July 21st, 2008
Genentech deal shows drug companies are oil drillers
Roche values Genentech at $85.2 billion and wants to pay $43.7 billion for the 44.1% of it the Swiss drug-maker does not yet own.
It’s a good deal for Roche, which would be striking while the Euro is hot. But for the industry, it’s proof of an old adage.
Drug companies are just oil drillers in white coats. (The Texas Wildcatters were a minor league hockey team in Beaumont, Texas, until the well played out. They moved to Ontario, Calif. in 2008 and became the Reign.)
The economics are awfully similar. You spend billions on a compound, but once it’s approved you have a monopoly for about 20 years that can net perhaps hundreds of billions.
Consider Lipitor. Wikipedia estimates it had sales of $12.9 billion in 2006. But it’s an oil field that’s fast playing out. Once it goes generic in 2011 the profits disappear. It’s already running dry thanks to generic Zocor, called simvastatin.
The problem for drug makers is the same one oil drillers face. They’re running out of fields. They can use lawyers to extend their patent protection, but that’s a short-term play.
Genentech once represented the great hope of the game. It was founded in the 1970s as a biotechnology firm, not a drug maker, and it helped create an early 1990s market boom which got the market out of its 1987 funk.
As this week’s announcement shows there was considerable there, there. Genentech’s stock went public in 1980 with a Google-like pop which hit $88/share. Had you come in there, you would have done awfully well.
The problem is we’re finding, as the science of DNA advances, that there are few easy answers. A drug which works for one person may not work for others. Side-effects are worsening for those whose genetic code rejects a new substance.
Thus costs are rising and potential gains drying up. Again, like the oil drillers.
I’m not certain there is a way out of the analogy, but there are many areas of drug research which hold great promise for an untold number of cures. Just remember what you’re buying when you buy a company looking for patentable compounds.
A wildcatter.
Dana Blankenhorn has been a business journalist since 1978, and has covered technology since 1982. He launched the Interactive Age Daily, the first daily coverage of the Internet to launch with a magazine, in September 1994. See his full profile and disclosure of his industry affiliations.
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