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Structure of the Case
As the case begins, Dr. Richard Scheller, EVP of Research and Early Development at Genentech, is
preparing for a meeting with Roche executives. Roche completed its acquisition of Genentech in 2009,
counting on the biotechnology company to advance its efforts in personalized medicine. Both firms
had high hopes that Genentech’s antiangio-genesis agent, Avastin, would become a blockbuster treat-
ment for a variety of early- and late-stage cancers. Since then, a Phase III trial in early-stage colon can-
cer has failed and an advisory panel voted to revoke Avastin’s approval for the treatment of advanced
breast cancer. Consequently, Scheller finds himself under significant pressure to accelerate other Phase
III projects in order to bring more products to market. At the same time, he is afraid that reallocating too
many resources to late-stage drug development risks neglecting Genentech’s core capability in early
drug discovery.
development and marketing. The result was an explosion of biotech startups and double-digit growth
in biotech revenues. Pharmaceutical firms readily established strategic alliances or acquired their bio-
tech partners in order to bring their innovative capabilities and new-product pipelines in-house. Case
Exhibits2-9 provide rich material for students to conduct an in-depth industry analysis.
The next section presents the legendary founding and growth of Genentech, the creator of the bio-
as those related to Genentech’s strategic goals. Their “creativity and initiative” led to the development
of more than 100 projects across multiple therapeutic areas, as detailed in Case Exhibits 13 and 14.
Nevertheless, Genentech remains vulnerable in two main respects: an insufficient quantity of original
drugs in its pipeline and an overreliance on the cancer market for a majority of its revenues.
Genentech: After the Acquisition by Roche
TEACHING NOTE
MHE-FTR-014
1259420477
REV: JANuARy 6, 2012
Teaching Note — Genentech: After the Acquisition by Roche
The section entitled “Buyout by Roche” describes the development of the Roche-Genentech relation-
ship leading up to the 2009 acquisition (see Case Exhibit 18). Roche has decided to maintain Genentech
as a wholly owned subsidiary, which means that it will continue operations as an independent research
and development center within the Roche Group. Nevertheless, there have been considerable struc-
tural and leadership changes made in anticipation of scale benefits and operational synergies. It is also
cutting costs and improving health care effectiveness. Genentech is particularly concerned because
close to 70 percent of its sales come from patent-protected cancer drugs, which sell at a premium but
provide minimal benefit in terms of survival time. Meanwhile, Genentech is facing increased competi-
tion from established pharmaceutical companies, who view investments in biotechnology as a means
to offset stagnating sales of new chemical entities. Genentech is also in danger of self-cannibalization
The case concludes by describing the difficult balancing act faced by Scheller: how best to allocate
resources between basic research (exploration) and the development (exploitation) of existing thera-
pies. Research is the fuel that keeps the product pipeline full, but late-stage development translates
Genentech’s medical advances into useful therapeutics for patients. Finding the right trade-off is neces-
sary if Genentech is to gain a sustainable competitive advantage over its competition.
Suggested Questions
AnAlysis: Focus on internAl And externAl environment
1. Perform a VRIO analysis. What is Genentech’s competitive advantage, if any?
2. Apply a PESTEL analysis. What impact will changes in health care and biogenerics regulation
have on Genentech? Why?
3. Apply a five forces analysis. How would you describe Genentech’s competitive position?
4. Perform a SWOT analysis.
Teaching Note —Genentech: After the Acquisition by Roche
FormulAtion: Focus on Business, corporAte or GloBAl
strAteGy
5. What impact will the Roche buyout have on Genentech? Will it be possible for Roche to own
Genentech without destroying its ability to innovate?
implementAtion: Focus on recommendAtions And How to
execute tHem
6. What is the major dilemma that Mr. Scheller faces in the case? What should he do?
Suggested Answers
AnAlysis: Focus on internAl And externAl environment
1. Perform a VRIO analysis. What is Genentech’s competitive advantage, if any?
As in any knowledge-intensive industry, Genentech’s intangible resources and capabilities are more
important than its tangible assets when it comes to creating and sustaining a competitive advantage.
