Roche Genentech Acquisition Analysis

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Roche Genentech Acquisition Analysis

  1. 1. Gene- Gene-alyzing GENENTECH Strategic Management for Executives GROUP 8 – HCEMBA’09 Primary Contributor: Manas Kanungo Copyright: Manas Kanungo 2009
  2. 2. THE BIOTECH & PHARMA INDUSTRIES Agriculture Agri - Food Aqua/Marine PHARMA BIOTECH Animal Health Animal Health - Chemistry Based, Orals - Proteins & Peptides, Fluids - “Small Molecules” - “Large Molecules” - Patents for Formulations - Patents for Discovery, Process Human Therapy Copyright: Manas Kanungo 2009
  3. 3. Biotech Industry Landscape – Room to Grow Few Large, $B Companies – 40% Amgen $16B Many Small Players < $50M ea 1000 Companies ~ $85B Genentech $14B Amongst Top 5 Biotechs: Baxter $12B Others 60% 3 are Biotherapeutics Cos: Monsanto $11B (Amgen, Genentech, Baxter) 2 are in Agriculture: Baxter $12B (Syngenta, Monsanto) Copyright: Manas Kanungo 2009
  4. 4. 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!) vs. saturated pharma Formative FDA approval & regulatory processes: Whoever gets in first gets to pave the way… Copyright: Manas Kanungo 2009
  5. 5. 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 Copyright: Manas Kanungo 2009
  6. 6. BIO- BIO-THERAPEUTIC INDUSTRY TRENDS Mass Patients THERAPY Personalized Medicine New NUCLEIC ACIDS & OLIGONUCLEOTIDES I ROI N D I PHARMAS C Consolidation A - Few Major Players T I BIOTECHS - Niche Market LARGE MOLECULES, INJECTIONS - High Prices O PROTEINS, PEPTIDES, ANTIBODIES - Low Volumes The Few & The Proud - Large Capital Need N - Research & Tech S - Process & Marketing GENERICS Coming out of the woodworks Known DISEASES New Copyright: Manas Kanungo 2009
  7. 7. BIOTHERAPEUTIC INDUSTRY & APPROVALS 1982 - 2007 All Biotech Approvals Genentech • 1982 – 1995: 42 20: ~ 50% !! • 1996 – 2007: 243 15 35 30 1996: Biotherape 7.5% of all drugs utic Era: 25 26 25 marketed 28 23 Approved! 21 20 19 20% CAGR: 32% of all 18 17 18 17 pipeline research 15 16 programs 15 10 9 6 6 5 4 4 3 3 3 2 1 1 0 0 0 0 Copyright: Manas Kanungo 2009 Approvals
  8. 8. Top 25 Biotherapeutic Drugs = $70B Drug Company $B ’07 100% Biotech Companies: Top 5 & 12/25 Rituxan Genentech $ 5.5 Enbrel Amgen $ 5.3 Amgen 5/25 $ 15.7B (22.4%) Hercepti Genentech $ 4.8 Avastin Genentech $ 4.1 Aranesp Amgen $ 3.6 Genentech 3/25 $ 14.4B (20.6%) Remicade J&J $ 3.3 Lantus Sanofi-Aventis $ 3.2 Rest Pharmas: by acquiring smaller Biotechs Humira Abbott $ 3.1 Gleevec Novartis $ 3.0 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 Copyright: Manas Kanungo 2009
  9. 9. 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 1.00 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 Environment Copyright: Manas Kanungo 2009
  10. 10. Gene- Gene-sis of Gene-n-tech Gene- $ 35 -- $ 88 Went Public: 1980 1980’s Process External Contributors Out-Licensed Sales: Innovation: Lilly, Roche Genomics, Proteomics, Identification FDA: Growth Hormone Microarrays, Heart/Blood Clot Cloning Sensitive Assay Technologies, 1st Sales: 1985 Antibodies Molecular Biology FDA Enforced Humanizing Discoveries, CUSTOMER TRACKING Therapy Economic Boom … Focus: BioOncology Internal Capabilities Genentech is Formed: 1976 Boyer & Swanson Technological Innovation: Genetic Engineering 1977 - 1979 Identify absent, defective, excess protein; Discovery: Engineer protein or molecule for therapy; rDNA Technology Splice Genes in Fast Growing Bacteria 70’s to Produce Therapeutic Proteins Boyer: Biochem Chohen: Genetist 1st Cloning: Human Protein in E.Coli Licensed to Eli Lilly: Human Insulin, Growth Hormone Copyright: Manas Kanungo 2009
