Strategy & Competition November 25, 2009, 5:00PM EST

Can Roche Leave Genentech Alone?

Now that it has acquired the biotech superstar, success will depend on keeping some distance

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Incoming Genentech CEO Clark at South San Francisco headquarters Andy Freeberg

By Arlene Weintraub

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Pascal Soriot, a senior executive with Roche (RHHBY), says he was wracked with anxiety while boarding a plane from Basel, Switzerland, to San Francisco last March. The Swiss pharmaceutical giant had just acquired its longtime drug development partner, Genentech, and Soriot was on his way to meet the company's CEO, Arthur D. Levinson, credited with building one of the world's most effective pipeline for cancer drugs. The Genentech products that Roche sold overseas, including Herceptin for breast cancer and Avastin for colon cancer, accounted for 40% of Roche's $42.3 billion in revenue last year. Soriot was awed—and worried. "The first question I asked Art was, 'How do we keep the Genentech spirit alive forever?' " he recalls.

Several of the world's top pharmaceutical companies are spending the final weeks of 2009 digesting some of the biggest acquisitions in their history. Pfizer (PFE) just closed its $68 billion merger with Wyeth, and Merck (MRK) sewed up its $41 billion purchase of Schering-Plough. Roche's deal was different: It paid $47 billion to acquire the 44% of Genentech it didn't already own, essentially bringing its most productive unit in-house when the deal closed on Mar. 26.

What all these companies have in common is they must prove to investors and patients that they've learned from past megadeals, which typically generated short-term cost savings but few exciting drugs. "If you look at mergers in the pharmaceutical industry, I don't think we have a long history of successes," concedes Ian T. Clark, a Genentech veteran who will become the unit's CEO starting in January and is serving on the integration team. "Roche knew that the cradle of innovation was the research site at Genentech and that it needed to be handled carefully and distinctly." Investors expect Roche to get it right: The company's American depositary receipts have climbed 12% this year, to 41.

For nearly 20 years, Roche executives said that Genentech succeeded because it operated at arm's length, maintaining its own shareholders and management team and suffering little meddling from its big stakeholder in Basel. Genentech's sales doubled, to $13 billion, in the five years ended in 2008. And the stock advanced more than 300% in the 10 years leading up to Roche's July 2008 bid for the company. Roche CEO Severin Schwan says the centerpiece of his integration strategy is that he will not impose the Roche culture or way of doing business on the South San Francisco biotech unit. "Most companies think the first thing you have to do after an acquisition is streamline everything," Schwan says. "I have to tell you, this kills innovation."

To keep the ideas flowing from Genentech's labs, Roche left in place almost everything in the research operation, including its senior leadership team. Genentech's scientists will continue to focus on cancer, immunology, and brain diseases. "We have a budget and a completely independent [drug] portfolio that we manage, irrespective of the rest of Roche," says Richard H. Scheller, a nine-year Genentech veteran who continues to serve as head of research. To ensure scientists wouldn't flee from what might now seem like a big, bureaucratic company, Scheller and his colleagues preserved Genentech's university-like culture. The postdoctoral program for fledgling scientists is intact, as are the Wednesday review meetings where researchers present their work to management. And Genentech still throws after-work parties on Fridays, a tradition that stretches back to the company's founding in 1976.