Volume 87 Issue 19 | p. 22
Issue Date: May 11, 2009

Keeping Hands Off

Roche lets Genentech's R&D run free as it integrates the biotech powerhouse
Department: Business
Scheller
Credit: Genentech
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Scheller
Credit: Genentech

SINCE LAST JULY when Roche said it wanted the 44% of Genentech it didn't already own, the linchpin to a successful acquisition has been the biotech company's R&D operations. Since 1976, Genentech scientists have pioneered not only the first biologic drugs, but a chain of blockbusters. These products fueled Genentech's success and brought riches to Roche after it became a majority shareholder nearly 20 years ago.

Now that Roche owns Genentech outright, analysts, pundits, and employees are speculating how the business practices of the massive Swiss corporation will mesh with the entrepreneurial and scientifically free-spirited culture that has defined South San Francisco-based Genentech. After finalizing an at-times acrimonious takeover in March, Roche's management has so far been true to its promise to leave well enough alone—at least when it comes to R&D.

"Roche has lived up to every bit of what they proposed nine months ago, and that is that the research and early development organization at Genentech will stay an independent unit," says Richard H. Scheller, formerly Genentech's executive vice president for research. Now leading what's called Genentech Research & Early Development (GR&ED), Scheller reports directly to Roche Chief Executive Officer Severin Schwan rather than through intermediaries.

GR&ED will focus on early drug discovery through Phase II clinical work, after which Roche will handle late-stage development and manufacturing. According to Scheller, Schwan "made it absolutely clear that we will remain in control of our own destiny." GR&ED will operate under its already-allocated budget for the rest of 2009. Genentech's R&D spending in 2008 was about $2.8 billion, or 21% of its sales, which is close to the percentage Roche spent on its own drug R&D.

Down the road, Scheller will set a budget with Roche that he believes "will be based fairly on what we feel we are able to deliver and in proportion to our productivity." GR&ED's task is to advance molecules so they are ready for final development. Until that point, "we'll have all decision-making in this unit," Scheller says. "That's a large amount of independence that we're very excited about."

In many respects, it looks like business as usual. After all, even as a majority owner, Roche took a hands-off approach. Since 1995, Roche has had the right to sell Genentech products outside the U.S. These products accounted for about a third, or nearly $10 billion, of Roche's sales last year. The agreement also generated about $2.5 billion in product sales, royalties, and R&D funding for Genentech.

IF IT'S SMART, observers say, Roche didn't pay $47 billion just for Genentech's products and pipeline but also for the R&D engine behind them. Hoping to avoid the R&D productivity losses of other big mergers, Roche executives assured employees in a February letter that they remain "committed to nurturing Genentech's innovative and science-driven culture and to retaining its talent."

Indeed, Genentech has top-notch scientists. According to the company, its 1,100 researchers publish more than 150 scientific papers in peer-reviewed journals each year, a lot for an industry that guards proprietary information. Also, citations to its work in molecular biology and genetics surpassed those of many major academic institutions. In 2007, the company received more than twice as many U.S. biotech patents as any other company or university.

Scheller is happy to report that GR&ED staffers will still enjoy several long-standing perks. "Our publishing will continue without change," he says, as will a postdoctoral program of more than 100 students. "This program keeps us intellectually vibrant, it keeps us current with modern techniques, and it's terrific to have a constant flux of people coming through Genentech.

"In addition, all of our scientists will still have discretionary time to work on projects of their own interest," Scheller explains. "Roche has a firm belief that it is these aspects of our culture that have been at least in part responsible for our ability to attract terrific scientists and be innovative. And the last thing they want to do is mess with that."

Other incentives are in play. Soon after Roche made its bid in July, Genentech created an employee retention plan. In lieu of annual stock option grants, it took $371 million and offered cash bonuses to those who agreed to stay until after the merger. Under the plan, Genentech's top five executives, including Scheller, could get a combined $21.5 million.

Although Roche will not retain Susan Desmond-Hellmann, Genentech's president for product development, Marc Tessier-Lavigne, now executive vice president for research and chief scientific officer, and other senior managers are staying. "I haven't heard of any scientist who plans on leaving because of the merger, and I have been told there is no reason to think that our headcount will be going down," Scheller says.

Still, there will be changes. Despite its entrepreneurial reputation, Genentech had grown into a fully integrated major drug company, with more than $13 billion in annual revenues and 11,000 employees. Roche envisions merger savings of about $800 million, largely by paring down redundancies in late-stage development, manufacturing, and corporate functions.

Although there are overlapping areas of R&D focus, Scheller says Genentech's research areas will stay the same for now and that decisions on advancing either Roche or Genentech candidates will be made as the compounds progress in development. Notably, GR&ED will not lose the small-molecule drug discovery program it began building about four years ago. Scheller also supports uniting discovery and early development because it will foster integrated work on personalized medicines, as well as on diagnostics with Roche.

Less than two months since the deal closed, it's too early to predict whether the merger is an R&D success. Roche sees the further cementing of a long, productive relationship with Genentech. Whether employees really like their new owner may become clear this summer after the retention bonuses start paying out.

 
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