  11. 11. 1990’s: Building & Leveraging Core Competencies Hamel – Prahalad / Internal, or Inside-Out Strategy Model: Specific, Inherent, Integrated, and Applied KSAs $$$$ $2.1B Roche Merger Smith Kline – Hep. B Biogen Idec – NHL Internal – USA Alkermes - Nutropin External: Roche Customer Service - SPOC Out-License BIOTECH MANUFACTURING Vacaville Plant Internal Cost Leader Difficult for Others to Imitate 3 PRODUCT DEVELOPMENT FDA Approvals – Int/Ext Internal External Partnerships Out-License Strategic Portfolio: High Value Customer Benefits 2 Founders Research RESEARCH: Access to Wide Variety of Products & Markets 1 Center Various 1st: Internal External Partnerships In License Monoclonal Antibodies Targeted Therapies Oncology Immunology Specialty Biotherapeutics Copyright: Manas Kanungo 2009
  12. 12. 2000’s: Genentech’s Sustained 1st Mover Leadership Due To: • Process & Filing Expertise for Biologics FDA Approvals To Date: • Robust Clinicals w/HCP & Patients Inputs 35 Largest New Products Pipeline • Huge Staff w/most R&D Spending: 21% • Foster Basic & Outcomes Based Research, Partners Global Reach w/o Marketing & Significant • US Internal: Strategic, Targeted Plans w/Execution Sales Investment • Co-Marketing & Sales to Leverage Partners’ Strengths Profits, Manufg: Capacity, Cost Best In • Optimized Volumes to Minimize Costs Class • Strategic Partnerships, Purchases for Expansion Copyright: Manas Kanungo 2009
  13. 13. GENENTECH – Setting & Achieving Goals – ’99 to ‘05 Target Actual Avg EPS/yr Growth 1.25% 33% Approved Products / Indications 5 7 w/Multi-Indic w/Multi- Late Stage Clinicals 5 6 w/21 Indications Rev from Alliances / Acquisitions $500M $300M Net Income as % of Op. Revenue 25% 21% (Rituxan w/Several Indications, need to share with other partners) 2010 Vision & Goals Leader in revolutionizing treatment of patients w/cancer, immunological diseases, 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 $12B Copyright: Manas Kanungo 2009
  14. 14. Genentech’s External Strategy Decisions Red Ocean - Sharks Blue Ocean - Dolphins Market – Compete in Existing Space Create New Space Therapeutic (Mass Pts, Small Molecules) (Personalized Meds, Large Products Molecules) (Pharma) Try to Beat, Eat, or Look Out Ignore – Make Them Irrelevant Competition Patients / Exploit / Steal Existing Patients Create & Capture New Patients Demand Make Trade-offs: Brand or Willing to Pay More: For Unmet, Value Offering Generic Aspirin? Life Saving Cancer Solutions Systems & Activities to Chose Systems & Activities for BOTH Internal Low Cost or Differentiation: Low Cost & Differentiation: : Alignment Make/Buy, Other Compromises Own Biotech Mfg: Low Cost, High Profits Although Kim & Mauborgne did not propose their Blue Ocean Strategy in HBR till Oct 2004, Genentech’s inherently innovative culture extended beyond their R&D Staff to develop a business strategy with a path of least resistance and execute with precision for superb results. Copyright: Manas Kanungo 2009
  15. 15. Genentech’s Value Based Management Strategy McKinsey’s 7 – S Framework Model Innovative, Co-operative, “Best Companies Partnership, Citizenship to Work For” Clear, Challenging, Achievable Style Goals……..stay Focused! Very High Caliber People, Subject Area Experts……R&D: Nobel Laureates Strategy Skills Guiding Principles • Scientific Excellence Shared • Long-Term Planning values Built Streamlined Systems and • Execution Processes to Lead in Manufg, Technology, Approvals, Performance • People & Culture Staff Systems 11K People w/ > 1000 Scientists; Unique Manufg & Mktg Staff; Structure RaaRaa – Responsibility w/Authority, Roles w/Accountability Centralized, Close Knit Family Atmosphere; Basic Research feeds Value Based Screening for Product Development; Execution Oriented Copyright: Manas Kanungo 2009
  16. 16. Financials ($B): Consistently Outperformed Industry 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% 16.0 14.0 12.0 10.0 Cash Flow: $4B from ‘08 Operations 8.0 6.0 4.0 2.0 0.0 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 Copyright: Manas Kanungo 2009
