Genentech

Genentech In business for life Malaspina, Noce, Schwartz, Yang

Introduction Genentech is a leading biotechnology company that discovers, develops, manufactures and commercializes pharmaceutical products to treat patients with significant unmet medical needs. Genentech commercialize multiple biotechnology products and also receive royalties from companies that have licensed our technology. Genentech’s 4 focused areas: IMMUNOLOGY ONCOLOGY TECHNOLOGY TISSUE GROWTH & REPAIR

Company Overview Revenue stream Product sales-90% Royalties-9% Contracts-1% Product lines Avastin – 24% Rituxan – 23% Herceptin-16% Lucentis-4% Xolair – 3%

Goals Genentech goals from 1999-2005 EPS growth New product approval 5 products in late-stage clinical trials Increase revenue increase from strategic alliances or acquisitions Horizon 2010 Genentech’s corporate growth strategy for the next 5 yrs Goals: Bring 20 new molecules into clinical development Bring 15 major new products to market Be the #1 US oncology company in sales Increase EPS by 25% annually Have 12 billion in free cash flow Strategies: Apply discipline decision-making in managing its portfolio of R&D Be a leader in translating basic scientific discoveries into novel therapeutics for significant unmet medical needs

Products in the pipeline Number of products Phase or combinations Awaiting FDA action 1 Preparing for filing 2 Phase 3 13 Preparing for phase 3 4 Phase 2 8 Preparing for phase 2 3 Phase 1 and preparing for phase 1 multiple molecular entities

Competitive Landscape New competitive products Follow-on biologics Corporate level Large pharmaceuticals – Glaxo, Merck, J&J Smaller biotechs – Amgen, Imclone, Biogen Product level Avastin – Erbitux ( Imclone ) Rituxan – Bexxar ( GSK ) Herceptin – Tykerb ( GSK )

Biotechnology: a snapshot Biotechnology was born in 1976 when Genentech was created to exploit recombinant DNA technology ( technique for engineering cells to produce human proteins). 2006 sales: 40B ( ≅ 15.% yearly over last decade) Still unprofitable 4,000 biotech companies in 2006 198,300 employees 17.9 B in R&D in 2003. Clustering – Strong state based strategies to stimulate industry growth. Economies of scale due to geographical clustering Subsectors Main players: Amgen, Genentech, Biogen Idec, Genzyme Performance on the stock market - flight to safety 300B capital investing since start, but Biotech VC backing fall (over 40%) in 2008 ( risky nature, long develoment time and appeal of solar, wind and biofuels ) .

Highly fragmented, two different industrial realities. Huge cost (800M-1B) over the long time. need for investors to spread risk: average maximum invest=20M. Average investment in biotech: 3M. Ability to cope with extreme uncertainty. (It is called biotech, but it only dreams of having the same certainties of technology). One out of 6000 synthesized compounds has ever made it to market 10-20% of drugs beginning clinical trial have ultimately been approved for commercial sale (Source: G. Pisano, HBR, 10/2006). Is a company a good investment if a big Pharma invests in it? Not necessarily. VC time horizon= 3 yrs  Drug time horizon = 10-12 yrs: Now what? Murky Intellectual Property regime. What is patentable, the molecule or the idea of how of use it? (Often more scientists involved) Opportunities in China and India where biotech is in strong demand Age/cancer correlation: In economically developed countries, 78% of all newly diagnosed cancer cases occur at age 55 and older Democrats interest in allowing government to negotiate prices directly with drugmakers as part of the Medicare drug benefit, but debatable. Environment

Porter 5 forces, + 1. Threat of new entrants: low Threat of substitute products: low Bargaining power of suppliers” very low Bargaining power of customers: very low but can change soon and dramatically depending on political decisions. Internal structure: polarized on extremes. Complementors: strategic alliances Grade 0 -10. Bargaining power of customers (2) Threat of new Entrants (4) Internal Industry Competition Bargaining power of suppliers (3) Threat of substitute Products (4) Complementors

DJ US Biotech Index 52 Week. Range: 411.23 to 581.13

Financial Ratio Comparison to Competitors Genentech Amgen Biogen Operating Margin 37.09% 37.59% 30.94% Quarterly Revenue Growth 17.30% 7.30% 38.50% Return on Assets 15.45% 10.00% 9.28% Return on Equity 23.81% 22.16% 14.45%

Levels of strategy Corporate strategy Growth by concentration capturing market share Repositioning the product through new indications Growth by diversification Expand consumers’ base Shared Technologies Business unit strategy Focus on oncology Functional strategies Marketing R&D Strategic collaborations management Regulatory compliance Do the strategies pass the strategy criteria? Uniqueness Implementability Sustainability Imitability

Business Unit Strategy Focus on Oncology Large sustainable market (1.4M new cancer cases in 07) Inelastic demand Fewer regulatory barriers

For biopharma drugs marketers, it’s cold out there. no status symbol no cool design no fashionable trends can’t advertise to increase demand (“ Excuse us , could you please get sicker ?”) can only save lives so they…. Turned to the patients they saved for marketing (2006) The importance of phase III announcements. Genentech pursues "targeted therapies. Feel-good psychology – priceless face time with doctors Lean marketing arm Few blockbusters Functional strategies: Marketing

Functional strategies: R&D Genentech revolutionized the concept of pharma R&D: first biotech IPO , first business/science. Biotech R&D tool kit: from medical chemistry in 1977 to molecular biology, cell biology, genetics, bio-informatics, computational chemistry, genetics, bio-informatics, computational chemistry, proteic chemistry, combinational chemistry, genetic engineering, high-throughput screening, and many others. Genentech has active access to all these tools. Magnitude of tacit knowledge in biotech R&D and how it impedes learning Need for highly integrated communication among scientists: there are no bridges. Strategic collaborations ( more to come ) Drugs R&D can not be broken down in an orderly set of independent sub-problems. R&D is Genentech most fundamental strategic patrimony asset. In 2007: 2.45B (=88% of NI; 21% of TOR, was 19% in 2006 and 2005)

Functional strategies: Strategic collaborations management Novartis owns 33% of Genentech through Roche Roche owns 56% of Genentech Genentech Co-develop Biogen gives 31.5m to develop cancer treatment Collaboration Thermo Fisher Scientific to provide siRNA Therapeutics Second Collaboration Nerviano Medical Sciences to discover antibody drug conjugates Co-develop & US commercial rights Glycart Biotech AG and Roche for GA 101 molecule. $105m in R&D expense Benefits : New products, R&D funding, profit sharing, publicity, marketing, global and domestic reach

Genentech, please keep… Realizing that the approaches needed to develop more innovative drugs differ enormously from those required to develop less innovative drugs and implement such different strategies. Establishing external, longer-term collaborations: alliances will continue to be critical complement to internal R&D More sharing of properietary infos Greater joint learning Larger, more productive investments Developing cross-disciplinary research and knowledge: how do we connect the tools? Developing translational research: how stem cells divide and specialize = basic research => developing hypotheses and insights about using stem cells to treat diabetes is an example of translational research. Functional strategies: R&D developments

Functional strategies: Regulatory – Accelerated Approval FDA accelerated approval Genentech recently submitted application to FDA for Avastin in the most aggressive form of brain cancer Glioblastoma, the most aggressive type of cancer with no cure and few treatment options. 90% of people with Glioblastoma see their cancer return. There are few effective treatments when initial therapy stops working. WHY? Glioblastoma is the most common type of brain tumor and there has been no substantial improvement in the treatment of glioblastoma for more than 20 years. People with this disease desperately need new treatment options. Only 15% of patients live six months without their cancer advancing.

References: Genentech web site and 10-K “ How Genentech Got it: The maker of a hot cancer medicine shows there’s a better way to run a drug company than chasing blockbusters”, Fortune, 6/9/2003, David Stipp. “ Can Science be a Business? Lessons from Biotech” , Gary P.Pisano, HBR, October 2006 “ 2008 Biotech Update and Outlook”, George Fulop MD, MS, Stuyvesant Capital Partners, Presentation at New York Society of Security Analysts, 12/2/2008 “ Missing the $20 billion biogeneric boom”, Aaron Smith, 8/15/2006 CNNMoney.com “ Cash-Poor Biotech Firms Cut Research, Seek Aid”, Jeanne Whalen and Ron Winslow, WSJ, 10/29/08 “ Novartis & Biotechs:”I don’t think we’ve seen the trough”, Deal Journal, WSJ, 10/20/2008 Hard Times for Biotech Could Spur Recent Comments: Big Pharma Feast”, Jonathan Rockoff, WSJ, 11/18/2008 “ Biotech Stocks, Once Risky, Now Look safe”, Jeff D. Opdyke, WSJ, 10/22/2008 “ Clustering and the Biotech Industry”, “ Genentech earnings show why companies want cancer drugs”, J. Goldstein, WSJ, October 15 2008, American Cancer Society web site Ernst & Young LLP, Americas’ Biotechnology Report, 2004 Rebuilding the R&D Engine in Big Pharma, JeanPierre Garnier, HBR, May 2008

Genentech

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