This morning's announcement that Roche wants to pay $43.7 billion for the 44.1% of Genentech (NASDAQ: DNA) it doesn't already own raises the question: "Why is Genentech worth so much to Roche?" The answer: it outperforms its competitors when it comes to innovation.
Roche is offering a 9% premium to Genentech's market value at Friday's close. Reuters reports that Roche wants Genentech's $2.6 billion (2008 estimated sales) Avastin, a colorectal cancer treatment, and Herceptin, a $1.3 billion (estimated 2008 sales) breast cancer drug, as well as Genentech's drug development portfolio.
Roche also expects to save $750 million to $850 million in pretax costs, but the long-term benefit would be for Genentech's innovative culture to take over the relatively dry drug development environment of Roche. If that doesn't happen, the deal could be unprofitable for both companies.
How so? According to Building Biotechnology, Genentech's stock was up 1,190% in the decade ending June 2005. It got there by using the Four Sources of Advantage I first wrote about in my book The Technology Leaders. What are these four?
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Entrepreneurial Leadership -- hiring and motivating people who can build new businesses. Genentech does this by encouraging its researchers to spend 25% of their time on projects of their choosing (vs. an industry average of 10%). In 1988, Genentech's Napoleone Ferrara focused on anti-angiogenesis, which cuts the blood supply to cancer tumors, resulting in Avastin;
- Open Technology -- licensing in or acquiring technologies, rather than developing them all in-house.
Genentech has in-licensed over 100 technologies such as Rituxan, a $2.6 billion (estimated 2008 sales) cancer treatment; - Boundaryless Product Development -- developing products in cross-functional teams rather than scientists working in isolation. Genentech does this by including both technical personnel, relevant business functions, and key outside stakeholders like physicians. Genentech 's Secreted Protein Discovery Initiative, used genomics to facilitate boundaryless product development, generating five product leads; and
- Disciplined Resource Allocation -- Invest in products that can take a big share of markets with high profit potential, kill products that don't. CEO, Arthur Levinson, focused Genentech in 1995 on cancer treatment. He kills development projects before they hit clinical trials -- which cost between $30 million and $100 million -- if the scientific arguments for pursuing the drug can't withstand his intense scrutiny.
My biggest concern about the Roche deal is that Genentech's culture would be destroyed once it became wholly-owned by the Swiss pharmaceutical giant. It seems unlikely to me that Levinson could take over the management of Roche, and if he does not, Genentech would be likely to smother Genentech's more innovative culture.
Investors like this announcement -- Genentech stock is up 17.8% in pre-market.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