  17. 17. Investor Performance – Stocks & EPS 100 Shares @ $35 in May ‘80 IPO for $3500 = 5040 Shares @ $82 worth $43,280 Return of 1,137% (Not Including Dividends!) 100 90 2008 Ind Avg 80 EBIT 5.5B 1.4B 70 P/E 26 30 60 P/B 5.84 6.28 50 LTD/Equity 14.86 30.46 40 ROA 17 8 30 Gross Profit 87% 0% 20 10 0 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% Copyright: Manas Kanungo 2009
  18. 18. Biotherapeutic Industry Future Biotech industry somewhat shielded from economic recession: • Globalization with Increasing Exports • Current Unmet Diseases, with Aging Human Market Segments • Growth in Agricultural, Animal, Aquatic, and Environmental Segments Therapeutic Industry Revenue will Grow $86B $147B from ‘08 –’13 Growth of 11.4%, or 5 x Avg. US GDP over the same period Market Driven by High ROIs, Dual Patent Protections, Personalized Meds CHALLENGES New Entrants, Pharma Companies Refocusing (Pfizer), Bio-Generics, Bio- Market Plateau in Existing Areas, Margin Threats from Cost Controls from Medicare, Govt , Insurance Nucleotides (DNA/RNAs) may Substitute Bio-Therapeutics Bio- Copyright: Manas Kanungo 2009
  19. 19. Future for Genentech - Pros Unmet Demands for New Indications and Therapies will continue to ensure Market and Industry Attractiveness Positive Paradigm Shift to Curative Solutions for Severe Conditions that People are Willing to Pay (Blue Ocean) vs. only alleviating conditions with threat of regression Strong R&D with Over 100 New Products in Pipeline, mostly in New or Expanded Areas, will ensure Increasing Market Shares and Revenues Expertise in Innovative Biotech Processes & Large Scale Manufacturing will Generate Low Cost Products with High Profits & Price Flexibility High Barriers to Entry … Strong Technology & Process IPs w/New & Expanded Extensions, Capital Intensive Mfg will limit Competition to a Few Substitutes Copyright: Manas Kanungo 2009
  20. 20. Future for Genentech – Pros .. Contd Foundation and Strength in Basic Biotech Research also gives Genentech significant lead in next generation Nucleotides Era. Excellent Financial Position (Cash, Earnings, Valuations, Stock) : Invest to Grow Core Competencies – Research & Development? Explore Further Economies of Scale in Manufacturing? Share Growth through Out-Licensing, In-Licensing, New Diseases? Out- In- Expand Biotech Moat – Agriculture, Marine, Environmental Invest in the Future – Nucleotides? Theranostics? Disease Management? Wait for anticipated blockbusters, and buy Roche??? Roche One of few w/+ve Outcomes from Mergers: BMC, Ventana Copyright: Manas Kanungo 2009
  21. 21. Future for Genentech - Con End of Pricing Honeymoon Around the Corner - Increasing Cost Control Pressures from Govt and Private Payers The Vultures are Waiting (Generics & Estrangeros) Estrangeros) - Large Pharmas waiting to buy up - Teva Already a Major Biotech Contender - Strong Lobby to Allow Bio-Generics Bio- - Therapies with Oldest IPs at Risk - UK, Germany, France, Singapore, South Korea Government Backed Programs Forced into a Bad Marriage? (Roche)…..who benefits? - $4B Cash Dowry too tempting for Roche not to cover debts - No longer w/family, friends I grew up with…. - Oncology, Core Area, Relocating to Nutley.. Scare - Career Path Issues Away - MBO vs. Innovative Incentives, Options Core - New Decision Making Process Members - Systems, Reporting, Accountabilities Changes ??? Copyright: Manas Kanungo 2009
  22. 22. Sources • 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 • BioWorld, BioSpace, Scrips News • valuebasedmanagement.net • Business Week, HBJ • Private consultants • Personal experience in Roche Copyright: Manas Kanungo 2009

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