Certainly, Genentech has solid financial resources as a result of its approved product portfolio, but both
of these are a function of Genentech’s underlying technological expertise and its ability to leverage its
knowledge and reputation to create novel biotech therapies. Similarly, Genentech’s location in the San
2. Apply a PESTEL analysis. What impact will health care and biogenerics regulation have on
Genentech? Why?
This question is ideal for a PESTEL analysis, which will show that health care regulation is a critical
external (political/legal) force that can have great impact on biopharmaceutical companies, including
Genentech. Recent health care reform in the united States impacts the biopharmaceutical industry
in at least two ways. First, the Patient Protection and Affordable Care Act and the Health Care and
Teaching Note — Genentech: After the Acquisition by Roche
of McGraw-Hill Education.
estimated 16 percent of the population, or 47 million people. With the new law, more people in the
united States will have health insurance, which translates to broader coverage for insurance compa-
nies. This is good news for biopharmaceutical companies like Roche and Genentech since more people
will have insurance to pay for prescription drugs. What is not clear is how drug coverage rates might
change, as many of these people will be from lower income brackets.
Second, a key part of health care reform includes cost-saving measures. Government payers (such
as Medicare and Medicaid) will likely rely more on comparative effectiveness research (CER) to deter-
mine what drugs will receive coverage. As noted in the case, Genentech has had a recent spate of dis-
appointing results from CER studies, making its products likely targets to be removed from eligibility
for insurance coverage. This is especially true in light of the high prices of most cancer drugs ($25,000
have the same effect of limiting biotechnology companies’ period of market exclusivity.
Perhaps the next most important PESTEL sector is the sociocultural, as a result of demographic changes
in the world’s population. Roche’s 2010 Annual Report (page 16) describes the trends and resulting
impact as follows (emphasis added):
The world’s population continues to expand, and people are living longer on average. Greater life expectancy means
a rise in age-related diseases such as cancer, diabetes, rheumatoid arthritis, Parkinson’s and Alzheimer’s. This
is true not only of the industrialised world but increasingly of developing countries and emerging markets
third largest pharmaceutical market after the united States and Japan in 2010.
3. Apply a five forces analysis. How would you describe Genentech’s competitive position?
Applying the five forces model (see the Exhibit TN-2 at the end of this teaching note), we can see
that Genentech is in a relatively attractive industry with significant profit potential. Entry barriers to
the biopharmaceutical industry are high because it takes years for any new entrant to build a core
Teaching Note —Genentech: After the Acquisition by Roche
The threat of substitutes is greater than the threat of entry. Generics are already a major threat to phar-
maceuticals, and are an emerging threat to biotechnology products with the approval of the Biologics
Rivalry tends to be high, as most large drug companies compete in the same therapeutic areas,
seeking to develop the next blockbuster medication for the major diseases/disorders that affect the
population of the developed world. In other words, they go after the (same) largest markets in terms
of size and profitability. For example, Avastin’s competitor drugs include Erbitux by ImClone/Bristol-
The power of suppliers is relatively low in this industry because there are many biochemical manu-
facturers available to choose from, switching costs are low, and suppliers pose a low threat of forward
integration. The drug manufacturing process and quality of inputs is highly regulated by the FDA,
4. Perform a SWOT analysis.
A SWOT analysis is a helpful tool for integrating the results from internal (VRIO) and external
(PESTEL and five forces) analysis.
strengths—Genentech’s core competency is its technological expertise in genetic engineering, which
enables it to innovate multiple novel therapeutic agents. Its strong commitment to basic research has
been a powerful engine that has propelled the company forward, making it one of the few profitable
Teaching Note — Genentech: After the Acquisition by Roche
of McGraw-Hill Education.
