In March this year, Roche and Genentech agreed to a friendly acquisition of Genentech, in a deal valued at $46.8 billion. Obvious attractions for the deal included access to Genentech’s lead cancer drugs and a highly regarded and innovative biotech pipeline.
In terms of background, the two organizations had quite different heritages: Roche Holding AG, the Swiss pharma giant started in 1896 by its eponymous founder, with some 80,000 employees and revenues of $44 billion (2008 figures); and Genentech, a San Francisco biotech leader and haven for scientists, founded in 1976 by a VC and a biochemist, and with 11,000 employees and revenues of $13 billion (2008). So, as soon as the deal was announced, the question on everyone’s lips was would Roche be able to maintain Genentech’s culture? Genentech was deemed as both inventive and entrepreneurial – and the challenge for Roche was even termed by some as a fight to keep Genentech’s genius.
Now, Roche had clearly done their homework, having acquired a controlling stake in Genentech originally in 1990 for $2.1 billion. 18 years is a good stretch of time to “live together” before deciding to get married. Though while co-habiting, Roche left full and independent control to the leadership team within Genentech. This was sheer brilliance – leaving the entrepreneurial scientists to get on with what they knew best. Though now, post acquisition, things are changing. Roche was always going to struggle to keep hold of the top talent at Genentech. Their stock options often ran into millions or tens of millions of dollars – such talented people could well go off and do something new. But we now see a fuller extent of such changes by considering moves at the top at Roche.
The two appointments that particularly stand out to us are:
Ian Clark (49), currently Head Global Product Strategy Pharma, will succeed Pascal Soriot as CEO Genentech. He will report to Pascal Soriot and will be based in South San Francisco.
Meanwhile, Levinson clearly did not stay on as CEO of Genentech. If Roche wanted to maintain the culture that had led to the development of Avastin, Raptiva, Tarceva and Lucentis, surely keeping the existing leadership team in place was key? There may have of course been other issues (perhaps Levinson was ready for a different challenge?) and indeed Levinson was appointed as Chairman of Genentech with talk of appointment to the Roche board at a later date. So, his influence would still be present, but not at the same “coal-face” level that one would need to maintain the pre-merger culture.
And what of other key staff? Susan Desmond-Hellman, as the highly vaunted head of development at Genentech and key in the advancement of several of the lead cancer drugs, moved to the Genentech Scientific Resource Board, shortly after the merger. Again, Roche would still have the benefit of her experience, but loose her highly valued and hands-on focused input of the pre-merger Genentech.
Or as aptly put by Stephen Burrill in an interview with Bloomberg:
This leads us to perhaps the most interesting contradiction of all in Roche’s actions post-merger. The changes mentioned above seem to reflect incorporating a entrepreneurial growth phase company into a more stable steady pharma business (e.g. fully exploiting Genentech’s product line by appointing commercial managers to run the units). And if Roche was essentially building on its rich pharma heritage this would make sense. However, Roche is working very hard loose it’s pharma title and re-brand itself as a biotech company. This is seen most clearly in dropping its PhRMA membership (the pharma trade body, Pharmaceutical Research and Manufacturers Association) and joining instead biotech’s key industry group, BIO.
Why does this change in industry groups matter? Well, in and of itself, probably not much. The reported rationale is that BIO more closely resembles the interests of the newly merged company. Fair enough. But on a wider level, what Roche is trying to do is send out a very clear signal to the market that it is now a biotech company and not a pharma. And as such, it should be valued more in line with its biotech peers (i.e. richly, based on future potential) rather than its pharma brethren (currently at low valuations, due in no small part to threats from patent expirations). How could this affect valuation. Well, pre-merger, Roche’s valuation was based on an earnings multiple (or price earnings ratio, PE) of around 16x. Meanwhile, Genentech carried a much richer PE of nearly 30x (and histortically has even been over 40x).
So, if the newly biotech-anointed Roche could garner even a small uplift in earnings multiple, what a great way that would be to increase valuation – no new products, just a new label, and a new earnings multiple. Will the market award this? Who knows, only time will tell. And to truly justify it, Roche would need to develop new hit biotech drugs arising out of the post-merger group, rather than from the pipeline of pre-merger Genentech. But what is clear is that Roche is not the same biotech company as Genentech was, and the magic of Genentech’s culture is already being diluted.
This article was written by Raman Minhas. He is CEO of ATPBio, a consultancy firm providing strategic insight and transaction support to the life sciences industry.