Genentech, Roche Find New Balance Three Years Post-Merger
In late 2009, I wrote a feature story for BusinessWeek that was given the clever and rather blunt headline “Can Roche Leave Genentech Alone?” It was a pressing question at the time. Roche had just laid out $47 billion to acquire the 44 percent of Genentech that it didn’t already own. For years leading up to that, the Basel, Switzerland-based drug giant held a majority stake of the South San Francisco-based biotech, but was famously hands-off in how it managed the investment. That strategy worked: Genentech spent much of the late ‘90s and 2000s churning out a string of oncology blockbusters, including trastuzumab (Herceptin) for breast cancer and bevacizumab (Avastin), now approved to treat tumors of the colon, lungs, kidneys, and brain.
Three years post-merger, Xconomy wondered, how has Roche gone about leaving Genentech alone, while at the same time integrating it into the larger organization in a way that benefits both organizations? And how has life changed for employees of the company’s two major U.S. sites, Genentech’s South San Francisco headquarters and Roche’s Nutley, NJ-based research center?
To get the answers, I interviewed a half-dozen top executives of the integrated company, including Ian Clark, Genentech’s CEO. What emerged is a portrait of a company that is going through a top-to-bottom redesign in a process that’s complex, yet at the same time organized and meticulously thought-out. It’s too early to definitively declare the integration a success, but Clark says the early signs are positive. “From a structural and process point of view, the proof is in the pudding. Are we discovering anything?” he says. “We have entered into a rich vein of new molecules.”
It’s hard to argue with Clark when you take a look at Genentech’s plans for the upcoming conference of the American Society of Clinical Oncology (ASCO)—the most important cancer confab of the year. At the event, which begins in Chicago on June 1, Genentech is planning 30 oral presentations on its drug portfolio, including details from a pivotal trial of T-DM1, a turbocharged version of trastuzumab that’s part of an emerging drug class called antibody drug conjugates. These drugs are antibodies linked to toxins, which travel straight to cancer cells and destroy them, while leaving healthy tissue intact. Early positive results from trials of the drug, which Genentech is preparing to file to the FDA, have made it one of the most highly anticipated cancer products of the year. The company expects to get a verdict from the FDA on another new breast cancer drug, pertuzumab, shortly.
That kind of progress could have easily been stalled or derailed by too much merger disruption or employee angst. Not long after completing its big purchase of Genentech, Roche felt the pressure, like many of its large pharma peers, to slash its overhead expenses and become more efficient. And it did make cuts, right around the time when many talented Genentech employees were trying to figure out if they wanted to stick around.
In November 2010, Roche said it planned to eliminate 4,800 jobs worldwide, and get out of certain lines of research altogether, like RNA interference. While a few of the jobs were slashed from Genentech’s manufacturing operations in South San Francisco, Genentech’s scientific staff was largely shielded from the budget axe.
But 900 jobs were eliminated from the Nutley site, amounting to a 38 percent reduction in headcount. The sprawling campus, which sits proudly on one of the main highways leading to New York City, had always been Roche’s U.S. headquarters. But after the acquisition, Roche moved its U.S. headquarters to South San Francisco and rebranded all its old products as Genentech drugs. The company shifted the focus of the Nutley site away from administration and manufacturing and towards research.
Roche CEO Severin Schwan estimated that the layoffs would save the company $2.4 billion in 2012. Still, the Nutley shakeup was a blow to New Jersey, where virtually all of the area’s Big Pharma companies were making similar cuts.
To maintain the productivity of the Roche/Genentech pipeline—and raise the probability of generating more T-DM1-like successes—the company has done much more than just restructure its research sites. It has also prioritized the development of personalized medicine, even going so far as to set out specific five-year goals for making products that are aimed at specific patient populations. And it has defined its therapeutic priorities beyond oncology, bolstering separate research groups in virology, immunology, and neurology.
The first step in the transformation was figuring out how to preserve as much of Genentech’s independence as possible. To that end, the company created two discovery groups: Genentech Research and Early Development, which encompasses everything happening in South San Francisco, and Pharma Research and Early Development, which includes all of Roche’s research operations around the world. The two groups develop their own compounds up until what the industry refers to as “proof of concept,” or the end of the phase 2 studies that precede the pivotal phase 3 studies. At that point, molecules are handed to a single group within Roche, which handles the late-stage trials and the commercialization.
Joe McCracken, who had been head of partnering in Asia for Roche, moved to Nutley in the wake of the layoffs to run the business development and licensing group. One of his responsibilities was to raise morale, so he made an effort to focus on the positive aspects of the change. “The site went from a place that was losing its identity to one that consolidated its identity around the purpose of conducting important basic research, and translating that research into medicine,” he says. “I think that was a great move.”
Although the East Coast and West Coast research sites operate independently of each other, they share the goal of strengthening Roche’s presence in personalized medicine. And uniting the two companies has eased that process. Roche is one of the world’s leaders in diagnostics—the development of tools that can detect genetic mutations that will make some patients respond well to certain drugs. Genentech was one of the pioneers in personalized medicine with trastuzumab, which is approved to treat breast tumors that are partly driven by a mutant form of the Her-2 gene. But, says Genentech’s executive vice president of research administration, Richard Scheller, the success of the product didn’t spawn a boom in developing diagnostics that could be paired with new drugs. That was partly because of the big differences in product development timelines, budgets, and priorities that have often made it tough for therapeutic and diagnostic companies to work hand-in-glove. “Even though Herceptin made the benefits of personalized healthcare obvious to everyone, it just didn’t catch on,” Scheller says.
