Roche Genentech Acquisition Analysis

GeneGene--alyzingalyzing GENENTECHGENENTECH

Strategic ManagementStrategic Management

for Executivesfor Executivesfor Executivesfor Executives

GROUP 8 GROUP 8 –– HCEMBA’09HCEMBA’09Primary Contributor: Manas KanungoPrimary Contributor: Manas Kanungo

Copyright: Manas Kanungo 2009Copyright: Manas Kanungo 2009

THE BIOTECH & PHARMA INDUSTRIESTHE BIOTECH & PHARMA INDUSTRIES

PHARMA BIOTECH

Agriculture

Aqua/MarineAqua/Marine

Agri - Food

PHARMA BIOTECH

- Chemistry Based, Orals- “Small Molecules”- Patents for Formulations

- Proteins & Peptides, Fluids- “Large Molecules”- Patents for Discovery, Process

Animal Health

Human Therapy

Animal Health


Amgen $16B

Genentech $14B

� Few Large, $B Companies – 40%

� Many Small Players < $50M ea

� 1000 Companies ~ $85B

Biotech Industry Landscape – Room to Grow

Baxter $12B

Monsanto $11B

Baxter $12B

Others 60%

Amongst Top 5 Biotechs:

� 3 are Biotherapeutics Cos:(Amgen, Genentech, Baxter)

� 2 are in Agriculture:(Syngenta, Monsanto)


Key Drivers for Biotech Industry Trends

� Increasing Biotech Markets from Globalization, New Indications, in several Segments

� Therapeutic demand driven by insurers’ willingness to reimburse new, off-label treatments (CURES!) to reimburse new, off-label treatments (CURES!) vs. saturated pharma

� Formative FDA approval & regulatory processes:

Whoever gets in first gets to pave the way…


Key Drivers for Biotech Industry Trends ..contd

� Large, fast growing, high ROI market potential

� Small biotech companies can co exist with large ones if they have research expertise, specialization

� New original patents for Large Molecule Technology Plus Process vs. small molecule chemistries only

� Thinning Pipelines w/Generics Entry, Saturated Disease Areas, Cost Pressures, Leading Pharmas to Consolidate or buy Biotechs


BIOBIO--THERAPEUTIC INDUSTRY TRENDSTHERAPEUTIC INDUSTRY TRENDS

I

N

D

I

New

PHARMAS

NUCLEIC ACIDS & OLIGONUCLEOTIDES

Mass Patients T H E R A P Y �� Personalized Medicine

ROI

D I S E A S E S �

I

C

A

T

I

O

N

S

Known New

GENERICS

PHARMAS

BIOTECHSLARGE MOLECULES, INJECTIONSPROTEINS, PEPTIDES, ANTIBODIESThe Few & The Proud

Consolidation

Coming out of the woodworks

- Few Major Players- Niche Market- High Prices- Low Volumes- Large Capital Need- Research & Tech- Process & Marketing


BIOTHERAPEUTIC INDUSTRY & APPROVALS 1982 BIOTHERAPEUTIC INDUSTRY & APPROVALS 1982 -- 20072007

1996: Biotherape

utic Era: 28

Approved!

2526

2325

30

All Biotech Approvals Genentech

• 1982 – 1995: 42 20: ~ 50% !!• 1996 – 2007: 243 15

35

� 7.5% of all drugs marketed

10 0

1

4

2

0

3 3

6

3

6

4

9

Approved!

15

18

1617

1819

17

21

0

5

10

15

20

Approvals

� 20% CAGR: 32% of all pipeline research programs


Top 25 Biotherapeutic Drugs = $70BDrug Company $B ’07

Rituxan Genentech $ 5.5Enbrel Amgen $ 5.3Hercepti Genentech $ 4.8Avastin Genentech $ 4.1Aranesp Amgen $ 3.6Remicade J&J $ 3.3Lantus Sanofi-Aventis $ 3.2Humira Abbott $ 3.1Gleevec Novartis $ 3.0

�100% Biotech Companies: Top 5 & 12/25

� Amgen 5/25 $ 15.7B (22.4%)

� Genentech 3/25 $ 14.4B (20.6%)

