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Tuesday, Sept. 9, 2008 | Inside a biological manufacturing plant situated on 60 acres in Oceanside, nearly 500 Genentech, Inc. employees produce thousands of liters of Avastin, the company’s best-selling cancer drug made from genetically modified cells grown from the ovaries of Chinese hamsters.
Since July, however, the fate of the sprawling plant at One Antibody Way has been uncertain because of a takeover bid by Roche, a Swiss drug maker with United States headquarters in New Jersey. The buy-out proposal threatens to upset an arrangement that has largely been considered a model relationship between a big international pharmaceutical company and a research-oriented biotech company since 1990, when Roche bought a majority stake in Genentech.
Headquartered in South San Francisco, Genentech is known for its independently-minded researchers and executives, and Roche’s bid threatens to erode a culture and record for innovation largely responsible for the company’s success, several Genentech employees and industry analysts said.
One Genentech employee, who asked to remain anonymous because of the pending negotiations, said the climate of the plant is likely to change from “independent and gutsy to cumbersome and ultra-corporate.”
Buy-outs, a takeover of one company by another, and mergers, when two autonomous companies combine to grow without the hassle of starting a new business entirely, often bring side effects. Companies often relocate, close facilities, slash jobs and change long-held practices.
And in biotech, a promising yet risky industry, there are often more subtle concerns that have to be grappled with, particularly in a company such as Genentech, where employees have come to expect a hands-off approach from shareholders in exchange for creating blockbuster drugs.
Roche, which already owns 55.9 percent of the publicly traded Genentech, made the surprise $43.7 billion offer in July to buy the rest of the company, which has three U.S. facilities, including Oceanside. Roche’s three biggest-selling drugs — the cancer medicines Rituxan, Herceptin and Avastin — came from Genentech.
On Aug. 13, Genentech rejected the bid, saying that a special committee of directors, made up of the three Genentech directors who are not Roche or Genentech employees, had found that Roche’s offer of $89 a share “substantially undervalues the company.” But in a statement, the special committee said it would consider a higher offer, suggesting a deal will eventually be made. After the initial bid, Genentech’s stock price immediately rose above $89 a share, indicating that investors anticipate that Roche will eventually have to pay more to seal the deal.
Desperate not to lose valuable employees who might jump ship after a buy-out, Genentech announced that it would spend more than $300 million on retention bonuses —in lieu of 2008 stock options — to hold on to employees. The move, which came about a week after Roche’s offer, lends credence to the notion that Genentech’s virtually unmatched record for innovation in the biotech and pharmaceutical industries is largely due to its independent research.
According to a regulatory filing that detailed the severance package for employees who could be laid off after a buy-out, the retention plan would extend to virtually all of Genentech’s 10,700 employees, and its chief executive, Arthur D. Levinson, would be entitled to a bonus of $8.7 million if he stays. A Genentech spokeswoman said the company hadn’t made any decisions about the number of lay-offs planned if the deal is brokered.
But even with the bonuses, keeping employees could be a challenge. Genentech employees are expected to become much wealthier if Roche pays a high price for their stock, and that might mean some employees would no longer have to work or might start their own companies.
As expected, Roche has already started to shave costs as it pursues its takeover bid. The company announced this week that it is planning to close its 1,000-worker, 1-million-square-foot Palo Alto research lab, moving the facility’s research unit to its New Jersey headquarters.
Locally, the 500,000-square-foot Oceanside plant is expected to undergo a host of internal changes, but a closure or massive lay-offs are probably out of the question because the facility is too valuable, industry insiders said.
Given the complexity of drug-making, it’s costly to move production, and the expertise needed to produce drugs such as Avastin is difficult to find outside of university hotbeds, such as San Diego. What’s more, the plant can produce nearly a quarter of Genentech’s federally approved capacity to make Avastin — a drug that enjoys increasing demand, despite its hefty price tag.
Several analysts have speculated that Roche’s takeover could backfire on the Swiss company if the employees who created Avastin— often referred to as Genentech’s “golden egg” — leave the company. Roche executives, however, have balked at the suggestion. They said that Roche could save $750 million to $850 million a year from the deal because the companies would be able to better share ideas and research, making it able to get new drugs to consumers quicker.
One factor that could be causing Roche to re-evaluate the successful arrangement is that without the deal it might not have first dibs on new Genentech products after 2015, the end of an agreement that now gives Roche the option to sell Genentech products outside the U.S, some analysts said. Moreover, the weak American dollar makes it less expensive for foreign companies to buy American ones right now.
Along with the prediction that Oceanside won’t lose its Genentech plant if a deal with Roche is reached, the region also emerged on the upside of a recent merger.
Under a deal announced in June and expected to close in the fall, Carlsbad-based Invitrogen, a biotech company that makes specialized laboratory supplies, will merge with Applied Biosystems, a Foster City, Calif.-based company that produces similar products.
The combined company will be called Applied Biosystems, but will be headquartered in Carlsbad, and Invitrogen Chairman Greg Lucier will remain at the helm when the companies combine. The deal is expected to give the company combined annual sales of $3.5 billion.
“All we’re losing is the name,” said Tim Ingersoll, a spokesman for Biocom, the regional industry trade group.