By Jennifer Boggs and Trista Morrison

Staff Writers

As the details of Roche Holding AG's $43.7 billion proposal to acquire Genentech Inc. unfolded on Monday, integration emerged as a key aspect of the deal.

In a conference call, Roche Chairman Franz Humer said the pharma will do "everything that's necessary" to maintain Genentech's entrepreneurial spirit and unique science-driven culture, including preserving the company as an independent unit within Roche and providing plenty of operational and creative freedom.

It's a trend often seen when big pharma acquires a biotech: Keep the biotech functioning as an autonomous unit to preserve the innovation. GlaxoSmithKline plc did it recently after acquiring Sirtris Pharmaceuticals Inc., ditto for Bristol-Myers Squibb Co. after acquiring Kosan Biosciences Inc. (See BioWorld Today, May 30, 2008, and April 24, 2008.)

Of course, Genentech isn't exactly a traditional biotech - its $98 billion market cap rivals that of some big pharmas. But much like Apple, Genentech has been able to "maintain a culture of innovation" even though it is no longer a small company, said Adam Goldston, senior vice president of investment banking with Jefferies & Co. Inc.

Michael Brinkman, managing director of health care investment banking at Piper Jaffray & Co., predicted that some of Genentech's "vigor" will dissipate if it is indeed acquired by Roche. "I can't imagine that they would be able to maintain that level of creativity and talent," he said.

But Brinkman noted that for many biotechs, the prospect of an eventual big pharma acquisition has become a driving force for innovation. "Innovation in biotech is largely driven by financial motivation," he said, adding that many new biotechs have been founded specifically with the goal of quickly getting acquired.

And once the acquisition closes, big pharma's resources can "leapfrog" biotech's innovation, Goldston said. Pharma funding and expertise in areas like clinical development, regulatory filings and manufacturing can help a biotech move its innovative projects forward much more quickly.

Despite its potential to nurture acquired innovations, big pharma still gets plenty of flak for the poor performance of its own discovery efforts and its overreliance on biotech to fill flagging pipelines. Yet Brinkman argued that pharma is innovative - the problem is that no amount of innovation can fill the gaping holes left behind by patent expirations on products like Pfizer Inc.'s Lipitor (atorvastatin).

"It's not so much a lack of innovation as that the low-hanging fruit has been picked and is going off patent," Brinkman said. He noted that Genentech's Avastin (bevacizumab), with second-quarter sales of $650 million and rising, is one of the few drugs that could "make a difference" on big pharma's income statement.

'One-Off' Deal Unique, Not Portentous

Pharma's shrinking pipelines continue to drive M&A in the sector, and the weak U.S. dollar and slumping stock prices clearly have made it a buyer's market. So it's no wonder big pharma firms, particularly those based in Europe and Asia, are taking advantage.

This year already has marked some major acquisitions. Japanese firm Takeda Pharmaceuticals Ltd., for instance, has spent a fortune on U.S. companies, buying Cambridge, Mass.-based Millennium Pharmaceuticals Inc. for $8.8 billion in May and taking over Amgen Inc.'s Japanese unit and up to 13 molecules for more than $1 billion. (See BioWorld Today, Feb. 5, 2008, and April 11, 2008.)

In January, another Japanese firm, Eisai Co., completed its purchase of Minneapolis-based MGI Pharma Inc. for $3.9 billion. More recently, Paris-based Ipsen SA offered to buy out Increlex partner Tercica Inc., of Brisbane, Calif., in a $663 million deal, and Basel, Switzerland-based Novartis AG offered $400 million for Malvern, Pa.-based Protez Pharmaceuticals Inc. in June. (See BioWorld Today, Dec. 11, 2007, June 5, 2008, and June 6, 2008.) None of those deals, however, comes anywhere close to Roche's $44 billion bid for the remaining shares of Genentech.

But does a deal of that magnitude mean other large-cap firms also might be up for grabs, like Thousand Oaks, Calif.-based Amgen or Foster City, Calif.-based Gilead Sciences Inc.?

According to analyst Jason Kantor, of RBC Capital Markets, that's unlikely. "This is a unique transaction," he told BioWorld Today. "This is a company that already is majority owned."

If the deal goes through - Kantor, like most analysts polled Monday, agreed that the acquisition likely will close, though Roche will end up paying more than its initial offer of $89 per share - it also would be the second acquisition by Roche in Genentech's 30-plus-year-old history.

Roche first acquired a majority interest in the biotech in 1990 and later acquired the full company in 1999, though shortly after, it floated about 42 percent of Genentech common stock through public offerings. Currently, Roche owns about 56 percent of the company.

"So it's a different situation than, say, a Gilead or an Amgen," Kantor said. "In this case, Roche doesn't have to pay the same premium and the amount of money needed to acquire the company is less than 50 percent.

"It's definitely a one-off," he added. "You can view it as part of a three- or four-year trend, but I don't think it's going to trigger" a new flurry of M&A activity.

Nevertheless, most of biotech's big names got at least a slight collateral boost from the news. Shares of Gilead (NASDAQ:GILD) closed at $49.64, up 11 cents, Monday, while shares of Summit, N.J.-based Celgene (NASDAQ:CELG) gained 66 cents to close at $71.51, shares of Amgen (NASDAQ:AMGN) rose 60 cents to close at $53.16 and shares of Biogen Idec Inc. (NASDAQ:BIIB) got a $2.20 bump to close at $66.85.

Piper Jaffrey's Brinkman said some big biotechs - like Celgene - are ripe for acquisition.

And overall, biotech acquisitions - big, medium and small - are likely to continue, Goldston said, adding that "the market can only suppress the valuations of these companies for so long."

But Roche's chairman stressed that the Genentech bid is a far cry the "mega-mergers or large-scale acquisitions" that Roche has sought to avoid. "I am still convinced that such transactions destroy rather than create value, and immobilize a company's innovative potential for years," Humer said during a media call. "Roche and Genentech are a different matter indeed," he added, referring to the companies' partnership, which goes back nearly 20 years.

In fact, most large pharma competitors already "have considered Genentech to be part of Roche," RBC's Kantor said, "so [the acquisition] really wouldn't change the competitive landscape."