� Rest Pharmas: by acquiring smaller Biotechs

� Roche, Sanofi 2/25 ea $ 3.7 / 6.1B� Roche, Sanofi 2/25 ea $ 3.7 / 6.1B

� Others: 1 each ... Including 1 Generic! (Teva)

Indications: Chronic, End-stage , Life Saving, Rare Diseases

Cancer: Breast, Colon, Lung, Prostate, Gastric, Head/Neck,Non-Hodgkins Lymphoma, Tumors

Others: Anemia, Crohn’s, Chemo Infection, Diabetes, Hepatitis B/C, Hemophilia A, Various Types of Arthritis, Multiple Sclerosis


Top Pure Biotherapeutics Companies $40B

Company Tkr Rev $B Cap $B x Rev 52Wk Lo Now 52Wk Hi EPS P/E Beta

Genentech DNA 11.7 89 7.6 66 85 99 3.02 28.10 0.64

Amgen AMGN 14.8 60 4.1 39 52 74 3.91 14.70 0.80

Gilead Sc. GILD 4.2 45 10.7 36 50 57 2.09 23.70 0.93

Celgene CELG 1.4 25 17.9 45 54 77 -3.76 -14.30 1.00Celgene CELG 1.4 25 17.9 45 54 77 -3.76 -14.30 1.00

Genzyme GENZ 3.8 19 5.0 56 71 84 1.50 47.40 0.85

Biogen Idec BIIB 4.1 15 3.7 37 52 74 2.64 19.40 0.90

HIGH Low

� Significant Lead in Revenue by Amgen & Genentech Over Others

� Genentech w/Highest Market Cap Even if NOT w/Highest Revenue or EPS

� Stock Prices Significantly Higher Than Pharma Stocks in Current EnvironmentCopyright: Manas Kanungo 2009Copyright: Manas Kanungo 2009

GeneGene--sis of Genesis of Gene--nn--techtech

External Contributors

Genomics, Proteomics,

Microarrays,

Sensitive Assay Technologies,

Molecular BiologyDiscoveries,

1980’s

Process Innovation:

Identification

Cloning

Antibodies

Humanizing

Therapy

Went Public: 1980

Out-Licensed Sales:Lilly, Roche

FDA: Growth HormoneHeart/Blood Clot

1st Sales: 1985

FDA Enforced CUSTOMERTRACKING

$ 35 -- $ 88

70’s

Discovery:rDNA TechnologyBoyer: BiochemChohen: Genetist

1976

1977 - 1979

Genentech is Formed:Boyer & Swanson

Technological Innovation: Genetic EngineeringIdentify absent, defective, excess protein;Engineer protein or molecule for therapy;Splice Genes in Fast Growing Bacteriato Produce Therapeutic Proteins

1st Cloning: Human Protein in E.ColiLicensed to Eli Lilly: Human Insulin, Growth Hormone

Economic Boom …Therapy

Internal Capabilities

TRACKING

Focus: BioOncology


1990’s: Building & Leveraging Core Competencies1990’s: Building & Leveraging Core CompetenciesHamel – Prahalad / Internal, or Inside-Out Strategy Model: Specific, Inherent, Integrated, and Applied KSAs

BIOTECH MANUFACTURING

$$$$

Internal – USAExternal: Roche

Out-License

$2.1B Roche MergerSmith Kline – Hep. BBiogen Idec – NHL

Alkermes - NutropinCustomer Service - SPOC

Vacaville Plant

RESEARCH: Access to Wide Variety of Products & Markets

Internal External Partnerships In License

Oncology Immunology Specialty Biotherapeutics

PRODUCT DEVELOPMENT

Internal External Partnerships Out-License

Strategic Portfolio: High Value Customer Benefits

Internal Cost Leader

Difficult for Others to Imitate

Vacaville Plant

FDA Approvals – Int/Ext

Founders Research Center

Various 1st:Monoclonal Antibodies

Targeted Therapies

2

3

1


2000’s: Genentech’s Sustained 12000’s: Genentech’s Sustained 1stst Mover LeadershipMover Leadership

FDA Approvals

Due To:

New Products

• Process & Filing Expertise for Biologics• Robust Clinicals w/HCP & Patients Inputs

• Huge Staff w/most R&D Spending: 21%• Foster Basic & Outcomes Based Research, Partners

