Are you an idiot?
Inside Man: Putz! How come you only sell what we don't have? Any fool can sell the stuff that everyone wants to buy!

Translate to drug projects:

Scientist: Why do only let us work on stupid projects that won't work? Are you an idiot?
Manager: Why can't you make the projects that we invest in work? Any fool can get the easy projects to succeed!

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12. CMC guy on July 25, 2008 8:30 PM writes...

2mrklr I accept your reasoning so who should we line up first? ;)

srp your story is telling to a point as there is frequently a divide in communications and expectations between management and scientists however these days seems the science part of pharma (and those in it) are expendable tools to be used then discarded. The major drivers are marketing and profits where the fruits of R&D are only incidental to those. Also IMO there are no easy projects just different levels of hard.

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13. bootsy on July 26, 2008 9:20 AM writes...

Back to the original post and away from the management spray...

Roche certainly seems to be on a biologics buying spree, assuming you count RNAi strategies as biologics. Alnylam, Genentech, Mirus, am I missing any others in the last several months? Granted, the first and last of those didn't gather much attention from the small-insoluble-heterocycle crowd, but it has made an impression among the RNAi cultists.

Is this a new strategy to add to or replace some of the small molecule work?

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14. Sara on July 26, 2008 1:28 PM writes...

srp said-

"with respect to the persistent anti-management tone of the comments on this blog, "

Not really, it reflects current day realities. If this were 1996 I doubt you'd hear a peep. The reality is that business schools churn out a sociopathic type of personality. By this I mean they care nothing about their society or fellow man and believe all benefits should accrue to them alone. Just look at the airline executives, auto executives or even congress for that matter. Lavish compensation, no matter what the circumstances, while slash and burn the engine which created the companies or societies underlying technology.

They'd outsource an entire division for a 1% improvement in gross margins. We have bred a sick society and are suffering the consequences.

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15. srp on July 27, 2008 1:57 AM writes...

There has been no substantial change in what business schools teach since 1996, certainly with respect to the kind of issues Sara raises. As far as I know, the zillions of non-MBA executives managing companies have no obvious differences in how they make ethical decisions from their credentialed counterparts--if you have evidence to the contrary, I'd like to see it. Otherwise these generalizations are the equivalent of health claims made without any scientific support.

Outsourcing a division to increase gross margin by 1% could be a mistake--it might lower net margins because of increased coordination overheads, or lead to long-term erosion in critical firm know-how--but absent such accidental damage to the value of the firm, what could possibly be wrong with outsourcing to raise profitability? Are the more efficient and effective organizations to whom the work is outsourced somehow untermenshcen? Aren't the shareholders who depend on the company's profit stream entitled to not have their money wasted?

I suggest Sara rent a copy of Other People's Money and pay particular attention to the shareholders' meeting scene at the end.

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16. Bob on July 27, 2008 12:26 PM writes...

"but absent such accidental damage to the value of the firm, what could possibly be wrong with outsourcing to raise profitability?"

I think that kind of attitude is what the others are talking about. I suggest that you, and any others that espouse such views take your money, and move to China. Your company should not be afforded legal protections and you obviously have no need for civil liberties or the rule of law. FDA should put you at the bottom of the pile.

I really want the pro-outsourcing types to go abroad. I think it best you become citizens of China and breathe the fresh clean air. Maye you'll get an inkling of what you're destroying.


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17. starchild on July 27, 2008 6:32 PM writes...

It seems like every thread these days devolves into some sort of discussion of management. I guess it's Scott Adams' world and we're all just living in it.

Derek, as I understand it this is a somewhat moderated forum where you have some control. I do not suggest silencing this discussion, but is there some way to create a sticky thread, or permanent sidebar discussion for all of this? Then all management/MBA/corporate evil discussion could be shunted there and the threads could actually discuss something related to the day's topic.

Just a suggestion. Flame away.

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18. fred on July 28, 2008 8:37 AM writes...

""with respect to the persistent anti-management tone of the comments on this blog, ""

The Roche/DNA question DOES revolve around one's attitude towards Roche's potential management of DNA. If they were benign dictators, who would care?

Drug management's fatal mistake is that they think you can turn R&D on and off. For all their highly mathematical Gantt chart training they fail to fully grasp the timelines involved in bringing a drug from screen to product. Drug companies NEED to be almost like academic institutions, with career arcs that look almost like tenure for scientists. Government's mistake is that they let drug companies advertise direct to consumers. That wastes a lot of money. The FDA's mistake is that they are slow-poke political cronies with a CYA attitude. VC's are greedy ba****ds. Scientists-- well many scientists in Big Pharma spent too much time around the water cooler or tweaking their Powerpoint talks excessively. Probably not so much anymore. Tweaking CV's instead.

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19. The Pharmacoepidemiologist on July 28, 2008 12:21 PM writes...

My understanding is that Nutley is being shut down except for regional marketing activities. That means SSF is going to grow pretty big. And 101 is going to become impossible to traverse into the city from the peninsula. I have my doubts how many will actually move from Nutley to Cali. The problem Roche faces is more dire: how to keep the Genentechers around. Last week, the number of resumes I received and those friends received from folks at Genentech was pretty impressive. Unlike the 1990s, when there weren't so many start-ups on the peninsula, there are now quite a few, and they're ready to absorb whatever Genentech throws at them (less training costs and stuff like that, too). If Roche plans to spin Genentech out again, it may have a much harder time staffing the company, and not just at the executive levels. Therefore, I think Roche is playing for keeps this time.

