Roche-Genentech: Desperation Is On the Rise

Roche's $44 billion bid for the 44 percent of Genentech it doesn't already own marks the end of an era in a number of ways. Genentech, the world's oldest biotech, is a remarkable symbol of the industry's success at turning innovative science into bestselling drugs. For it to vanish inside Roche much the way Chiron disappeared into Novartis a few years ago would be more than a little sad, even given the ways Genentech itself has started behaving much like the Big Pharmas it once challenged.

The deal also has a funny smell to it. Roche CEO Severin Schwan claims the merger would save $800 million a year in administrative costs from merging commercial and manufacturing operations, but that doesn't come close to justifying the cost. Obviously, Roche would also get 100 percent of the revenues from Genentech's hit cancer drugs Avastin, Rituxan and Herceptin, instead of the (significant) fraction it receives by virtue of marketing the drugs outside the U.S.

But the greatest risk here for Roche is obviously that of killing the goose that lays the golden eggs. Genentech has thrived while operating at arm's length from its majority owner Roche, but it's hard to imagine that it will continue to do so once the California biotech is "integrated" with Roche's New Jersey-based U.S. operation. Sure, Roche intends to transfer its U.S. commercial operation and its virology research group to Genentech's South San Francisco campus, but you have to wonder just how well those teams are going to mesh.

Besides, Roche doesn't mince words in describing its vision for Genentech, which it says "will operate as an independent research and early development center within Roche." The company will keep the Genentech name for branding purposes, but apparently not much else. And apparently Roche will take over late-stage development of Genentech drugs, which could well spell the end of Genentech's unusually rigorous late-stage clinical-trial program.

Generally speaking, it's hard to get too excited about any drug-industry merger when the acquiring company says things like, "[T]he transaction will also unlock synergies by leveraging the scale of the combined operations in the U.S. and improving operational efficiency." That's a pretty far cry from the go-getter startup culture that has long characterized Genentech. I suspect that Roche -- like other Big Pharmas who've taken the plunge into biotech -- has vastly underestimated both the difficulty of managing biotech operations and the risk that Genentech's scientists will simply walk away at their first opportunity.

So, why is Roche acting now? Chris Morrison over at the In Vivo Blog speculates that Genentech is likely to get a lot more expensive, particularly should the FDA approve Avastin for "adjuvant" use in colon cancer (that is, as a post-surgery drug intended to keep tumors from recurring). So for Roche, buying out its subsidiary is a now-or-never proposition.

In actuality, it's more likely yet another big merger driven by fear and desperation -- although not your typical fear and desperation related to looming generic competition. Recall that Roche has had Novartis looking over its shoulder for the past few years -- Daniel Vasella's outfit currently holds a whopping 33 percent stake in Roche -- and the Genentech play begins to look a lot more like Roche's effort to get big fast in order to fend off its Swiss rival.

The game's not over yet, of course. Roche will probably have to raise its bid to convince Genentech's independent directors that the deal is in the interests of shareholders, and that carries a different set of risks. It's just too bad that the industry's leading biotech -- whatever its other faults -- is going to get caught in the middle.