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

Can Roche Leave Genentech Alone?

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Roche's Soriot worried about fixing what wasn't broken at Genentech Andy Freeberg

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Roche is following a completely different research path from those of its rivals, which have been reshuffling research and development in a desperate attempt to jump-start innovation and make research more efficient. Companies such as Pfizer and GlaxoSmithKline (GSK) have set up small R&D units defined by what diseases they're pursuing. At Pfizer, the changes have been disruptive: The company said in November it would close six research sites. Roche, on the other hand, is keeping its existing research centers in Basel; Nutley, N.J.; and South San Francisco as independently managed sites. And it's encouraging scientists in all those places to pursue a variety of therapeutic targets—even if their efforts overlap with other Roche sites. Roche scientists from around the world will share results, meeting periodically to decide which molecules have the best chance of becoming drugs. "You need different approaches and cultures and ways of pursuing ideas," Schwan says.

The merger will also allow Roche and Genentech to work together on an elusive goal they share: so-called personalized medicine. Roche leads in this area because it is a pioneer in "diagnostics," or technologies doctors use to determine which patients will respond best to which drugs. Genentech pioneered this approach with Herceptin, a breast cancer drug that comes with a genetic test to pinpoint appropriate patients. When they were separate, Genentech and Roche rarely tried to co-develop diagnostics, because it took too long to work out patent rights and other legal logistics. "Now there's no intellectual-property discussion, there's no negotiation—we're the same!" Scheller says. "You wouldn't believe how much easier it is." Genentech has already set up partnerships with Ventana Medical Systems, a U.S. diagnostics company Roche acquired in 2008.

A DIFFERENT COURSE

While Pfizer and Merck have been laying off scientists, Roche has let go fewer than 1,000 employees, almost all of whom worked in service functions. Analysts predict the company will continue spending more than 20% of sales on R&D, outpacing the 15% or so that most large drug companies spend. Schwan predicts the merger will eliminate $800 million in costs next year, nowhere near the $3 billion to $4 billion in savings Merck and Pfizer expect from their deals. But Roche could turn in double-digit earnings growth because it is so heavily concentrated in high-margin products such as biotech drugs. "It has a defensible base business that makes it different," says Jeffrey Holford, an analyst for Jefferies Group (JEF) in London. He expects Roche to chart compounded annual earnings growth of 13% through 2013, helped by tax efficiencies gained from owning Genentech outright.

Schwan is so determined to leverage Genentech's reputation that he rebranded all the drugs Roche sells in the U.S. as Genentech products. Even nonbiotech names such as Valium and Tamiflu now carry the name Genentech. Embracing an acquiree's identity is a rare move in the drug industry, but it sends a powerful message to employees, customers, and investors. "If you're buying an organization because you feel it's an extremely productive innovation engine with a precious culture, you keep the name," says Peter Tollman, senior partner at Boston Consulting Group's health-care practice.

Genentech's former CEO Levinson isn't ready to call Roche's strategy a success quite yet, but he's encouraged that none of Genentech's top scientists have left. "I was apprehensive because our cultures are not perfectly concordant," says Levinson, who is now chairman of the unit and will join Roche's board next year. In the end, he adds, he found that "Roche has a deep appreciation for protecting the science."

Editor's Note: In the original version of this story, the name of Roche senior executive Pascal Soriot was misspelled.

Weintraub is a senior writer for BusinessWeek's Science & Technology department.