Roche looks to maximize Genentech potential

Jul 23, 2008 (Datamonitor via COMTEX) -- DNA | Quote | Chart | News | PowerRating -- Roche has initiated efforts to acquire all outstanding shares in Genentech for approximately $43.7 billion, having purchased 55.9% of the company in 1990. While Genentech has historically operated independently from its parent company, it remains to be seen whether the merger will damage an operating structure which has allowed the biotech firm to drive Roche's growth performance in recent years.

Roche announced on July 21 that it will acquire all outstanding shares in its long-term partner, US biotech company Genentech, at a cost of $43.7 billion ($89 per share). Roche acquired a majority shareholding in the monoclonal antibody (mAb) specialist in 1990, and currently owns a 55.9% share of the company. The biotech company has played an integral role in Roche's performance in recent years. Over 2001-07, Roche's prescription drug sales increased at a compound annual growth rate (CAGR) of 11.9%. Genentech-derived products Avastin (colorectal, breast and non-small cell lung cancer), Herceptin (Her-2 positive breast cancer) and Rituxan (non-Hodgkin's lymphoma) have acted as key sales growth drivers. Indeed, combined sales of these drugs (at around $12 billion) accounted for 39% of Roche's total pharmaceutical sales in 2007.

Roche's decision to implement an innovative operating structure, within which Genentech has historically operated independently from its parent company, has been widely credited with enhancing innovation and driving the successful launches of Rituxan (1997), Herceptin (1998) and Avastin (2004). Critics of this latest move will suggest, therefore, that by acquiring Genentech in its entirety, Roche will potentially damage this operating structure.

However, since the announcement Roche has insisted that Genentech's unique research culture will be maintained. The Swiss company has suggested that innovation remains its central philosophy and that limited integration of Genentech is necessary to advance its relationship with Roche. Given the significant revenue growth that the current operating structure has provided Roche in recent years, the pharmaceutical giant cannot be accused of resting on its laurels. A key strategic directive which appears to underpin Roche's decision to acquire the remaining shares in Genentech is a so-called cross fertilization of R&D opportunities. Full acquisition will allow Genentech to share intellectual property with Roche's other R&D units, as well as companies working in collaboration with the Swiss player. Similarly, these elements of Roche's R&D base will benefit from increased input from Genentech.

One such area of R&D investment where Genentech's involvement would be seen as a major enhancement is ribonucleic acid interference (RNAi), viewed by many as the next 'technology jump' due to drive growth in the prescription drug market, in a similar fashion to recent mAb-driven growth. Having announced a major alliance with the RNAi specialist Alnylam in 2007, Roche also declared on July 22 that it would acquire Mirus Bio Science, a company which has developed an RNAi delivery platform.

To date, Roche has retained a 'hub and spoke' relationship with Genentech, which has been seen to enhance innovation at the biotech company. Following Roche's announcement, the validity of Genentech's continued independence will be questioned by some. However, it would appear that Roche is readying its internal R&D structure for more aggressive movement into new technology areas, with RNAi a leading candidate.

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