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20. Hap on July 28, 2008 12:40 PM writes...

#17: If you want to avoid criticism of managment decisions and mindset, it's best not to write to people who happen to be the "cannon fodder" management seems to be discarding. Kind of like looking for GM management support on a blog populated by UAW GM (soon-to-be-ex-GM) workers, and with only slightly less dire financial outcomes to support your arguments.

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21. Jose on July 28, 2008 1:38 PM writes...

Re: starchild-
I wholly agree, but also find it systematic of the realities of the industry in 2008. The sole drivers of corporations are the MBA-set; the science is essentially irrelevant in most (all?) decision making processes. And yet, no-one appears to see any correlation with anemic development pipelines.

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22. CMC guy on July 28, 2008 3:13 PM writes...

#17 starchild I for one enjoy the occasional management discussions as encouragement that am not the only one who has been part of Dilbert's world. It may be a bit of venting that's not totally accurate reflection but in pharma reality what's done by R&D is ultimately determined by management types. My read is that most execs no longer have grounding in science therefore a wider gap than once existed and void in leadership.

#15 srp mentions movie Other Peoples Money although there I think the stockholders knew and cared about what the company produced and the loyalty of the workers not just their own profit. Perhaps a better film analogy today is Wall Street where Greed is the operative mode, both by those running companies and the shareholders, who are mostly institutions/money managers who focus only on quarterly results not in investments for future. I do not believe exclusive to pharma as is more wide spread but the prevalent short-term mindset does not work well in R&D.

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23. srp on July 28, 2008 6:47 PM writes...

The point about Other People's Money is exactly the opposite of what CMC is saying. Larry the Liquidator wins at the shareholder's meeting because he convinces those assembled that the company would be worth more broken up with its assets sold off than as a going concern.

His argument about the poor workers of New England Wire & Cable who will be unemployed is that those workers didn't care at all about the investors during the previous twenty years when the company was being run into the ground and shareholder wealth was being destroyed. (The movie version softens the ending by inventing a last-minute Japanese white knight who buys out Larry and puts the company into a new venture--in the original play, written by a former Wall Street guy, the company really is broken up and everyone thrown out of work.)

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24. CMC guy on July 28, 2008 10:44 PM writes...

srp sorry maybe I saw the Disney version or am thinking of a different movie. However I still think Wall Street is a better analogy here. Most stock investors today don't care about the personal and professional investments of the people in industry. A lot of pharma people, especially scientists, believe if investors willing to accept the high risks with taking a long-term view there should be a reward shared in successes that will come.

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25. processchemist on July 29, 2008 2:03 AM writes...

srp, maybe I'm wrong, but I still think that R&D is the fuel that keeps the pharma business running. And maybe I'm not the only one to think so (see the market reactions about latest news from Amgen).
To sell most of the fuel to make cash is what the majority of managements are doing now, hoping that they will find a pump before the reservoir will get dry. Is it so sensible, also from an accountant's point of view?

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26. srp on July 29, 2008 5:23 AM writes...

You guys are quite right that R&D expenditures can add value to a firm and, in the case of proprietary pharmaceuticals, may be the main thing that creates firm value. Furthermore, there's tons of evidence that the stock market values R&D investment most of the time--just look at all those biotech stocks that have had no revenues or earnings but lofty valuations nonetheless. Investors try to be forward-looking, although it's a difficult task.

The problem in evaluating an R&D cutback as an outsider is that you have to distinguish between the total value of R&D and the marginal value, just as you would for marketing or any other activity. Is that last dollar really earning an expected value greater than a dollar? In addition, you have to distinguish the specific quality and prospects of the particular units being cut from the general notion that "R&D" is a good thing.

I concur that people who understand research have a huge leg up in making decisions of this kind, but I don't agree that only researchers can possess this understanding or that an "inside" view of research projects is always better than a more statistical or quantitative "outside" view. If a CFO looks at a group's hit rate versus other groups doing similar things and compares their costs and determines that this group is below the cost/success frontier, she and her colleagues have to decide whether this is a temporary fluke, a remediable problem, or a pathology of that group which is unlikely to be fixed. Obviously, this is no easy task.

The big management bias toward mergers and spinoffs and such comes from the CEO's ability to execute such things without having to engage in the gritty details of changing or directing the organization. There is no long process of explaining things, putting programs in place, changing habits, selling the new policies, etc. All you need is the phone numbers of your investment banker and your corporate counsel. It's like calling in an air strike versus fighting house-to-house--more expedient and lower risk for the decision maker, but also more likely to be misdirected and/or cause collateral damage.

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27. anon on July 29, 2008 7:48 AM writes...

"Last week, the number of resumes I received and those friends received from folks at Genentech was pretty impressive."

The Kiss of Death: DNA was featured as a great place to be recently in the corporate rag, C&E News, also known as "Pravda".

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