To Date: 35

Largest Pipeline

Profits, Capacity, Cost

Marketing & Sales

• US Internal: Strategic, Targeted Plans w/Execution• Co-Marketing & Sales to Leverage Partners’ Strengths

• Optimized Volumes to Minimize Costs• Strategic Partnerships, Purchases for Expansion

Global Reach w/o Significant Investment

Manufg: Best In Class


GENENTECH GENENTECH –– Setting & Achieving Goals Setting & Achieving Goals –– ’99 to ‘05’99 to ‘05

TargetTarget ActualActual

�� Avg EPS/yrAvg EPS/yr GrowthGrowth 1.25%1.25% 33%33%

�� Approved Products / IndicationsApproved Products / Indications 55 7 w/Multi7 w/Multi--IndicIndic

�� Late Stage ClinicalsLate Stage Clinicals 55 6 w/21 Indications6 w/21 Indications

�� Rev from Alliances / AcquisitionsRev from Alliances / Acquisitions $500M$500M $300M$300M

�� Net Income as % of Op. RevenueNet Income as % of Op. Revenue 25%25% 21%21%�� (Rituxan w/Several Indications, need to share with other partners)(Rituxan w/Several Indications, need to share with other partners)

2010 Vision & Goals2010 Vision & Goals2010 Vision & Goals2010 Vision & GoalsLeader in revolutionizing treatment of patients w/cancer, immunological Leader in revolutionizing treatment of patients w/cancer, immunological

diseases, and angiogenic disorders, utilizing science and biotechnologydiseases, and angiogenic disorders, utilizing science and biotechnology

� Approved Products /Indications 15� New Molecules to Clinical Development 20� US Oncology Market Position 1� Avg EPS/yr Growth 25%� Cumulative Free Cash Flow $12B


Genentech’s External StrategyGenentech’s External Strategy

Decisions Red Ocean - Sharks Blue Ocean - Dolphins

Market –Therapeutic Products

Compete in Existing Space (Mass Pts, Small Molecules)

Create New Space (Personalized Meds, Large Molecules)

(Pharma) Competition

Try to Beat, Eat, or Look Out Ignore – Make Them Irrelevant

Patients / Demand

Exploit / Steal Existing Patients Create & Capture New PatientsDemand

Value OfferingMake Trade-offs: Brand or Generic Aspirin?

Willing to Pay More: For Unmet, Life Saving Cancer Solutions

Internal Alignment

Systems & Activities to ChoseLow Cost or Differentiation: Make/Buy, Other Compromises

Systems & Activities for BOTHLow Cost & Differentiation: : Own Biotech Mfg:Low Cost, High Profits

Although Kim & Mauborgne did not propose their Blue Ocean Strategy in HBR tillOct 2004, Genentech’s inherently innovative culture extended beyond their R&DStaff to develop a business strategy with a path of least resistance and executewith precision for superb results. Copyright: Manas Kanungo 2009Copyright: Manas Kanungo 2009

Strategy Skills

Shared

Style

Genentech’s Value Based Management StrategyGenentech’s Value Based Management StrategyMcKinsey’s 7 – S Framework Model

Innovative, Co-operative, Partnership, Citizenship

Very High Caliber People, Subject Area Experts……R&D: Nobel Laureates

“Best Companies to Work For”

Clear, Challenging, Achievable Goals……..stay Focused!

Guiding Principles

• Scientific Excellence

SystemsStaff

Shared values

Structure

Built Streamlined Systems and Processes to Lead in Manufg, Technology, Approvals, Performance

Centralized, Close Knit Family Atmosphere; Basic Research feeds Value Based Screening for Product Development; Execution Oriented

11K People w/ > 1000 Scientists; Unique Manufg & Mktg Staff;RaaRaa – Responsibility w/Authority, Roles w/Accountability

• Scientific Excellence• Long-Term Planning• Execution• People & Culture


Financials ($B): Consistently Outperformed IndustryFinancials ($B): Consistently Outperformed Industry

