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How soon does 2015 seem to you?
August 2008
by Chris Anderson  |  Email the author

I've lived in my house for seven years, so I have a pretty good feel for how long seven years is. Seven years ago, my daughter still believed in the tooth fairy and we had a gate across the top stairs of our deck to prevent my toddler son from tumbling down. Today, my daughter is getting ready for high school and my son plays Little League baseball. In 2015, my daughter will be 22 and ready to start life on her own. My son will be nearing the end of high school. Suddenly, the future doesn't seem so far away.

And that, perhaps, is how the management at Roche began to feel about its longtime relationship with superstar biotech Genentech. Seven years ago, Genentech shares were trading for roughly $22 per share and Roche had been the majority owner of the company for a bit more than 10 years. In 2001, with agreements in place that would provide Roche with first choice to pick Genentech's ripest fruit, I'm sure 2015 seemed forever in the future.

But not anymore. Like most of the big pharma companies, Roche, though very well run, has to be apprehensive about the future. Chairman Franz Humer, in recent interviews, has commented on how challenging he expects the market will be for companies such as his, which are faced with what should be a very different industry over the next 20 years.

Gone are the days of big pharma riding a couple of bucking bronco blockbusters to profitability, with foals already lining up to replace the current horses when they get worn out—or their patents expire.

Which brings us back to Roche and Genentech. The sheer size of the companies involved, and the majority ownership by Roche, make this unlike other deals. Roche has not been referring to its offer of $43.7 billion for the remaining shares as an acquisition—and technically, anyway, that would be correct. But I'm sure it doesn't feel that way in South San Francisco.

And it doesn't look that way from the outside looking in. If this is all lovey-dovey and merely "taking Genentech private" as Humer has noted, why does this look more like a takeover? Maybe it's because, as has been reported in the media, Genentech CEO Arthur Levinson had it sprung on him via an evening phone call the day before Roche went public with its offer.

And once it went public, Roche began taking hits for making what many called a low-ball offer for the remaining shares. The market certainly expects more and as the price of Genentech still sits around $95 per share as I write this—seven percent more than Roche's $89 per share offer—and it appears the market is actually demanding more.

After all, it is hard to imagine the three-person special committee of Genentech sending the white smoke up the chimney and emerging to say, "we have a deal" at less than market.

Which also makes a recent lawsuit filed by an intentionally unnamed law firm against Roche and various Genentech executives all the more laughable. After all, no one has bought or sold anything yet. I could go on for hours about folks taking personal responsibility for their investment decisions, including knowing that Roche is a majority holder and that taking full ownership is a distinct possibility, but I guess some people just need someone to blame.

This deal is nothing more than what happens in those $43.7 million deals, where a big pharma company buys the up-and-coming biotech for its innovative technology. Genentech is arguably the model of innovation in the industry and it is hard to argue with the success the company has achieved.

Sure, Roche has benefited greatly from its ownership stake, but right now what it really wants is innovation—and in Genentech, it can get that in spades. It also wants to keep the ability to grab Genetech's ripest fruit, something that could disappear in seven years if it doesn't act to preserve that.

Consensus seems to be that this deal will get done, at a price higher than the initial offer, and that this shouldn't drag out as did Roche's recent acquisition of Ventana Medical Systems.

With the Swiss franc strong against the dollar, and for the above reasons, now was the time for Roche to act on what it surely has been contemplating for some time. It's a good move and a smart move. Roche has promised to allow Genentech broad latitude in its research operations should the deal eventually go through. That too is a good move.
So while we wait for the answers to the questions of how much will Roche pay and when, the real elephant in the room is a question that can only be answered in time: Will it work? DDN



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