Roche's Genentech buy could kill a technology leader

Swiss pharma giant Roche has reached an agreement with Genentech (DNA) to acquire at $95 a share the other 44 percent of the company that Roche doesn't already own. But Genentech -- which had all the features of a Technology Leader (about which I wrote in my book of that name and posted here) -- may never be the same again as it gets swallowed by a big dinosaur.

Wh the deal? It's a time-sensitive bet on Genentech approval for a new use of one of its most popular drugs. Roche's bid for Genentech turned hostile in January 2009 after its offer of $86.50 a share, down from the $89 it first offered in July 2008, was rejected. Genentech had put the asking price at $112 back in December. But the deal is basically a big bet that Genentech's drug Avastin will soon be approved for treating colon cancer, opening up a big new market. If Avastin works in the trial, Genentech's stock could hit $100 -- making the $95 price it struck look like a bargain -- but if the Avastin trial fails, Genentech stock will likely tumble to $70.

Once it becomes wholly owned by Roche, Genentech may lose the features that make it valuable -- its four sources of advantage -- which include:

  • Entrepreneurial Leadership --hiring and motivating people who can build new businesses. Genentech does this by encouraging its researchers to spend 25% of their time on projects of their choosing (vs. an industry average of 10%). In 1988, Genentech's Napoleone Ferrara focused on anti-angiogenesis, which cuts the blood supply to cancer tumors, resulting in the afore-mentioned Avastin;
  • Open Technology-- licensing in or acquiring technologies, rather than developing them all in-house.
    Genentech has in-licensed over 100 technologies such as Rituxan, a $2.6 billion (estimated 2008 sales) cancer treatment;
  • Boundaryless Product Development --developing products in cross-functional teams rather than scientists working in isolation. Genentech does this by including both technical personnel, relevant business functions, and key outside stakeholders like physicians. Genentech 's Secreted Protein Discovery Initiative, used genomics to facilitate boundaryless product development, generating five product leads; and
  • Disciplined Resource Allocation-- Invest in products that can take a big share of markets with high profit potential, kill products that don't. CEO, Arthur Levinson, focused Genentech in 1995 on cancer treatment. He kills development projects before they hit clinical trials -- which cost between $30 million and $100 million -- if the scientific arguments for pursuing the drug can't withstand his intense scrutiny.

If Roche really leaves Genentech alone to do what has been making it successful all along, then it may continue to innovate successfully. Otherwise, Roche's deal may be the silver bullet that kills the goose that laid the golden egg.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and is the author of You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.

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