Genentech took the road less traveled to become the second-largest biotech company in the world.
The San Francisco-based company has developed drugs on its own or through partnerships rather than acquiring its peers. The formula has worked, so far, with a pipeline of products that include cancer drugs: Avastin, Herceptin, Tarceva and Rituxan as well as Lucentis, a treatment for age-related blindness. The five drugs have helped Genentech boost sales to $7.6 billion in 2006.
But now Genentech has changed course attempting to make its first acquisition ever with the proposed $919 million cash purchase of Houston biotech Tanox. Genentech was attracted to the company mainly for its popular asthma drug, Xolair, but a monkey wrench could end the deal. A recent FDA ruling would require Tanox to add an additional warning label on Xolair. The required black box label would warn users Xolair can cause anaphylaxis, which can involve swelling, difficulty breathing, dizziness and-or fainting.
With Genentech putting a value of $525 million to $650 million on the Xolair-related program, the drug is about two-thirds of the deal value. "There is no question that buying in the Xolair product line is the main rationale for the deal ... Moreover, the (merger) contract specifically gives Genentech an out if there is a reasonable likelihood of a material change in future revenues from Xolair," The Deal senior writer Scott Stuart wrote in a recent Arbitrage column.
For now, Genentech is continuing to do its due diligence on the impact of the FDA ruling on the deal. But nay sayers of the acquisition are probably shrugging their shoulders saying that they should continue to do what they do best, which is science, and develop or partner with other companies to make drugs not buy its competitors. — Gerald Magpily
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