Biotech Values

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DNA merger

http://www.nytimes.com/2009/03/13/business/worldbusiness/13drugs.html?pagewanted=2&hp

March 13, 2009
Roche Agrees to Buy Genentech for $46.8 Billion
By DAVID JOLLY and ANDREW POLLACK

Genentech, after eight months of resistance, agreed Thursday to be acquired by Roche for $95 a share, ending the independence of what is widely considered the world’s first and most successful biotechnology company.

For Genentech, the deal comes a few days after Roche, a Swiss pharmaceutical giant, raised its offer to $93 a share to buy the 44 percent of the company that it does not already own. At the new, higher price of $95, the companies said the deal would be valued at $46.8 billion.

Now attention will turn to whether Roche can retain the top managers and scientists who have made Genentech so successful in developing drugs like the cancer medicines Avastin and Herceptin, which had combined global sales of nearly $9 billion last year. If not, Roche could end up ruining the operation that has been providing it with its biggest-selling products.

That the deal was finally accepted on friendly terms could increase the chances that Genentech’s people will stay. Moreover, the job market is not good right now.

Franz B. Humer, Roche’s chairman, expressed hope for retaining Genentech’s culture and people. “I think we now have clarity and we can together march forward,” he said in an interview.

A system of retention bonuses put in place last summer after Roche’s takeover effort started remains in place until June. That gives Roche and Genentech time to consider new plans for retaining employees it wants to keep, even as it plans some layoffs.

But Laurence Lasky, a Silicon Valley venture capitalist who was a scientist at Genentech for 20 years, said he doubted that Genentech’s culture would be able to survive for long.

“They’re Swiss, and Genentech is a bunch of California entrepreneurial cowboys,” Mr. Lasky said.

“I think it’s quite sad,” he added. “This is one of the great jewels of American corporate technology.”

The deal represents the third major pharmaceutical combination this year.

On Monday, Merck, an American drug giant, said it would pay $41 billion to acquire Schering-Plough. In January, Pfizer, the world’s biggest drug maker, bid $68 billion for Wyeth.

In a smaller deal announced Thursday, Gilead Sciences said it would buy CV Therapeutics of Palo Alto, Calif., for $20 a share or $1.4 billion, gaining the rights to drugs for cardiovascular diseases. Gilead topped a hostile offer of $16 a share, or $1 billion, made by Astellas Pharma, a Japanese pharmaceutical company.

The price Roche has agreed to pay for Genentech is significantly higher than the $89 a share initially offered in July — and well above the $86.50 a share Roche subsequently bid in a hostile tender offer it started last month. But the deal price is less than the $112 a share that Genentech’s board committee had asked.

After Roche raised its offer to $93 a share last Friday, though, a special committee of Genentech directors entered negotiations, deciding that $112 a share was unrealistic, given the recent sharp declines in the stock market, according to a filing Genentech made to the Securities and Exchange Commission on Thursday. So the directors are now recommending that Genentech shareholders tender their shares at $95.

“We believe this is a fair offer for Genentech shareholders, and the committee is pleased to come to a successful conclusion of this process,” Dr. Charles A. Sanders, who headed the committee, said in a statement.

Sven Borho, a portfolio manager at OrbiMed Advisors, which owns more than three million Genentech shares, said that $95 a share was “fair for the large majority of shareholders.”

But Mr. Borho said that while he appreciated the return his company would make on its Genentech investment, he was saddened that the company would no longer exist independently.

“It’s a shame that the biotechnology industry loses its guiding light,” he said. “It’s a tremendous research organization, run by the best management team.”

Roche, based in Basel, Switzerland, has insisted that it will allow Genentech’s drug discovery and early-stage clinical trial activities to be run independently. Moreover, because Roche’s existing drugs will be marketed in the United States under the Genentech name, the brand will endure.

Many of Roche’s American workers will be asked to move from the company’s United States headquarters in Nutley, N.J., to South San Francisco, Calif., where Genentech is based.

Other workers in Nutley and South San Francisco are likely to lose their jobs, although executives would not say how large the layoffs would be. But layoffs are not expected in the sales forces.

Mr. Lasky, the venture capitalist, who is a friend of Genentech’s chief executive, Arthur D. Levinson, said he suspected Mr. Levinson and some other top managers would leave, although he said he did not have direct information.

“These people will be branch managers for Roche,” Mr. Lasky said Monday, when the deal seemed imminent. “After being what they were before, do they really want to do that?”

Mr. Humer of Roche said, “I sincerely hope that Art will stay.”

A Genentech spokeswoman said Thursday that the company’s executives had no comments beyond what was in the Genentech press release. In that release, Mr. Levinson said, “We look forward to working with our partners at Roche to ensure a smooth transition once the transaction is complete and to continue our mission of serving patients.”

Genentech was founded in 1976 by Robert A. Swanson, a young venture capitalist, and Herbert W. Boyer, a professor at the University of California, San Francisco. Dr. Boyer had helped develop the technique of gene splicing, and Genentech was the first company to capitalize on it, producing the first drug, human insulin, made in genetically engineered bacteria.

A key to the company’s success, Mr. Levinson has said, is to recruit top scientists who would typically work at universities. Genentech lets scientists explore their own interests during part of their working day and allows them to publish their work in scientific journals. Last year Genentech was awarded more patents in molecular biology than any other company, and even more than the United States government and the vast and vaunted University of California system.

Still, Genentech’s early history was blemished. On New Year’s Eve in 1978 two of its scientists visited a University of California, San Francisco, and walked off with vital samples — a matter the company paid $2 million the university to settle. Later, after Genentech developed a human growth hormone that the university said could not have been done without the stolen samples, the company agreed to pay an additional $200 million. In a separate scandal, the company agreed in 1999 to pay the government $50 million for marketing growth hormone for unapproved uses. More recently, Genentech has been criticized for the high prices of its cancer drugs, prices the company says are needed to nurture innovation.

Roche has owned a majority stake in Genentech since 1990, and the relationship has been considered a model for collaboration between a pharmaceutical giant and a biotechnology company. Roche provided money and marketing outside the United States for Genentech’s products. Genentech, in turn, developed or helped develop three cancer drugs — Avastin, Herceptin and Rituxan — that are now Roche’s biggest selling products.

Roche has said owning all of Genentech would improve coordination and reduce overlap. The deal also assures Roche marketing rights for new Genentech products after 2015, when an existing marketing agreement would expire.

Analysts have said that Roche wanted to wrap up the deal before the release of information next month from a clinical trial of Avastin.

That trial, testing Avastin as a treatment for colon cancer after surgery to remove tumors, could potentially open a huge new market for the drug, which is now approved to treat cancer only at a later stage. If Avastin worked in the trial, analysts had said Genentech’s shares could have risen to $100 or more, which would have made the deal more costly for Roche. If the drug does not work, analysts say, Genentech’s shares might fall below $70.