Tuesday, December 22, 2009

DOTY 2009 Big Pharma Nominee: Roche/Genentech

It's time for the IN VIVO Blog's Second Annual Deal of the Year! competition. This year we're presenting awards in three categories--that's 300% more fake prizes than last year!--to highlight the most interesting and creative deal making solutions of the year. The categories are: Big Pharma Deal of the Year, M&A/Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply the nominations (roughly half a dozen in each category throughout December) and you, the voting public, will decide the winners (by voting early and often, commencing once we've announced all the nominees). Strap yourselves in, it's The Race for the Roger™.

Last but most definitely not least, the biopharma voting public would be crazy not to consider the Roche/Genentech tie-up as the Big Pharma Deal of the Year. After all, it's Roche's surprise hostile offer for Genenetech in the summer of 2008 that sparked the mega-merger madness that eventually resulted in Pfizer and Merck's respective take-outs of Wyeth and Schering-Plough. In case you quibble about its eligibility: the deal may have been hatched in 2008, but the wheeling and dealing lasted well into 2009.

True, the deal value isn't as eye-popping as Pfieth. And it doesn't have as much cleverly worded legalese as the Merck/Schering agreement. But the Roche/Genentech deal seems most likely--of the big three mergers at least--to actually work as advertised. And we'd note that up till now the track record on mega-mergers isn't even up for debate. It's been abysmal.

Already heavily diversified into specialty biotech products thanks to its long-time partial ownership of Genentech, Roche doesn't need a transformative deal to move the company to the next level. Nor does it need to buy time a la Merck as it bolsters its pipeline, thanks to ex-US revenues on Genentech products. But it also can't afford to leave 100% of the US oncology market on the table anymore either and the opportunity to take Genentech private allows the company to build itself into a power-house of personalized medicine.

Thus, with its landmark agreement with Genentech already nearing a sunset, Roche made a preemptive strike, betting it would gain more by owning 100% of sales juggernauts such as Avastin and the ability to slash duplicative infrastructure than it stood to lose if the top talent at Genentech hung up their lab coats and gave up their iPhones. (And there’s no doubt some have, including David Schenkhein, Susan Desmond-Hellman, and Art Levinson.)

Is there hope that by acquiring Genentech the Big Biotech's drug hunting prowess will spill over to the Rochies? Undoubtedly. But it's a nice-to-have NOT a need-to-have part of the deal. Despite the clever and very public lexical contortions Roche CEO Severin Schwan gave in discussing this deal--especially in the early and very hostile days of negotiating--this tie-up isn't about innovation. It's about efficiency. Even as FIGs (friends of an independent Genentech) get out their voodoo dolls in protest, we'll state again that the Genentech of 2009 was a far cry from the discovery-oriented scrappy biotech with high growth prospects of yesteryear.

And the acquisition's final price tag--$95-a-share, while certainly a great deal more than the intitial $89-a-share bid price, is more than matched by the likely earnings potential of Genentech's already marketed products. Furthermore, analysts estimate the biotech's mid- to late-stage pipeline adequately supplies Roche with a pipeline reservoir through 2016.

Moreover, it's not as if Schwan and co. haven't worked overtime to preserve the semblance of Genentech's autonomy. The DNA ticker symbol may be gone, but the early R&D group still has a biz dev unit, despite the seeming overlaps that come from having two such organizations under the Roche roof. Thanks to a restructuring of the executive committee that has Genentech's head of R&D Richard Scheller reporting directly to Schwan, Genentech also has extraordinary visibility within the new organization.

So vote for Roche/Genentech for Big Pharma deal of the year. It's a transaction that's got it all: drama (the hostile-then-ultimately-friendly (sort of) offer); high stakes months-long brinkmanship (a lower than expected offer followed by an even lower offer price); and ultimately, a chance of being successful.

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