Roche-Genentech: A Drug Powerhouse

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Schwann is adamant that a full-scale takeover will support, not stifle, innovation. A complete union will make it easier to share technologies such as RNAi, a natural mechanism that the body uses to silence certain genes, and assets such as libraries of potential biological targets for new drugs. "We have an enormous respect for the unique science-driven culture at Genentech, and it is important that we keep this culture and build upon it," Schwann says. "The moment you start blending corporate cultures, you run the risk of mediocrity," he adds.

Big Nod to Genentech

Schwann intends to keep research independent. The Genentech Founders Research Center, a massive state-of-the-art complex devoted to biotech research, will operate autonomously. And in what Schwann says is a "big signal" to Genentech, Roche will move its existing commercial U.S. headquarters from Nutley, N.J., to Genentech's base in San Francisco. The U.S. business of both companies will trade under the Genentech name, and sales and research staff will probably increase.

Yet some analysts reckon that Roche hopes by buying Genentech, some of its magic will rub off. Andrew Weiss, a pharmaceutical analyst at Bank Vontobel in Zurich, describes the deal as a reverse takeover. Sure, Roche's market value of $152 billion dwarfs Genentech's $95 billion. And Roche's 2008 revenues, which Weiss estimates will hit $44 billion, are more than triple Genentech's. But it's Genentech's super-productive research and development machine that is responsible for much of Roche's success. Now some analysts believe it will be Genentech, not Roche, calling the shots when it comes to R&D. "It's about turning Roche into a megasized Genentech," says Weiss.

Roche is likely to have to increase its offer to succeed. With a slew of clinical trial results expected in the next 18 months, analysts expect Genentech's share price could soar on the back of positive data. Genentech's Avastin is in clinical testing as a secondary treatment for colon and breast cancer, and Rituxan is being investigated as a possible lupus treatment. Some analysts believe positive outcomes could bring Genentech an additional $5 billion in peak sales for Avastin alone. The Holy Grail, of course, is pairing Genentech's therapeutics with diagnostics that tell doctors which patients can benefit. This is the breakthrough Roche achieved with Herceptin.

Roche says it believes it has made a full and fair offer, at a 9% premium to Genentech's closing share price on July 18. But many believe it underestimates the pipeline potential of the U.S. biotech. "We believe Roche is attempting to capture Genentech's significant future growth on the cheap," Oppenheimer (OPY) analyst Bret Holley wrote in an investment note. With $10 billion in free cash and a further $5 billion in securities, Roche has the financial strength to up its offer if needed. "If all these trials fail, then the acquisition looks pretty pricey. But if they succeed, it will be a steal," Vontobel's Weiss says.

Capell is a senior writer in BusinessWeek's London bureau .

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