Genentech’s top four selling products (Avastin, Rituxan, Herceptin, and Lucentis) have achieved
constant growth. Meanwhile, the company has been actively pursuing new indications of existing
products, as well as identifying new molecular entities in order to move them into development. As a
result of Genentech’s strong brand equity in the North American market, Roche has decided to place
all of its u.S. commercial operations in pharmaceuticals under the Genentech name. under Roche’s
ownership, Genentech will benefit from the companies’ combined u.S. sales organizations to maintain
strong performance in its specialty areas.
weaknesses—Paradoxically, Genentech’s dependence on the oncology market is also one of the com-
pany’s biggest weaknesses (close to 70 percent of Genentech’s 2008 sales came from cancer drugs).
Growing governmental concern over health care expenses has led to more careful scrutiny of the cost/
benefit ratio of high-priced cancer treatments. With several therapies showing minimal survival ben-
is mid-2012. Genentech does have a few more new products in Phases I and II of development; how-
ever, it will be years before Genentech can reap financial benefits from its research efforts. (Postscript:
Genentech did not get another drug approved until Actemra [toclizumab], a treatment for rheumatoid
arthritis, in 2010).
opportunities—Genentech currently has the leading position in the u.S. oncology drug market,
which is expected to grow quickly. According to MarketResearch, cancer is the second-leading cause
of death in the united States. The world market for cancer therapeutics is growing at a brisk double-
digit pace, with revenues surpassing $40 billion in 2010. This increased demand for oncology drugs is
threats—Recent health care reform will likely place an increasing emphasis on comparative effec-
tiveness research as a means of reducing health care expenses. This could pose a serious threat to
Genentech, which is highly dependent on the expensive (and lucrative) oncology market. If studies
continue to demonstrate that Genentech’s oncology products confer minimal survival benefits, the
products are likely to lose insurance coverage, forcing Genentech to lower its prices.
Teaching Note —Genentech: After the Acquisition by Roche
7
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction, distribution, or posting online without the prior written consent
of McGraw-Hill Education.
Generic drug competition has been a serious problem for many large pharmaceutical companies,
but was not an issue for biotechnology firms until the passage of the Biologics Price Competition and
Innovation Act in 2010. While the FDA has yet to develop a full implementation plan, the new legis-
lation allows for an abbreviated approval pathway for biosimilars. unlike pharmaceutical generics
(which must only demonstrate “pharmaceutical equivalence” to the patented compound), biogeneric
sponsors will be required to provide data from analytical, animal, and clinical studies, significantly
increasing the time and expense of getting a biosimilar approved. Nevertheless, the future prospect of
biogenerics is a serious threat looming on Genentech’s horizon.
FormulAtion: Focus on Business, corporAte or GloBAl
strAteGy
5. What impact will the Roche buyout have on Genentech? Will it be possible for Roche to own
Genentech without destroying its ability to innovate?
Evidence suggests that Roche had long been planning to buy the remaining shares of Genentech,
and that the equity alliance was merely a precursor to an eventual acquisition. By developing an early
relationship with Genentech, Roche preempted competitors and also reserved the future option of
unfortunately, empirical research indicates that most M&A deals turn out to be unsuccessful, and
ultimately destroy shareholder value, despite their high price tags. An important question for both
companies, therefore, is whether Roche will be able to avoid the M&A curse and realize the anticipated
synergies from this acquisition. Of course, the outcome of the Roche–Genentech integration depends
on multiple factors.
continuity between Genentech’s independent past and future as part of the Roche Group. He was
promoted to Executive Vice President of Research and Early Development, reporting directly to Roche
CEO, Severin Schwan.
