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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

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: derekb.lowe@gmail.com Twitter: Dereklowe

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August 18, 2008

Genentech and Roche, Act Two

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Posted by Derek

So Genentech has told Roche to get lost – well, to a first approximation, anyway. I think what they’ve actually told them is to go open their Swiss wallets wider. What it comes down to now is how highly Genentech values itself versus how much Roche is willing to pay – the balance between those two will determine how things go. And then there are the large shareholders in Genentech to consider – if their idea of a good price clashes with the figure that Genentech’s board has in mind, then things could get more complicated. (And if the US dollar continues to climb against the Euro, that could complicated everyone's calculations, too - at the very least, it's speeding things up).

Personally, I think that Genentech is better off being left alone. But that’s no surprise – I think that in a lot of the M&A deals I’ve seen in the industry, particularly between large companies, I’ve thought that the participants should have stayed home and spent their money elsewhere. A personality defect, to be sure, and clear evidence that I’d never make it at an investment bank.

The reasons I think that Genentech is better off unmolested are probably the same ones that its own employees have. The company seems to have a good research culture going – they’ve been productive and willing to take risks, which is all you can ask of a drug discovery organization. Roche, for its part, isn’t exactly an Evil Empire, but they’re not Genentech. And that, I think, is what gets me about most of these deals. I think that there is no one best way to do drug discovery, since the problems we face are so varied. And that means that the more different approaches there are being tried, the better. We need a healthy ecology in this industry, and the closer we get to a monoculture, the worse off I think we’ll be. I think that Genentech has something to offer all its own, and that it’s in danger of being lost if Roche buys (and Roche-ifies) the place.

Some people out there are worried more than others. Roche doesn’t have as much experience in biologics, so they’ll want to retain the protein groups. (The question is whether they'll want to work for Roche!) But Genentech has also made a push into small molecules in recent years, and medicinal chemistry might be an area that Roche feels it has enough of already – they’re not buying Genentech for small molecules, after all. We’ll see over the next month if they’re buying Genentech at all. . .

Comments (10) + TrackBacks (0) | Category: Business and Markets


COMMENTS

1. John Wisp on August 18, 2008 3:58 PM writes...

Dr. Lowe,

Thank you for posting your thoughts. There have been too many "analysts" posting their two cents on what will happen with the Genentech-Roche deal, and what it will mean for the Genentech folks. Most of them have little to no experience or background in science and research culture, and it shows in their commentaries. Thank you again for your thoughtful comments.

Cheers,
John

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2. Cowtipper on August 18, 2008 6:41 PM writes...

By Swiss wallet, do you really mean European man-purse?

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3. Anonymous BMS Researcher on August 18, 2008 8:12 PM writes...

At least it's not Pfizer trying to buy up Genentech -- getting taken over by them isn't a whole lot better than getting taken over by Vito Corleone or Tony Soprano, except the terminations are nonlethal!

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4. RTW on August 19, 2008 8:43 AM writes...

3) Anon BMS Researcher - Right on!

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5. Saul Sterman on August 20, 2008 9:55 AM writes...

Roche has to buy DNA now as it loses its exclusive marketing rights in 2015. According to BusinessWeek a full 30% of Roche's revenue comes from DNA products. As time goes on the acquisition price is likely to go up.

See: DNA - Genentech Inc: Roche Buyout Valued at $113 to $118
http://www.crossprofit.com/article.asp?id=171
by Steven Davidoff (New York Times) / CrossProfit

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6. Anonymous on August 20, 2008 12:35 PM writes...

As someone who has worked for both companies one of the most striking differences I found is that Roche (like other big pharma) chooses its projects based on market opportunity. Genentech (like other biotechs) chooses its projects from a more scientific/benefit standpoint – not to say it doesn’t consider how much money it will make, but it’s not the sole driver. I’ve seen many programs and disease areas closed down at Roche because of ‘lack of market need’ and I think would be a difficult transition for a Genentech employee to make.

The other big difference is in decision making. Apart from its manufacturing sites Genentech is based at one location and focused on two therapy areas – cancer and inflammation. As part of Roche they will be competing for funds against others working on other diverse disease areas, from different cultures and in different time zones. This would undoubtedly be a challenge to Genentech staff who would lose a lot of their decision making control.

I would actually disagree with you re Roche’s experience in biologics. They have a good knowledge of the business side of things through the many Genentech partnerships they are part of and they have been moving more and more in to biologics research in the last 5 years. If you look at their pipeline it features a lot of biologics (though admittedly many licensed from Genentech). Their Penzberg site is very heavily focused on Biologics research and they also have biologics programs derived from Chugai in addition to Genentech. As big pharma goes I think they are probably ahead of the curve on biologics.

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7. Anonymous on August 20, 2008 4:45 PM writes...

I recently retired from Genentech and, while the Roche buyout is sad to see, Genentech has been experiencing significant growing pains from the "big pharma" Sr. Management currently in place. The Tissue Growth and Respiratory groups are struggling daily with an "it is all about numbers not the patients" mindset from the current Sr. Management. In truth, the company may not actually have huge adjustments to make. Much of the freedom and creativity has already been replaced by budget cuts, FDA and Pharma restrictions and corporate downsizing.
The future of those brands are most likely in jeopardy while Roche will focus on the Oncology business.

My guess is those now running these departments will actually welcome the journey back to familiar "big pharma" waters and all the wealth that will likely come to those on top. What troubles me most is the thought that the normal, hardworking, employee (the ones without the hundreds of thousands of stock options) will suffer most from layoffs and unequal distribution of accelerated vesting retention plans that I've heard are currently in the works between the two companies.

How sad. "Genentech" used to be a great concept.

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8. Kevin on August 26, 2008 5:08 PM writes...

I just read the most amazing story on the net. The US government has uncovered another Illegal drug testing program that is like the famous “Tuskegee Studies!” The people who uncovered this reported to congress in May of this year, but it has still been covered up! Why hasn’t this been on the news and why are medical whistleblowers being punished for telling the truth?

Here is the link for the amazing story!!
http://www.dailykos.com/story/2008/5/28/183236/071/356/524418

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9. Anonymous on December 5, 2008 3:55 PM writes...

I think Roche needs to buy Genentech b/c they have a licensing arrangement that's due to expire and cost Roche millions if they can't renew under the same terms (which Genentech won't).

Also, my understanding has been that Roche really is the international group while Genentech has a strong US presence and management style. As such, I believe Roche plans to close it's US attempts and let Genentech be the US presence for Roche.

If these assumptions are true, then buying out Genentech is a better option for Roche than losing out on the sweet licensing arrangement for lucrative products and trying to compete in the US where they have a pathetic presence. Seems the deal to buy Genentech makes sense to Roche in light of these assumptions.

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10. Anonymous on December 5, 2008 4:09 PM writes...

Here's a press release by Roche with higher ups stating their intentions:

http://www.roche.com/med-cor-2008-07-21b

According to Roche, its pharma comercial oertions in the US will move from Roche's Nutley, NJ location to Genentech's S. San Francisco location while the combined company's US commercial operations will reflect the Genentech name.

At least one assumption is confirmed.

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