Roche Embraces Genentech Innovation to Keep Drug Pipeline

When Roche Holding AG (ROG) executives held an investor-day briefing in New York in March, Morgan Stanley analyst Andrew Baum had a question that had nothing to do with new drugs, licensing deals or health-care legislation.

“Did the Genentech team hide the ties of the Roche executives?” he asked. Richard Scheller, a veteran of Genentech, the biotechnology pioneer that Roche bought last year, quipped that he doesn’t own one. His Roche colleagues on the stage, led by Chief Executive Officer Severin Schwan, didn’t want him to look out of place, so they went tieless too.

“I’d never seen them without suits and ties before,” Baum said in an interview. To him, the informal attire “reflected the willingness of Roche to be seen to bend toward Genentech, rather than the other way around.”

Such signals are easing investor concern that Roche might destroy the Genentech culture of innovation that produced some of the world’s top cancer drugs, said Karl-Heinz Koch, an analyst at Helvea AG in Zurich. There are even signs the $46.8 billion takeover may be bringing more change to Roche, the 114-year-old inventor of Valium, than to Genentech, Bloomberg Businessweek reports in its July 5 issue.

Scientists from the acquired company took key jobs, such as head of development for Roche and Genentech combined. The preexisting U.S. operations of Basel, Switzerland-based Roche bore the brunt of job cuts after the buyout, and the parent adopted Genentech’s research structure. At Genentech’s base, 1 DNA Way in South San Francisco, California, employees say it’s business as usual.

‘Key Positions’

“Success ultimately equates into power, and that’s exactly what we are seeing at Roche/Genentech,” said Joerg de Vries-Hippen, chief investment officer for European equities at Allianz Global Investors in Frankfurt, where he helps manage $146.6 billion of assets, including Roche shares. “Now that the full integration has taken place, it’s the Genentech guys who are being promoted and getting the key positions.”

Roche fell 2.8 Swiss francs, or 1.9 percent, to 146.3 francs in Swiss trading yesterday, valuing the company at 127.6 billion francs ($119.5 billion). Roche shares have declined 2.8 percent since March 27, 2009, the day after Genentech stopped trading on the New York Exchange because of the buyout. Of 43 Roche analysts tracked by Bloomberg, 33 now recommend buying the stock, while nine rate the shares “hold” and one says investors should sell.

‘Ahead of the Game’

There may be risk for Roche if Genentech becomes too powerful, for the parent needs to preserve its “strategic vision,” said Nick Draeger, a former Roche employee who heads Basel-based Cederberg Advisors, which counsels health-care companies. Roche’s strength has been thinking 10 to 15 years “ahead of the game,” and strategizing at U.S. companies can be shorter-term, he said.

“Roche is the best company in the pharma business at the moment,” Draeger said. “But they have to be very careful that there is not undue and excessive influence on Roche by Genentech.”

Roche acquired 60 percent of Genentech in 1990, for $2.1 billion. Roche owned 100 percent in July 1999, according to a Genentech prospectus filed that month, before Roche reduced the stake again. While retaining the right to control Genentech’s board, Roche held just three of seven board seats in 2008 when it owned 56 percent of the shares.

Rights to Products

In March 2009, Roche again took full ownership, ensuring continued access to rights to sell Genentech’s products. Three of those, Avastin, MabThera and Herceptin, had combined sales of 17.6 billion francs last year, topping the total for Roche’s 10 best-selling non-Genentech medicines, led by the antiviral drug Tamiflu. MabThera is sold in the U.S. as Rituxan.

Genentech’s generated revenue per employee of $1.2 million in 2008 compared with $527,664 at the Swiss company, according to data compiled by Bloomberg.

“Roche’s long-term sales growth is better than its peers mainly due to a subsidiary that’s been churning out its key blockbusters, while its own research unit hasn’t been as productive,” Carri Duncan, an analyst at Macquarie Group Ltd. in Zurich, said in an interview. “It appears to be a case of, ‘If you can’t beat ‘em, join ‘em.’”

Roche installed Genentech veterans in strategic posts. Hal Barron, who joined the U.S. company in 1996, is head of global development. Genentech’s Ian Clark, at the company since 2003 and CEO since January, heads all of Roche’s North American commercial operations. Pat Yang, who joined Genentech in 2004, moved to Basel to run global manufacturing. Scheller took a seat on Roche’s 12-member executive committee, where he is the only Genentech representative.

Moving From Basel

Genentech people also came to the fore in commercial roles. About half of the oncology-life-cycle leaders, who manage market introductions of drugs, are now based in South San Francisco. Mondher Mahjoubi, who had been working for Roche in Basel and oversees global product strategy for cancer, moved to South San Francisco to work alongside Genentech people.

