Published online 22 July 2008 | Nature | doi:10.1038/news.2008.968
Corrected online: 22 July 2008

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An offer Genentech can't refuse?

Roche promises to preserve Genentech's independence if it acquires the remaining shares.

On Monday, the Swiss pharmaceutical giant Roche offered US$43.7 billion to acquire the 44% of biotechnology jewel Genentech that it doesn't currently own.

The offer immediately raised questions as to how independent Genentech, based in South San Francisco, California, would remain if fully acquired. The 32-year-old firm is one of the biggest biotechnology success stories, with a market value of some $86 billion. Its blockbuster drugs include Avastin (bevacizumab) for colon cancer and Herceptin (trastuzumab) for breast cancer.

Genentech's headquarters in South San Francisco, California, would become home to Roche's combined US commercial operations.AP/Paul Sakuma

Roche acquired a majority stake in Genentech in 1990 but has largely operated in a hands-off fashion. Breaking the news of the potential acquisition, Severin Schwan, the chief executive of Roche, promised that the company "will take the necessary steps to nurture Genentech's innovative and unique science-driven culture."

Original research

That may be cold comfort to scientists who have gravitated to Genentech because of its atmosphere of independence and innovation. A biotechnology icon with roots that go back to cofounder Herbert Boyer, a pioneer of recombinant DNA technology, the company gave birth to the first biologic drugs â€" among them insulin and human growth hormone. It has kept its reputation as a hive of creativity and workplace moxie, winning first place on Fortune's 2006 list of the '100 Best Companies To Work For'.

Some company watchers said that defections may be in the offing. "I would imagine a lot of people work there because of the culture," says William Tanner, a biotechnology analyst with Leerink Swann, a Boston-based healthcare investment bank. "If they wanted to work at Roche, they would already be working at Roche."

Wall Street analysts suggest that the proposal is being driven by Schwan, Roche's new chief executive, and by a provision in a current license agreement between the two companies that gives Roche right of first refusal for marketing Genentech products outside of the United States until 2014. After that, a semi-independent Genentech could conceivably take its products to Roche competitors for offshore marketing.

Under the proposed acquisition, Roche would operate Genentech's main South San Francisco site as an independent research center, where headquarters for Roche's commercial operations would be relocated from Nutley, New Jersey. Virology research and development would also move to South San Francisco from nearby Palo Alto, California.

Drugs in the works

Genentech has a relatively "depleted" drug pipeline, notes analyst Mark Schoenebaum, who works in the New York office of Frankfurt-based Deutsche Bank. As a result a good deal is riding on upcoming results from a late-stage trial of its anti-cancer drug Avastin that, if successful, would significantly increase its use in breast and colon cancer patients. In the near term, he says, "the pipeline is Avastin, Avastin, Avastin."

Among Genentech's other late-stage drug candidates is ocrelizumab, a humanized monoclonal antibody in Phase III trials for rheumatoid arthritis and lupus and in Phase II trials for relapsing multiple sclerosis. But the company is bogged down in a legal dispute with the drug's co-developer, Biogen Idec of Cambridge, Massachusetts, which could lead to trials being changed or cancelled outright. The two companies announced in April that another drug on which they are co-operating, Rituxan (rituximab), failed in a late-stage trial for treating lupus.

Genentech's heavy reliance for its considerable profits on pricey anti-cancer drugs, says Tanner, may mean that Roche is on target with its acquisition offer, which is for an 8% premium over Friday's closing stock price. The $89 share price is "probably going to have to go up, but maybe not a lot," he says. "That tells you that maybe things aren't as rosy as people think." He notes that US insurers are increasingly reluctant to pay five- and six-figure bills to extend cancer patients' lives by a matter of months.

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In a brief statement on Monday, Genentech confirmed receipt of the Roche offer and said it would promptly convene a special committee of its three independent directors -- who include co-founder Boyer -- to determine what action to take. Roche, for its part, said it expects to complete the transaction "as soon as possible", subject to approval by the holders of a majority of the Genentech shares not already owned by Roche.

Schoenebaum, for one, thinks shareholders may hold out for more than the offer price. 

Corrected:

Rituxan (rituximab) failed in a late-stage trial, not late-stage trials, as we had stated.
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