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merger and acquisition

For all the talk of the numerous biotechnology companies with mere months of cash left and the predictions of looming liquidations, mergers, and acquisitions, it is important to note that a measure of destruction can benefit industry progress.

Economy Joseph Schumpeter coined a term for industrial progress through destruction: creative destruction. In this process, growth occurs by the development of new companies, which develop new innovations and replace older companies.

Even mergers and acquisitions can drive progress, as they free seasoned executives from their former jobs. The story of Hybritech’s key role in the development of the San Diego biotechnology cluster is a case study of this kind of growth:

Creative Destruction: Hybritech's role in building the San Diego Biotechnology Cluster

Creative Destruction: Hybritech's role in building the San Diego Biotechnology Cluster

Source: Building Biotechnology

So, while the process of creative destruction may be painful for those who are employees or investors in the destroyed companies, it is a natural element of business cycles, and an essential part of driving progress.

Does Roche’s recent acquisition of Genentech mean the end of the big-biotech business model? Has Genentech lost it’s independence? Not so, if history decides to repeat itself.

Roche has already bought (and sold) Genentech once before. It’s not unimaginable to think that they’re using the current economic crisis to do another value-based flip. Using an excerpt from Building Biotechnology to illustrate, Roche pocketed several billion dollars when it bought and sold Genentech in 1999:

Source: Building Biotechnology

So, before you write-off Genentech, consider that Roche may simply decide to flip them again.

Roche has floated an offer to acquire Genentech, a move which has raised a flurry of questions about the sustainability of the big Pharma business model, Genentech’s future independence, and the value of Genentech. It it worth noting, however, that Roche already bought (and sold) Genentech. Using an excerpt from Building Biotechnology to illustrate, Roche pocketed several billion dollars the last time it bought and sold Genentech over a six-week period in 1999:

Source: Building Biotechnology

So, the question must be asked: Despite Roche’s announced plans to include Genentech as an independent research entity, is this transaction simply based on a weak U.S. dollar and an undervalued Genentech? Might they just flip Genentech again?