More than a third of the life-cycle-leader positions in the cancer business, which yields about 50 percent of Roche’s pharmaceutical revenue, went to Genentech employees. U.S. commercial operations operate under the Genentech name.

Roche preserved Genentech jobs as it made cuts elsewhere. The parent shut its Palo Alto, California, facility this year and axed 500 of about 3,000 jobs at its Nutley, New Jersey, site as part of a manufacturing shake-up.

More cuts may be in store, said Koch of Helvea, who recommends buying Roche shares. Nutley is home to Roche’s research and early development of compounds to treat cancer, viruses, and inflammation. Genentech’s labs are also targeting those diseases, and it isn’t clear that keeping two research arms that do the same thing will make sense, Koch said.

‘Sacred Place’

“Roche may not have wanted to rock the boat too quickly, as Nutley’s always been something of a sacred place within the company,” Koch said in an interview. “Valium was invented there. Roche was built on Valium’s success.”

Roche changed how its preexisting labs work, because the company’s scientists saw that Genentech’s set-up made more sense, CEO Schwan said. In the past, Roche maintained separate departments for laboratory research and early-stage testing in people, functions that Genentech combined. Now both have integrated research and early-development teams.

“The merger last year looks to me more like an attempt to change the culture at Roche rather than the culture at Genentech,” said David Botstein, a former science vice president at Genentech who now consults for the company and is a professor of genomics at Princeton University in Princeton, New Jersey.

Power Base

Schwan said the shake-up of research led to initial uncertainty, particularly in Basel. Also, for the “first time ever in our history of acquisitions or mergers,” global-management positions moved away from the Swiss city, Schwan said. Before, decision-making powers had always been integrated into Roche headquarters, he said in an interview.

For instance, Roche took over Boehringer Mannheim, a health-care company based in Mannheim, Germany, in March 1998 and appointed its own manager to lead the merged diagnostics business. Roche centralized, in Basel, functions such as pharmaceutical marketing and development.

The main initial risk of the Genentech takeover for Roche was losing staff from the biotechnology company, so the integration was handled differently, Schwan said.

‘Utmost Importance’

“If we look back a year ago, it was of utmost importance to keep the spirit and the culture of Genentech and to keep innovation thriving,” Schwan said. “It was really, really important to retain people and to retain scientists.”

Staff fluctuation rates at Genentech are lower than they were before the purchase was announced, Schwan said. A Roche spokeswoman, Claudia Schmitt, declined to give a breakdown of staff changes, saying only that there were 11,120 Genentech employees before the takeover and 13,000 afterward. The number includes Roche employees who transferred to Genentech.

Roche management was “doing everything they can to make us feel welcome, probably at the expense of their own folks a little bit,” said Dennis Kleid, a scientist and patent adviser who was the fifth employee that Genentech hired, and who helped the company develop the first human insulin based on recombinant-DNA technology.

While Kleid retired in May after more than three decades at Genentech, departures of key personnel have been few. Arthur Levinson, who had been Genentech’s CEO since July 1995, retired from daily operations in May 2009, while remaining chairman, and was given a seat on the Roche board of directors in March.

Retention Payments

Susan Desmond-Hellmann, who had been the head of product development, left Genentech and last August became chancellor of the University of California, San Francisco.

Roche distributed $375 million in payments to prevent defections, and none of the top scientists from Scheller’s research and early-development group left, even after the outlays ended, Schwan said.

Genentech prides itself on a culture of research and innovation, encouraging employees to pursue their own projects and creating a workplace where jeans predominate, hierarchy is kept to a minimum, and scientists have easy access to top managers, said Mark Sliwkowski, who has worked as a researcher at Genentech for 19 years.

‘Little Has Changed’

“From my point of view as a research scientist very little has changed,” Sliwkowski said in an interview. “If I don’t wander outside our research facility you wouldn’t know there was anything different. The culture is exactly the same.”

Genentech earned a reputation for treating employees well, offering perks such as day care for children and “Ho-Hos,” or regular get-togethers, for staff. One such event saw members of Genentech’s executive committee dress in lederhosen, in honor of Roche’s initial acquisition in 1990.

Four years ago, Fortune Magazine ranked Genentech the best company to work for in the U.S. The Ho-Hos are still a fixture, and an atmosphere of what Pascal Soriot, the head of Roche’s pharmaceuticals division, called ‘casual intensity’ remains, employees say.

“Genentech has always had as an explicit goal being a great place to work,” Genentech CEO Clark said. “I don’t think that was such a conscious goal for Roche, and that may be one place where our culture can rub off a little bit.”

To contact the reporters on this story: Dermot Doherty in Geneva at ddoherty9@bloomberg.net; Rob Waters in San Francisco at rwaters5@bloomberg.net

To contact the editors responsible for this story: Phil Serafino at pserafino@bloomberg.net; Reg Gale in New York at rgale5@bloomberg.net

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