Wednesday, June 20, 2007

Why No More Roche-Genentechs?

Another note from the Oxford Bioscience CEO retreat: why can’t more acquisitions follow the Roche-Genentech model?

The question is being raised with increasing frequency. Understandably so: it’s frustrating to biotech CEOs and scientists to watch their creations disappear into what they see as the bureaucratic abyss of Big Pharma. Sure, these disappearances delight VCs, but they don’t do a lot for the employees who worked as hard as they did because they felt they were building something uniquely valuable.

Sometimes those employees are right. If you think about Genentech-Roche, the deal actually saved both parties. At the time unable to invest in research and delivering sub-par commercial results, Genentech would certainly not exist as an independent company today without the Roche reprieve. Neither would Roche, which gets from Genentech products nearly 50% of its sales and 60% of its operating profit growth. Its ownership position in Genentech shares now accounts for 30% of its own market cap.

Indeed, there is virtually no question that the deal was the single most successful transaction in the modern history of pharmaceuticals. Granted by the deal nearly six years of freedom from stock-market concerns, Genentech created a product-development engine which has delivered virtually unprecedented productivity. And Roche reaped the benefits.

So why have there been no repeat successes? Early on, American Home (now Wyeth) bought a majority of Genetics Institute, and American Cyanamid traded some cash and products for a stake with Immunex. Both were attempted variations of the Roche/Genentech deal; so, in some ways, was Novo's spin-off of Zymogenetics, Novartis' acquisition-cum-alliance with Idenix, and GlaxoSmithKline's alliance-cum-put/call transaction with Theravance.

The jury is still out on the last three; only the Wyeth/GI deal can really be said to have worked at all (that’s the source of Wyeth’s biologics business—key to its growth). But it took Wyeth way too long to capitalize on what it had and when it did, it wasn’t with GI as an independent company. Cyanamid disappeared into Wyeth before it could take advantage of Immunex – and Immunex disappeared into Amgen.

When the subject of acquisitions was raised at the Oxford meeting (full disclosure: the Blog was on the panel), it was pretty clear that there are plenty of biotechs which, rather than getting taken out completely, would welcome the chance to continue semi-independent existence. John Dee, former CEO of Hypnion, sold to Lilly a few months ago, said that he would have preferred it; he apparently even discussed the idea in deal negotiations. But it went nowhere.

There are probably plenty of good reasons Roche-Genentech is tough to duplicate. VCs would certainly rather have a simple exit; so would public shareholders. More importantly, while there probably aren’t many Genentechs around, there certainly aren’t many Roches: controlled by the Hoffmann and Oeri-Hoffmann families, the virtually private Swiss company could make big long-term bets without listening to the carping of investors and analysts (“You’re consolidating those losses for how long? And you don’t even get worldwide rights to its programs?”).

Still, Tuan Ha-Ngoc, the CEO of Aveo, noted two interesting candidates for the Roche role: Astellas and Takeda. Both have global ambitions; both have relatively tolerant shareholder bases. Both apparently want to buy into the biotech industry.

So who knows—maybe the next Roche will be Japanese.

No comments: