GeneGene--alyzingalyzing GENENTECHGENENTECH
Strategic ManagementStrategic Management
for Executivesfor Executivesfor Executivesfor Executives
GROUP 8 GROUP 8 –– HCEMBA’09HCEMBA’09Primary Contributor: Manas KanungoPrimary Contributor: Manas Kanungo
Copyright: Manas Kanungo 2009Copyright: Manas Kanungo 2009
THE BIOTECH & PHARMA INDUSTRIESTHE BIOTECH & PHARMA INDUSTRIES
PHARMA BIOTECH
Agriculture
Aqua/MarineAqua/Marine
Agri - Food
PHARMA BIOTECH
- Chemistry Based, Orals- “Small Molecules”- Patents for Formulations
- Proteins & Peptides, Fluids- “Large Molecules”- Patents for Discovery, Process
Animal Health
Human Therapy
Animal Health
Copyright: Manas Kanungo 2009Copyright: Manas Kanungo 2009
Amgen $16B
Genentech $14B
� Few Large, $B Companies – 40%
� Many Small Players < $50M ea
� 1000 Companies ~ $85B
Biotech Industry Landscape – Room to Grow
Baxter $12B
Monsanto $11B
Baxter $12B
Others 60%
Amongst Top 5 Biotechs:
� 3 are Biotherapeutics Cos:(Amgen, Genentech, Baxter)
� 2 are in Agriculture:(Syngenta, Monsanto)
Copyright: Manas Kanungo 2009Copyright: Manas Kanungo 2009
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!) 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 2009Copyright: Manas Kanungo 2009
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 2009Copyright: Manas Kanungo 2009
BIOBIO--THERAPEUTIC INDUSTRY TRENDSTHERAPEUTIC INDUSTRY TRENDS
I
N
D
I
New
PHARMAS
NUCLEIC ACIDS & OLIGONUCLEOTIDES
Mass Patients T H E R A P Y ���� Personalized Medicine
ROI
D I S E A S E S �
I
C
A
T
I
O
N
S
Known New
GENERICS
PHARMAS
BIOTECHSLARGE MOLECULES, INJECTIONSPROTEINS, PEPTIDES, ANTIBODIESThe Few & The Proud
Consolidation
Coming out of the woodworks
- Few Major Players- Niche Market- High Prices- Low Volumes- Large Capital Need- Research & Tech- Process & Marketing
Copyright: Manas Kanungo 2009Copyright: Manas Kanungo 2009
BIOTHERAPEUTIC INDUSTRY & APPROVALS 1982 BIOTHERAPEUTIC INDUSTRY & APPROVALS 1982 -- 20072007
1996: Biotherape
utic Era: 28
Approved!
2526
2325
30
All Biotech Approvals Genentech
• 1982 – 1995: 42 20: ~ 50% !!• 1996 – 2007: 243 15
35
� 7.5% of all drugs marketed
10 0
1
4
2
0
3 3
6
3
6
4
9
Approved!
15
18
1617
1819
17
21
0
5
10
15
20
Approvals
� 20% CAGR: 32% of all pipeline research programs
Copyright: Manas Kanungo 2009Copyright: Manas Kanungo 2009
Top 25 Biotherapeutic Drugs = $70BDrug Company $B ’07
Rituxan Genentech $ 5.5Enbrel Amgen $ 5.3Hercepti Genentech $ 4.8Avastin Genentech $ 4.1Aranesp Amgen $ 3.6Remicade J&J $ 3.3Lantus Sanofi-Aventis $ 3.2Humira Abbott $ 3.1Gleevec Novartis $ 3.0
�100% Biotech Companies: Top 5 & 12/25
� Amgen 5/25 $ 15.7B (22.4%)
� Genentech 3/25 $ 14.4B (20.6%)
� Rest Pharmas: by acquiring smaller Biotechs
� Roche, Sanofi 2/25 ea $ 3.7 / 6.1B� 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 2009Copyright: Manas Kanungo 2009
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 1.00Celgene 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 EnvironmentCopyright: Manas Kanungo 2009Copyright: Manas Kanungo 2009
GeneGene--sis of Genesis of Gene--nn--techtech
External Contributors
Genomics, Proteomics,
Microarrays,
Sensitive Assay Technologies,
Molecular BiologyDiscoveries,
1980’s
Process Innovation:
Identification
Cloning
Antibodies
Humanizing
Therapy
Went Public: 1980
Out-Licensed Sales:Lilly, Roche
FDA: Growth HormoneHeart/Blood Clot
1st Sales: 1985
FDA Enforced CUSTOMERTRACKING
$ 35 -- $ 88
70’s
Discovery:rDNA TechnologyBoyer: BiochemChohen: Genetist
1976
1977 - 1979
Genentech is Formed:Boyer & Swanson
Technological Innovation: Genetic EngineeringIdentify absent, defective, excess protein;Engineer protein or molecule for therapy;Splice Genes in Fast Growing Bacteriato Produce Therapeutic Proteins
1st Cloning: Human Protein in E.ColiLicensed to Eli Lilly: Human Insulin, Growth Hormone
Economic Boom …Therapy
Internal Capabilities
TRACKING
Focus: BioOncology
Copyright: Manas Kanungo 2009Copyright: Manas Kanungo 2009
1990’s: Building & Leveraging Core Competencies1990’s: Building & Leveraging Core CompetenciesHamel – Prahalad / Internal, or Inside-Out Strategy Model: Specific, Inherent, Integrated, and Applied KSAs
BIOTECH MANUFACTURING
$$$$
Internal – USAExternal: Roche
Out-License
$2.1B Roche MergerSmith Kline – Hep. BBiogen Idec – NHL
Alkermes - NutropinCustomer Service - SPOC
Vacaville Plant
RESEARCH: Access to Wide Variety of Products & Markets
Internal External Partnerships In License
Oncology Immunology Specialty Biotherapeutics
PRODUCT DEVELOPMENT
Internal External Partnerships Out-License
Strategic Portfolio: High Value Customer Benefits
Internal Cost Leader
Difficult for Others to Imitate
Vacaville Plant
FDA Approvals – Int/Ext
Founders Research Center
Various 1st:Monoclonal Antibodies
Targeted Therapies
2
3
1
Copyright: Manas Kanungo 2009Copyright: Manas Kanungo 2009
2000’s: Genentech’s Sustained 12000’s: Genentech’s Sustained 1stst Mover LeadershipMover Leadership
FDA Approvals
Due To:
New Products
• Process & Filing Expertise for Biologics• Robust Clinicals w/HCP & Patients Inputs
• Huge Staff w/most R&D Spending: 21%• Foster Basic & Outcomes Based Research, Partners
To Date: 35
Largest Pipeline
Profits, Capacity, Cost
Marketing & Sales
• US Internal: Strategic, Targeted Plans w/Execution• Co-Marketing & Sales to Leverage Partners’ Strengths
• Optimized Volumes to Minimize Costs• Strategic Partnerships, Purchases for Expansion
Global Reach w/o Significant Investment
Manufg: Best In Class
Copyright: Manas Kanungo 2009Copyright: Manas Kanungo 2009
GENENTECH GENENTECH –– Setting & Achieving Goals Setting & Achieving Goals –– ’99 to ‘05’99 to ‘05
TargetTarget ActualActual
�� Avg EPS/yrAvg EPS/yr GrowthGrowth 1.25%1.25% 33%33%
�� Approved Products / IndicationsApproved Products / Indications 55 7 w/Multi7 w/Multi--IndicIndic
�� Late Stage ClinicalsLate Stage Clinicals 55 6 w/21 Indications6 w/21 Indications
�� Rev from Alliances / AcquisitionsRev from Alliances / Acquisitions $500M$500M $300M$300M
�� Net Income as % of Op. RevenueNet Income as % of Op. Revenue 25%25% 21%21%�� (Rituxan w/Several Indications, need to share with other partners)(Rituxan w/Several Indications, need to share with other partners)
2010 Vision & Goals2010 Vision & Goals2010 Vision & Goals2010 Vision & GoalsLeader in revolutionizing treatment of patients w/cancer, immunological Leader in revolutionizing treatment of patients w/cancer, immunological
diseases, and angiogenic disorders, utilizing science and biotechnologydiseases, 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 2009Copyright: Manas Kanungo 2009
Genentech’s External StrategyGenentech’s External Strategy
Decisions Red Ocean - Sharks Blue Ocean - Dolphins
Market –Therapeutic Products
Compete in Existing Space (Mass Pts, Small Molecules)
Create New Space (Personalized Meds, Large Molecules)
(Pharma) Competition
Try to Beat, Eat, or Look Out Ignore – Make Them Irrelevant
Patients / Demand
Exploit / Steal Existing Patients Create & Capture New PatientsDemand
Value OfferingMake Trade-offs: Brand or Generic Aspirin?
Willing to Pay More: For Unmet, Life Saving Cancer Solutions
Internal Alignment
Systems & Activities to ChoseLow Cost or Differentiation: Make/Buy, Other Compromises
Systems & Activities for BOTHLow Cost & Differentiation: : Own Biotech Mfg:Low Cost, High Profits
Although Kim & Mauborgne did not propose their Blue Ocean Strategy in HBR tillOct 2004, Genentech’s inherently innovative culture extended beyond their R&DStaff to develop a business strategy with a path of least resistance and executewith precision for superb results. Copyright: Manas Kanungo 2009Copyright: Manas Kanungo 2009
Strategy Skills
Shared
Style
Genentech’s Value Based Management StrategyGenentech’s Value Based Management StrategyMcKinsey’s 7 – S Framework Model
Innovative, Co-operative, Partnership, Citizenship
Very High Caliber People, Subject Area Experts……R&D: Nobel Laureates
“Best Companies to Work For”
Clear, Challenging, Achievable Goals……..stay Focused!
Guiding Principles
• Scientific Excellence
SystemsStaff
Shared values
Structure
Built Streamlined Systems and Processes to Lead in Manufg, Technology, Approvals, Performance
Centralized, Close Knit Family Atmosphere; Basic Research feeds Value Based Screening for Product Development; Execution Oriented
11K People w/ > 1000 Scientists; Unique Manufg & Mktg Staff;RaaRaa – Responsibility w/Authority, Roles w/Accountability
• Scientific Excellence• Long-Term Planning• Execution• People & Culture
Copyright: Manas Kanungo 2009Copyright: Manas Kanungo 2009
Financials ($B): Consistently Outperformed IndustryFinancials ($B): Consistently Outperformed Industry
10.0
12.0
14.0
16.0
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%
Cash Flow: $4B from ‘08 Operations
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
0.0
2.0
4.0
6.0
8.0
10.0Cash Flow: $4B from ‘08 Operations
Copyright: Manas Kanungo 2009Copyright: Manas Kanungo 2009
Investor Performance Investor Performance –– Stocks & EPSStocks & EPS
60
70
80
90
100
2008 Ind Avg
EBIT 5.5B 1.4B
P/E 26 30
P/B 5.84 6.28
100 Shares @ $35 in May ‘80 IPO for $3500 = 5040 Shares @ $82 worth $43,280
Return of 1,137% (Not Including Dividends!)
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%
0
10
20
30
40
50
60 P/B 5.84 6.28
LTD/Equity 14.86 30.46
ROA 17 8
Gross Profit 87% 0%
Copyright: Manas Kanungo 2009Copyright: Manas Kanungo 2009
Biotherapeutic Industry FutureBiotherapeutic Industry Future
�� Biotech industry somewhat shielded from economic recession:Biotech industry somewhat shielded from economic recession:•• Globalization with Increasing ExportsGlobalization with Increasing Exports•• Current Unmet Diseases, with Aging Human Market SegmentsCurrent Unmet Diseases, with Aging Human Market Segments•• Growth in Agricultural, Animal, Aquatic, and Environmental SegmentsGrowth in Agricultural, Animal, Aquatic, and Environmental Segments
�� Therapeutic Industry Revenue will Grow $86BTherapeutic Industry Revenue will Grow $86B�� $147B from ‘08 $147B from ‘08 ––’13’13
�� Growth of 11.4%, or 5 x Avg. US GDP over the same periodGrowth of 11.4%, or 5 x Avg. US GDP over the same period
�� Market Driven by High ROIs, Dual Patent Protections, Personalized MedsMarket Driven by High ROIs, Dual Patent Protections, Personalized Meds
CHALLENGESCHALLENGES
�� New Entrants, Pharma Companies Refocusing (Pfizer), BioNew Entrants, Pharma Companies Refocusing (Pfizer), Bio--Generics, Generics, Market Plateau in Existing Areas, Margin Threats from Cost Controls from Market Plateau in Existing Areas, Margin Threats from Cost Controls from Medicare, Govt , InsuranceMedicare, Govt , Insurance
�� Nucleotides (DNA/RNAs) may Substitute BioNucleotides (DNA/RNAs) may Substitute Bio--TherapeuticsTherapeutics
Copyright: Manas Kanungo 2009Copyright: Manas Kanungo 2009
Future for Genentech Future for Genentech -- ProsPros
�� Unmet Demands for New Indications and Therapies will continue Unmet Demands for New Indications and Therapies will continue to ensure Market and Industry Attractivenessto ensure Market and Industry Attractiveness
�� Positive Paradigm Shift to Positive Paradigm Shift to Curative Solutions for Severe Curative Solutions for Severe ConditionsConditions that People are Willing to Pay (Blue Ocean) vs. only that People are Willing to Pay (Blue Ocean) vs. only alleviating conditions with threat of regressionalleviating conditions with threat of regression
�� Strong R&D with Over 100 New Products in Pipeline, mostly in Strong R&D with Over 100 New Products in Pipeline, mostly in �� Strong R&D with Over 100 New Products in Pipeline, mostly in Strong R&D with Over 100 New Products in Pipeline, mostly in New or Expanded Areas, will ensure Increasing Market Shares New or Expanded Areas, will ensure Increasing Market Shares and Revenuesand Revenues
�� Expertise in Innovative Biotech Processes & Large Scale Expertise in Innovative Biotech Processes & Large Scale Manufacturing will Generate Low Cost Products with High Profits Manufacturing will Generate Low Cost Products with High Profits & Price Flexibility& Price Flexibility
�� High Barriers to Entry … Strong Technology & Process IPs High Barriers to Entry … Strong Technology & Process IPs w/New & Expanded Extensions, Capital Intensive Mfg will limit w/New & Expanded Extensions, Capital Intensive Mfg will limit Competition to a Few SubstitutesCompetition to a Few Substitutes
Copyright: Manas Kanungo 2009Copyright: Manas Kanungo 2009
Future for Genentech Future for Genentech –– Pros .. Pros .. ContdContd
�� Foundation and Strength in Basic Biotech Research also gives Foundation and Strength in Basic Biotech Research also gives Genentech significant lead in next generation Nucleotides Era.Genentech significant lead in next generation Nucleotides Era.
