[Ip-health] Wall Street Journal: Roche Bid Blindsided Genentech

[Thiru Balasubramaniam]

Roche Bid Blindsided Genentech
Top Executives to Meet Tuesday
To Discuss Swiss Drug Giant's
$89-a-Share Offer for Rest of Biotech Firm
By JEANNE WHALEN, DANA CIMILLUCA and MARILYN CHASE
July 22, 2008; Page B1

Roche Holding AG's $44 billion bid to gain full ownership of Genentech
Inc. took the staunchly independent biotechnology company by surprise
and risks upsetting the highly successful -- but delicate --
relationship the partners have developed over two decades.
[chart]

Genentech's top management maintained public silence Monday after
Roche, which already controls roughly 56% of the San Francisco
company, unveiled its offer for the remaining shares.

But Genentech employees expressed concern about the proposed
takeover's impact on Genentech's culture and identity.

"It was so sudden," said Napoleone Ferrara, a Genentech fellow and 20-
year veteran who led the teams that invented the blockbuster cancer
drug Avastin and the related eye treatment Lucentis. "People are
asking questions," he said, describing the mood at Genentech as
watchful.

Franz Humer, Roche's chairman, didn't inform Genentech Chief Executive
Arthur Levinson or other Genentech directors of the Swiss
pharmaceutical giant's bid until Sunday evening European time, when he
phoned them from his home in Zurich.

In an interview in New York Monday, Mr. Humer said Dr. Levinson
expressed surprise upon learning of the bid and voiced concerns about
preserving Genentech's talent. The two men agreed to meet Tuesday in
San Francisco to discuss the offer.

Dr. Levinson couldn't be reached for comment.

Roche said Monday that it was offering $89 a share for the 44% of
Genentech it doesn't own, but it quickly came under pressure to raise
its bid. Analysts and industry watchers said the premium Roche offered
of 9% above Genentech's Friday closing price was low. In 4 p.m.
composite trading on the New York Stock Exchange, Genentech shares
jumped $12.06, or 15%, to $93.88.
Swiss pharmaceutical company Roche offers to buy the roughly 44% of
U.S. biotech firm Genentech it doesn't already own for nearly $44
billion. WSJ's Jacob Goldstein says this is no ordinary offer and
tells us what we can expect. (July 21)

Roche's move to acquire Genentech could embolden other big
pharmaceutical companies to consider takeovers of successful biotech
pioneers such as Amgen Inc., Gilead Sciences Inc. and Biogen Idec Inc.
as the productivity of traditional chemistry-based drug research
continues to decline. Amgen shares have weakened because of safety
worries surrounding its big-selling anemia drugs, making it more
vulnerable to a takeover.

For 18 years, Roche pulled off a difficult feat: controlling and
profiting from Genentech, the world's most innovative and successful
biotech company, without alienating its most valuable employees or
stifling its entrepreneurial culture.

But with its offer to buy all of Genentech and merge many of the
company's operations with its own, Roche risks clashes that could lead
to defections of Genentech executives and scientists. Roche's
willingness to take this risk underscores the pharmaceutical
industry's intense need for new products and more robust profits.

Big pharmaceutical companies, such as Roche, have had trouble
inventing drugs on their own in recent years and are relying more and
more on smaller biotech companies and outside labs to supply them with
new medicines.

In interviews Monday, Roche executives laid out their reasons for the
bid. For one, the company, which is based in Basel, wants to capture
all of Genentech's profits and achieve cost savings of as much as $850
million annually by combining the two companies' clinical research
teams and sales, manufacturing and administrative departments in the
U.S.

More important, it wants to foster greater cooperation between
Genentech's and its own scientists, because both sides have know-how
and technology that can be of use to the other, said Bill Burns, head
of Roche's pharmaceutical unit. "Instead of having to be with a
Chinese wall, ...we can bring all those creative juices within the
house," he said.

Roche's chief executive, Severin Schwan, said repeatedly in a
conference call with analysts Monday that Roche wants Genentech's drug
researchers to keep working as an independent group.

"We will do everything to preserve the unique and science-driven
culture of Genentech, something which made Genentech so successful and
something we want to build on," he said in a separate interview.

The danger, though, is that the big Swiss company will instead prove
stifling to Genentech's scientists and other employees. When big drug
makers have taken over biotech companies in the past, key scientists
have often defected to start-ups or other opportunities. A year after
AstraZeneca PLC paid $15.6 billion for biotech company MedImmune, for
example, two of MedImmune's top managers left the company.

Michael Ross, a Ph.D. biochemist from the California Institute of
Technology and Harvard who was an early Genentech employee, left six
months after Roche acquired its initial stake in 1990.

Dr. Ross, now a managing partner at a San Francisco Bay area venture-
capital fund, said Roche would be foolish to tamper with "a unique
culture, a Valley culture that has aspects of Google and the old
Hewlett-Packard." But, if Roche doesn't touch Genentech governance or
culture, the deal "could be smart," Dr. Ross said.

Founded in 1976 after a meeting between venture capitalist Robert
Swanson and biochemist Herbert Boyer at a bar near the University of
California San Francisco campus, Genentech has yielded a family of
blockbuster products delivering $11.7 billion in annual sales and an
enviable pipeline with another 100 projects in development. Among its
most successful drugs are Rituxan for cancer and arthritis and
Avastin, Herceptin and Tarceva for various forms of cancer.

When Roche first bought control of Genentech in 1990, it allowed the
company to keep working as an independent unit that decided which
research to pursue and how to spend its money. Both companies have
always maintained that this arms-length relationship is crucial to
Genentech's success.

Mr. Schwan said Roche would offer Genentech employees "attractive and
competitive" packages to try to keep them. But he said that
"protecting their culture and providing an environment where they feel
respected" would be more important in retaining them.

Asked whether Dr. Levinson might leave the company, Mr. Humer, the
Roche chairman, said: "It is far too early to talk about these things.
I would sincerely hope that Art would stay." But he later added that
Genentech "is not a one-man show."

A key factor influencing Roche's decision to act now in pursuing
Genentech: under an agreement the two companies signed in 1999, Roche
has the right to license and sell Genentech drugs outside of the U.S.
That right expires in 2015, and Roche would have to renegotiate it. On
a conference call with analysts, Mr. Schwan said Roche would rather
avoid that "complicated process."

Genentech's three independent directors on its seven-member board will
review Roche's offer and decide whether to recommend it to
shareholders, Roche said. Roche needs more than 50% of non-Roche
shareholders to approve the deal.

Roche left the door open for a price increase, saying in a statement:
"The precise terms of the transaction, as well as the conditions to
its consummation, will be determined through negotiations with the
independent directors."

Should Roche fail to win majority approval, it has an alternate route
to secure its prey: According to Genentech's most recent proxy
statement, Roche could in that case pay a price determined by two
outside investment banks to secure full ownership.

In similar deals so far this year, where a majority shareholder has
bought the rest of a company's stock, the average premium offered has
been 21%, according to Dealogic. That is well above the 9% premium
that Roche is offering for Genentech shares.

--Jacob Goldstein and Matthew Karnitschnig contributed to this article.

Write to Marilyn Chase at marilyn.chase@wsj.com1

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Thiru Balasubramaniam
Geneva Representative
Knowledge Ecology International (KEI)
thiru@keionline.org


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