10.0

12.0

14.0

16.0

2004 2005 2006 2007 2008

Rev Growth 39.0% 44.0% 41.0% 26.0% 15.0%

NI Growth 39.0% 66.0% 62.0% 33.0% 21.0%

NI % of Sales 17.0% 20.0% 23.0% 24.0% 25.0%

OI Growth 23.0% 73.0% 68.0% 31.0% 26.0%

OI % of Sales 24.0% 29.0% 34.0% 36.0% 40.0%

Cash Flow: $4B from ‘08 Operations

Revenue Net Income Operating Income

2001 2.0 0.15

2002 2.6 0.064 0.03

2003 3.3 0.563 0.898

2004 4.6 0.785 1.1

2005 6.6 1.3 1.9

2006 9.3 2.1 3.2

2007 11.7 2.8 4.2

2008 13.4 3.4 5.3

0.0

2.0

4.0

6.0

8.0

10.0Cash Flow: $4B from ‘08 Operations


Investor Performance Investor Performance –– Stocks & EPSStocks & EPS

60

70

80

90

100

2008 Ind Avg

EBIT 5.5B 1.4B

P/E 26 30

P/B 5.84 6.28

100 Shares @ $35 in May ‘80 IPO for $3500 = 5040 Shares @ $82 worth $43,280

Return of 1,137% (Not Including Dividends!)

Yrnd Share Price EPS x10 EPS Growth x 10

2004 55 7.3 388.0%

2005 93 11.8 616.0%

2006 81 19.7 669.0%

2007 67 25.9 315.0%

2008 82 32.1 239.0%

0

10

20

30

40

50

60 P/B 5.84 6.28

LTD/Equity 14.86 30.46

ROA 17 8

Gross Profit 87% 0%


Biotherapeutic Industry FutureBiotherapeutic Industry Future

�� Biotech industry somewhat shielded from economic recession:Biotech industry somewhat shielded from economic recession:•• Globalization with Increasing ExportsGlobalization with Increasing Exports•• Current Unmet Diseases, with Aging Human Market SegmentsCurrent Unmet Diseases, with Aging Human Market Segments•• Growth in Agricultural, Animal, Aquatic, and Environmental SegmentsGrowth in Agricultural, Animal, Aquatic, and Environmental Segments

�� Therapeutic Industry Revenue will Grow $86BTherapeutic Industry Revenue will Grow $86B�� $147B from ‘08 $147B from ‘08 ––’13’13

�� Growth of 11.4%, or 5 x Avg. US GDP over the same periodGrowth of 11.4%, or 5 x Avg. US GDP over the same period

�� Market Driven by High ROIs, Dual Patent Protections, Personalized MedsMarket Driven by High ROIs, Dual Patent Protections, Personalized Meds

CHALLENGESCHALLENGES

�� New Entrants, Pharma Companies Refocusing (Pfizer), BioNew Entrants, Pharma Companies Refocusing (Pfizer), Bio--Generics, Generics, Market Plateau in Existing Areas, Margin Threats from Cost Controls from Market Plateau in Existing Areas, Margin Threats from Cost Controls from Medicare, Govt , InsuranceMedicare, Govt , Insurance

�� Nucleotides (DNA/RNAs) may Substitute BioNucleotides (DNA/RNAs) may Substitute Bio--TherapeuticsTherapeutics


Future for Genentech Future for Genentech -- ProsPros

�� Unmet Demands for New Indications and Therapies will continue Unmet Demands for New Indications and Therapies will continue to ensure Market and Industry Attractivenessto ensure Market and Industry Attractiveness

�� Positive Paradigm Shift to Positive Paradigm Shift to Curative Solutions for Severe Curative Solutions for Severe ConditionsConditions that People are Willing to Pay (Blue Ocean) vs. only that People are Willing to Pay (Blue Ocean) vs. only alleviating conditions with threat of regressionalleviating conditions with threat of regression

�� Strong R&D with Over 100 New Products in Pipeline, mostly in Strong R&D with Over 100 New Products in Pipeline, mostly in �� Strong R&D with Over 100 New Products in Pipeline, mostly in Strong R&D with Over 100 New Products in Pipeline, mostly in New or Expanded Areas, will ensure Increasing Market Shares New or Expanded Areas, will ensure Increasing Market Shares and Revenuesand Revenues

