Roche-Genentech: A Drug Powerhouse

Given the biotech's promising pipeline, Roche's CEO may need to raise his $43.7 billion offer to buy out Genentech's minority investors

by Kerry Capell

Just months into his new role as chief executive of Roche Holding (RHHBY), Severin Schwann is moving quickly to cement one of the most successful biotech pharmaceutical partnerships in history. Eighteen years after taking a majority stake in U.S. biotech Genentech (DNA), the Swiss drugmaker announced plans to buy out minority shareholders for $43.7 billion. "It's a good time to take the partnership to a new level. We didn't wake up one day and say: 'Now is a good time to take Genentech private,'" Schwann told BusinessWeek in a telephone interview. "This transaction is about strengthening innovation; it is not about cost-cutting."

If consummated, the deal will solidify what is seen within the industry as a model of effective collaboration between Big Pharma and its smaller biotech brethren. It will merge Roche, the leader in the emerging field of molecular diagnostics, with Genentech, a company on the cutting edge of gene-based therapies. It also will be the biggest deal to date for the Basel drugmaker. And the hefty price tag is an indication that Roche recognizes the potential of pairing innovative therapeutics with gene-based diagnostics to unlocking the potential of personalized medicine.

The deal also underscores the pressure pharmaceutical companies are under to fill their pipelines. When Roche first bought into Genentech in 1990, it was a small San Francisco biotech with a handful of promising cancer treatments but little money to develop them. Today, thanks in large part to Roche's deep pockets and clinical development expertise, Genentech has a stable of blockbuster cancer treatments including Avastin for breast, lung, and colon cancer, breast cancer drug Herceptin, and Rituxan for the treatment of non-Hodgkin lymphoma and rheumatoid arthritis. A world leader in oncology, Genentech, with estimated 2008 revenues of $13.5 billion, is second only to Amgen (AMGN) among global biotechs.

Bold Gambit

In recent years, Roche has leaned heavily on Genentech for its success. Genentech drugs accounted for nearly one third of Roche's 2007 revenues of $44 billion. Together, the new company will boost its position in the U.S., the world's most competitive pharmaceutical market, where it will become the seventh-largest drugmaker, with U.S. revenues of more than $15 billion.

Launching an unsolicited bid for the remaining stake in Genentech is a bold gambit. While the acquisition will give Roche full control over one of the industry's most productive biotech companies, it also risks jeopardizing the independent and entrepreneurial culture that has made Genentech so successful. Roche's strategy of acquiring majority stakes in promising biotech and diagnostic companies while allowing them to run independently is viewed by analysts as the best way to foster cooperation between biotech and Big Pharma.