Teaching Note — Genentech: After the Acquisition by Roche
A bigger concern in M&A deals is cultural collision, and Roche’s acquisition of Genentech is no excep-
tion. Themost profound impact will come from whether or not Roche’s seniorpharmaceutical man-
agement will support Genentech’s culture and nurture its continuation. Genentech’s academic and
innovative culture has been the dynamic engine that has propelled the company forward and kept
implementAtion: Focus on recommendAtions And How to
execute tHem
6. What is the major dilemma that Mr. Scheller faces in the case? What should he do?
The key problem Dr. Scheller faces is managing the trade-off between exploitation (defined as apply-
ing current knowledge to enhance firm performance in the short term) and exploration (defined as
searching for new knowledge that may enhance a firm’s long-term performance). Empirical studies
have shown that an ambidextrous organization—an organization that can balance exploitation with
and development in 2008, which was approximately 21 percent of its operating revenues, and signifi-
cantly more than the pharmaceutical industry average. Much of this was directed toward expanding
Genentech’s biotech capabilities into two new therapeutic areas—neuroscience and infectious diseases.
The challenge Dr. Scheller faces is to convince Roche’s senior leaders of the value of basic research and
gain their support for continued investment in Genentech’s exploratory activities. This will not be an
easy job, however. To Roche, “only an approved drug is a good drug.” Roche’s expectations for Avastin
Teaching Note —Genentech: After the Acquisition by Roche
9
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction, distribution, or posting online without the prior written consent
of McGraw-Hill Education.
breast cancer in the united States. Prior to these disappointments, Avastin was predicted to become the
world’s biggest-selling prescription medicine by 2014, and it is still Genentech and Roche’s top-selling
product. Roche is therefore eager to counteract criticisms that the drug is overpriced (at $50,000 per
patient per year) and shows minimal benefits in survival time. After all, Avastin targets cancer patients
who face high mortality risks. Any extension of their survival, even by days, is invaluable to them and
their loved ones.
Changes in Genentech’s organizational structure following the Roche takeover may also push
Genentech more toward exploitation and efficiency. Dr. Scheller fears these changes might alienate
Genentech’s legendary scientists, who have been asking if the acquisition marks “the end of Genentech
as we know it.” Somehow, Dr. Scheller needs to make a compelling case to Roche’s top management
and convince them that increasing resource allocations to scientific exploration is the most sustainable
route to achieving competitive advantage.
Recent Updates
2011 NDA activity. In August 2011, the FDA approved Zelboraf (vemurafenib) for the treatment of
BRAF V600E mutation-positive, inoperable or metastatic melanoma, along with the cobas 4800 BRAF
V600 Mutation Test used to determine patient eligibility for treatment with Zelboraf. The approval
provides proof-of-concept for Roche’s personalized approaches to medicine. Additionally, Genentech
submitted an NDA for vismodegib for the treatment of inoperable, basal cell carcinoma in November
2011. The application is undergoing priority review with an action date of March 8, 2012. For ongoing
updates, please visit Genentech’s press release archives at http://www.gene.com/gene/news/press-
releases/display.do?method=archive&year=2011.
Avastin approval revoked. The FDA issued a final ruling revoking Avastin’s approval for the treat-
Additional Resources
1. Additional information on the company is available at the corporate website at http://www.gene.
com/gene/index.jsp.
2. For an updated version of Genentech’s clinical development pipeline (Case Exhibit 13), please see
the following web page: http://www.gene.com/gene/gred/science/pipeline/.
3. Case Exhibit 16 is provided as an interactive timeline at http://www.gene.com/gene/products/
approvals-timeline.html. Click the product logos for more information on approved indications
and safety profiles.
4. Datamonitor 360 (a resource available through most academic libraries) published an updated
profile of the u.S. biotechnology industry in August 2011:
Teaching Note — Genentech: After the Acquisition by Roche
“Biotechnology in the united States,” datamonitor, Reference code: 0072-0695, August 2011. www.
datamonitor.com.
5. http://www.blinkx.com/watch-video/genentech-driven-by-science/aqp_F_ j4lx1ubdQfMsFBMQ
(17:35). Genentech: driven by science (June 12, 2007). A PharmaTV interview with Joseph McCracken,
Genentech’s VP of Business Development. McCracken describes the firm’s approach to scientific
discovery and alliance management, prior to the completion of the Roche acquisition.
6. http://www.pharmatelevision.com/Video/332-Genentech-Marc-Tessier-Lavigne.aspx (13:11).