�� Expertise in Innovative Biotech Processes & Large Scale Expertise in Innovative Biotech Processes & Large Scale Manufacturing will Generate Low Cost Products with High Profits Manufacturing will Generate Low Cost Products with High Profits & Price Flexibility& Price Flexibility

�� High Barriers to Entry … Strong Technology & Process IPs High Barriers to Entry … Strong Technology & Process IPs w/New & Expanded Extensions, Capital Intensive Mfg will limit w/New & Expanded Extensions, Capital Intensive Mfg will limit Competition to a Few SubstitutesCompetition to a Few Substitutes


Future for Genentech Future for Genentech –– Pros .. Pros .. ContdContd

�� Foundation and Strength in Basic Biotech Research also gives Foundation and Strength in Basic Biotech Research also gives Genentech significant lead in next generation Nucleotides Era.Genentech significant lead in next generation Nucleotides Era.

�� Excellent Financial Position (Cash, Earnings, Valuations, Stock) :Excellent Financial Position (Cash, Earnings, Valuations, Stock) :

�� Invest to Grow Core Competencies Invest to Grow Core Competencies –– Research & Development?Research & Development?�� Explore Further Economies of Scale in Manufacturing?Explore Further Economies of Scale in Manufacturing?�� Explore Further Economies of Scale in Manufacturing?Explore Further Economies of Scale in Manufacturing?�� Share Growth through OutShare Growth through Out--Licensing, InLicensing, In--Licensing, New Diseases?Licensing, New Diseases?�� Expand Biotech Moat Expand Biotech Moat –– Agriculture, Marine, EnvironmentalAgriculture, Marine, Environmental�� Invest in the Future Invest in the Future –– Nucleotides? Theranostics? Disease Management?Nucleotides? Theranostics? Disease Management?

�� Wait for anticipated blockbusters, and buy Roche???Wait for anticipated blockbusters, and buy Roche???

�� Roche One of few w/+ve Outcomes from Mergers: BMC, VentanaRoche One of few w/+ve Outcomes from Mergers: BMC, Ventana


Future for Genentech Future for Genentech -- ConCon

�� End of Pricing Honeymoon Around the CornerEnd of Pricing Honeymoon Around the Corner-- Increasing Cost Control Pressures from Govt and Private PayersIncreasing Cost Control Pressures from Govt and Private Payers

�� The Vultures are Waiting (Generics & The Vultures are Waiting (Generics & EstrangerosEstrangeros))-- Large Pharmas waiting to buy upLarge Pharmas waiting to buy up-- Teva Already a Major Biotech ContenderTeva Already a Major Biotech Contender-- Strong Lobby to Allow BioStrong Lobby to Allow Bio--GenericsGenerics-- Therapies with Oldest IPs at RiskTherapies with Oldest IPs at Risk-- UK, Germany, France, Singapore, South KoreaUK, Germany, France, Singapore, South Korea-- UK, Germany, France, Singapore, South KoreaUK, Germany, France, Singapore, South KoreaGovernment Backed ProgramsGovernment Backed Programs

�� Forced into a Bad Marriage?Forced into a Bad Marriage? (Roche(Roche)…..who benefits?)…..who benefits?-- $$4B Cash Dowry 4B Cash Dowry too tempting for Roche not to cover debtstoo tempting for Roche not to cover debts-- No longer w/family, friends I grew up with….No longer w/family, friends I grew up with….-- Oncology, Core Area, Relocating to Nutley..Oncology, Core Area, Relocating to Nutley..-- Career Path IssuesCareer Path Issues-- MBO vs. Innovative Incentives, OptionsMBO vs. Innovative Incentives, Options-- New Decision Making ProcessNew Decision Making Process

-- Systems, Reporting, Accountabilities ChangeSystems, Reporting, Accountabilities Changess

Scare AwayCore Members???


SourcesSources

• Genentech Website, Archives, SEC Filings• Roche Website, Archives, SEC Filings• Analysts Reports• Morningstar, Guru, Vanguard, Money• CNBC, Bloomberg, Market Watch• Pharmaprojects.com, IBIS, UCI Library• WSJ, USA Today• WSJ, USA Today• BioWorld, BioSpace, Scrips News• valuebasedmanagement.net• Business Week, HBJ• Private consultants• Personal experience in Roche


Roche Genentech Acquisition Analysis

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