�� Excellent Financial Position (Cash, Earnings, Valuations, Stock) :Excellent Financial Position (Cash, Earnings, Valuations, Stock) :
�� Invest to Grow Core Competencies Invest to Grow Core Competencies –– Research & Development?Research & Development?�� Explore Further Economies of Scale in Manufacturing?Explore Further Economies of Scale in Manufacturing?�� Explore Further Economies of Scale in Manufacturing?Explore Further Economies of Scale in Manufacturing?�� Share Growth through OutShare Growth through Out--Licensing, InLicensing, In--Licensing, New Diseases?Licensing, New Diseases?�� Expand Biotech Moat Expand Biotech Moat –– Agriculture, Marine, EnvironmentalAgriculture, Marine, Environmental�� Invest in the Future Invest in the Future –– Nucleotides? Theranostics? Disease Management?Nucleotides? Theranostics? Disease Management?
�� Wait for anticipated blockbusters, and buy Roche???Wait for anticipated blockbusters, and buy Roche???
�� Roche One of few w/+ve Outcomes from Mergers: BMC, VentanaRoche One of few w/+ve Outcomes from Mergers: BMC, Ventana
Copyright: Manas Kanungo 2009Copyright: Manas Kanungo 2009
Future for Genentech Future for Genentech -- ConCon
�� End of Pricing Honeymoon Around the CornerEnd of Pricing Honeymoon Around the Corner-- Increasing Cost Control Pressures from Govt and Private PayersIncreasing Cost Control Pressures from Govt and Private Payers
�� The Vultures are Waiting (Generics & The Vultures are Waiting (Generics & EstrangerosEstrangeros))-- Large Pharmas waiting to buy upLarge Pharmas waiting to buy up-- Teva Already a Major Biotech ContenderTeva Already a Major Biotech Contender-- Strong Lobby to Allow BioStrong Lobby to Allow Bio--GenericsGenerics-- Therapies with Oldest IPs at RiskTherapies with Oldest IPs at Risk-- UK, Germany, France, Singapore, South KoreaUK, Germany, France, Singapore, South Korea-- UK, Germany, France, Singapore, South KoreaUK, Germany, France, Singapore, South KoreaGovernment Backed ProgramsGovernment Backed Programs
�� Forced into a Bad Marriage?Forced into a Bad Marriage? (Roche(Roche)…..who benefits?)…..who benefits?-- $$4B Cash Dowry 4B Cash Dowry too tempting for Roche not to cover debtstoo tempting for Roche not to cover debts-- No longer w/family, friends I grew up with….No longer w/family, friends I grew up with….-- Oncology, Core Area, Relocating to Nutley..Oncology, Core Area, Relocating to Nutley..-- Career Path IssuesCareer Path Issues-- MBO vs. Innovative Incentives, OptionsMBO vs. Innovative Incentives, Options-- New Decision Making ProcessNew Decision Making Process
-- Systems, Reporting, Accountabilities ChangeSystems, Reporting, Accountabilities Changess
Scare AwayCore Members???
Copyright: Manas Kanungo 2009Copyright: Manas Kanungo 2009
SourcesSources
• 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• WSJ, USA Today• BioWorld, BioSpace, Scrips News• valuebasedmanagement.net• Business Week, HBJ• Private consultants• Personal experience in Roche
Copyright: Manas Kanungo 2009Copyright: Manas Kanungo 2009