These days, Genentech is working hard to find ways to better coordinate therapeutic and diagnostic teams inside Roche. Each drug development team at Genentech has a diagnostics sub-committee, Scheller says. And there is a liaison who makes sure Genentech’s scientists are matched up with the right diagnostics experts on the Roche side of the company. “We’d like about 40 percent of [drugs in early development] to come with a diagnostic,” Clark says. “It’s a high bar, but we’re achieving it.”
Clark points to Genentech’s new melanoma product vemurafenib (Zelboraf) an example. The drug, which is targeted to patients with a specific genetic mutation, is paired with a diagnostic developed by Roche. “It is a relatively small market, but the drug wouldn’t have been approvable without the diagnostic,” he says.
Unifying Roche and Genentech has also streamlined the process of bringing in good science from the outside. Genentech in particular has formed a number of deals with biotech startups in the last year—each structured in a way that might have been challenging when Roche was a majority owner of Genentech, says James Sabry, vice president of Genentech partnering. “I think this opened up an ease of thinking about different types of structures for deals that we didn’t have before,” he says. “It’s allowed us to use our creativity on the business side.”
For example, last June, Genentech paid an undisclosed sum to Cambridge, MA-based Forma Therapeutics for rights to develop a drug that targets cancer cell metabolism. The unusual twist is that the deal allows Genentech to buy the drug outright, at a pre-determined price, if it meets certain development goals, without the need to further split the profits with Forma, or acquire Forma. Then, in January, Genentech formed a $95 million deal with Cambridge-based epigenetics company Constellation Pharmaceuticals that allows Genentech to buy the entire company at some point in the future if certain pre-determined milestones are met. And this morning, Genentech formed a drug-discovery pact with Cambridge-based Ensemble Therapeutics to use a new class of synthetic compounds Ensemble developed to hit protein targets that have been difficult to address with traditional biotech drugs.
Roche engages in its own efforts to license in good science from the outside—an arrangement that raises the risk that it and Genentech will inadvertently end up competing for the same deal. So shortly after the merger, the company put in place an infrastructure that lessens that probability. For each disease area, McCracken explains, there is a “single point of contact” (referred to internally as a SPOC) at both Genentech and Roche. The SPOCs know all the deals that are in the works, and they collaborate with each other to determine which arm of the company should be put in charge of a deal, should both Genentech and Roche be interested in it.
If an agreement can’t be reached among the SPOCs, Scheller and Sabry are brought in to mediate. If that doesn’t work, the dispute is escalated to Roche CEO Schwan. “It hasn’t gone that high, and I don’t think it ever will,” McCracken says. “We coordinate our activities to avoid competition.”
In fact, Scheller says, Schwan has taken a largely hands-off approach to making decisions about what science the company should pursue. Scheller, who reports directly to Schwan, says that has amounted to even more freedom than he had when he reported to Art Levinson, Genentech’s previous CEO. Levinson is now chairman of Genentech’s board of directors, as well as a member of the bigger Roche board. “Art is a scientist, so we talked all the time about what we should do next,” Scheller says. “My boss now is extremely smart, but he’s an economist. He expects me and my colleagues here to make scientific decisions.”
McCracken, who worked at Genentech before moving over to the Roche side, says Roche has adopted some aspects of Genentech’s culture in an effort to make R&D more efficient. For example, the company has embraced the Art Levinson system of making big decisions, which mandates that one person be the decision maker, not a whole committee. “Roche historically was consensus-oriented in making decisions,” McCracken says. “At Genentech, the concept was the single person who’s in the best position to make the decision makes the decision. I see that transformation at Roche.”
Executives and employees at both arms of the company are now being encouraged to help find other ways to further streamline R&D. At Genentech, there’s an effort underway called “Rethink D,” which encourages employees to try new methods for improving drug development. Towards that end, the company is piloting a program in its clinical trials for T-DM1 that allows patients to use iPads to complete some of the informed consent paperwork, which can be filled with daunting legalese for patients. “Our goal is to make the development process quicker, and maybe less expensive,” Clark says.
Roche is also working on strengthening its relationship with the academic community—a goal that has become a priority at the Nutley research site. Jacques Banchereau, who joined the site in October 2010 as head of virology discovery, came from the Baylor Institute for Immunology Research in Dallas. Roche is currently working with the institute on an HIV vaccine, Banchereau says. “Part of our transformation here is to make partnerships between our scientists and scientists in academia,” he says. The Nutley site has also recruited several academic researchers, including Hyam Levitsky, an oncologist from Johns Hopkins, James Cassidy, an oncologist from the University of Glasgow in Scotland, and Pamela Carroll, a biology Ph.D. from Harvard who is an expert in improving drug discovery. “We are recruiting at a small scale people who bring knowledge we need,” Banchereau says.
When asked how the integration has impacted innovation, Roche’s and Genentech’s early research groups are each able to point to about 30 new drugs working their way through their respective pipelines. “We’re very happy with the flow of molecules,” says Genentech’s Clark.
As for whether Roche is truly leaving Genentech alone, Clark says the answer is isn’t black-and-white. “We are more integrated, but there is a fairly significant measure of separateness,” he says. He adds that regardless of what changes as the integration continues, both legs of the company will continue to follow the Genentech’s longtime mantra: “We follow the science.”