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Jul 28, 2008

Insourcing vs. outsourcing: the Roche-Genetech deal

  • It's the biggest deal of the year and a strange one at that: Roche's unsolicited bid for the remaining 44% of Genentech it didn't already own. I want to look at this model of - let's call it insourcing to go along with the popular scary word outsourcing - and see if it makes sense for anyone and Roche in particular. Added complications are of course that Roche already OWNS 56% of the outstanding shares, hence it controls the company and so forth. So why do it?

    Certainly, Roche’s earnings are slowing and buying the remainder of Genentech will allow it to consolidate 100% of Genentech’s profits, not merely 56% of them. However, there is one big reason not to do the deal: this has been the most successful relationship in pharmaceutical history. Neither company would likely exist as an independent entity without it. Genentech was an acquisition waiting to happen back in 1990 when it managed to keep at least managerial independence by selling Roche 60% of its shares. Without Genentech, the Swiss giant would most likely be part of another Swiss giant, Novartis (which still owns a small stake in the pharma).

    By buying Genentech Roche wants to consolidate what has become to expensive to keep independent. The deal was announced the day after the Genentech CEO Art Levinson learned about it so that doesn't speak volumes about Roche's intent to give Genentech's management a long leash.

    However, a word of caution to Roche is that too strong a move may very well lead to mass exodus and thusly a loss of the very culture that made Genentech such a success.

    But Roche is populated by smart folks, so it's a good bet that the strategic and financial flexibility complete ownership permits are more valuable than the theoretical continued R&D productivity achieved by keeping Genentech at arm’s length, indeed the savings are rumored to be on the order of $750 - $850 million a year.

    Takeover's like these are one more pressure that will make biologics less profitable in the long run. Amgen has already transformed into a big pharma company, and now Genentech is part of one, too.

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