Genentech: Becoming part of roche (October 13, 2009). A PharmaTV interview with Marc Tessier-
Lavigne, Chief Scientific Officer and Executive Vice President of Genentech after the Roche acqui-
sition. Tessier-Lavigne talks about Genentech’s position within the larger Roche organization and
how they have sought to protect Genentech’s unique scientific culture. Note: The first five minutes
are available for free, but a subscription is required to view the episode in its entirety.
Teaching Note —Genentech: After the Acquisition by Roche
ExHIbIT TN-1 A VRIO Analysis of Genetech
Genentech’s Resources and Capabilities
… are they?
Valuable
V
Rare
R
Costly to
Imitate
I
Organized to
capture value
O
Teaching Note — Genentech: After the Acquisition by Roche
of McGraw-Hill Education.
ExHIbIT TN-2 Application of the Five Forces Model
(continued)
Factors
Leading to… Threat of New Entrants Power of Suppliers Interfirm Rivalry Power of Buyers Threat of Substitutes
High threat University laboratories
are a potent source
of new technologies,
but usually cannot
commercialize innovations
independently.
Industry consolidation has
resulted in fewer, large
competitors of roughly
equivalent size.
Most large pharmaceutical
and biotech firms seek to
develop blockbuster drugs
in the same therapeutic
areas.
First product in drug class
to make it to market has
competitive advantage,
as late comers must
demonstrate additional
benefits.
High exit barriers due to
specialized investments.
Physicians decide what to
prescribe to patients.
Insurers and policy
makers decide which
drugs receive insurance
coverage.
Strong political pressure
to lower health care
expenses.
Increased comparative
effectiveness research.
Drug effectiveness trumps
brand loyalty.
Generics are major threat
for pharmaceuticals
and emerging threat for
biologics.
Biotech and
pharmaceutical products
may be substitutes for
one another.
Drugs may work for
more than one indication,
cannibalizing existing
products.
Moderate
threat
Individual customer
switching costs are low if
generics are available.
Brand equity not as
significant if new drug
works better and doctors
prescribe it.
There are fewer biological
products suppliers, and
some may have unique
cell lines or other features.
For some indications,
diet and exercise may be
viable alternatives.
Neutraceuticals may
be available for some
indications.
Teaching Note —Genentech: After the Acquisition by Roche
13
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction, distribution, or posting online without the prior written consent
of McGraw-Hill Education.
and money to develop
proprietary technology
through R&D.
High capital requirements
for manufacturing
facilities.
Building sophisticated
sales force requires
significant capital
investment.
Industry is highly
regulated by FDA.
Many biochemical
materials suppliers are
available.
Highly regulated industry,
so minimal opportunities
for differentiation.
Low switching costs for
large drug companies.
Many biotech companies
produce their own
biomolecules in-house.
Suppliers do not have
technology or knowledge
to forward integrate.
Demand for product is
increasing with aging of
baby boomers.
Emerging economies
are relatively untapped
markets.
Consolidation has lowered
intensity of rivalry in
developed markets.
Low threat of backward
integration.
Nature of threat
depends on comparative
effectiveness.
Teaching Note — Genentech: After the Acquisition by Roche
ExHIbIT TN-3 Genentech Financial Highlights (in millions, except per-share data)
20072006 2008
6,000
4,000
2,000
0
8,000
10,000
12,000
14,000
$9,284
$13,418
$11,724
20072006 2008
3,000
2,000
1,000
0
4,000
$2,113
$2,769
$3,427
$3,643
$3,142
$2,390
20072006 2008
1.50
1.00
0.50
0.00
2.00
2.50
3.00
3.50
$1.97
$2.59
$2.94
$3.42
$3.21
$2.23
TOTAL OPERATING REVENUE
Contract Revenue
Royalties
Product Sales
NET INCOME
Non-GAAP
GAAP
DILUTED EARNINGS PER SHARE
Non-GAAP
GAAP
Source: Genentech 2008 Annual Report, p. 13. See the 2008 Annual Report for more details.
