Genentech VP-Business Development Joseph McCracken: An Interview With "The Pink Sheet" DAILY (Part 2 of 2)

Partnership with Roche has been the "ultimate win/win deal," McCracken says.

"The Pink Sheet" DAILY recently visited with Genentech VP-Business Development Joseph McCracken at the company's headquarters in South San Francisco to discuss product development and deal flow. This is the second of a two-part interview (see related story).

"The Pink Sheet" DAILY : Given the rise in deal costs, how do you ensure that Genentech picks the right products and can successfully close the deal?

McCracken: We've tried to do a couple of things. We've tried to look for products that are earlier in the value chain. Number two, we've tried to focus on specific areas of biology where we feel like our expertise gives us a competitive advantage. When you are selecting deals, deciding what products you want to in-license, at the very early stage - when you're licensing products that have never been into man - they are not validated or less validated, so the risk goes up substantially.

Our expertise in the areas of biology where we focus gives us a competitive advantage at picking the right projects. We do a lot of deals. And people will ask: "Is this a good deal or bad deal?" And I'll say: "If the product works, it's going to be a great deal. If the product fails, it's going to be a horrible deal."

So we've tried to really focus our attention on diligence, understanding basic scientific rationale, working in areas where we feel like we know what we're doing and where we can pick the right projects and increase the PTS [probability of technical success]. But we do have to increase the PTS, because we risk adjust everything at Genentech. Where we can win in the face of increasing deal costs, is by increasing the PTS for our deals.

[Genentech signed an early-stage deal Oct. 3 with CGI Pharmaceuticals for access to an undisclosed target for multiple oncology and autoimmune indications (¹ (Also see "Genentech Will Collaborate With CGI To Develop Oncology, Autoimmune Target" - Pink Sheet, 4 Oct, 2006.)). The company signed another early drug development deal in July with Inotek for poly-ADP-ribose polymerase inhibitors for the treatment of cancer (² (Also see "Genentech Gains PARP Inhibitor Through Inotek Deal" - Pink Sheet, 25 Jul, 2006.)).]

"The Pink Sheet" DAILY : Genentech has deals with Biogen Idec for Rituxan (rituximab), OSI for Tarceva (erlotinib), and Norvartis for Xolair (omalixumab). What are your expectations when you sign a major deal?

McCracken: Every one of those deals was very different. We had different goals and objectives. And that would probably be true for almost every deal in our portfolio.

In the case of Biogen Idec, for example, that was a very collaborative relationship, where Biogen had finished Phase II trials, and needed to do Phase III trials. They needed additional resources for that. They also needed, assuming that the trials would be successful, to either develop or have a partner who could develop large-scale manufacturing technologies.

So we provided the financial resources for them to conclude the Phase III clinical trials. They had the relationships with the clinical trial sites, so they took the lead in doing the clinical trials. We took the lead and focused on building a robust commercial process and scaling up manufacturing. We came together at the completion of the Phase III clinical trials with good robust data, and a good, robust, commercially viable manufacturing method. And then we had agreed to co-promote Rituxan. So we co-promote with them in the United States. We have our territory set up as mirrored territories, and share costs, and we share profits with Biogen....

[In September, FDA approved two new indications for Rituxan in Non-Hodgkin's lymphoma (³ (Also see "Rituxan Adds Third NHL Indication In 2006" - Pink Sheet, 2 Oct, 2006.)).]

"The Pink Sheet" DAILY : Has there been any impact on the Genentech-OSI partnership in light of the approval of Lucentis, which competes with OSI/Pfizer's Macugen?

McCracken: The competition between Lucentis and Macugen has not affected our collaboration with OSI on Tarceva in any way.

[In August, OSI said it would curtail research of Macugen due to slumping revenues stemming from the launch of Lucentis (⁴ (Also see "Pfizer/OSI To Curtail Macugen Research In Response To Genentech Competition" - Pink Sheet, 8 Aug, 2006.)).]

"The Pink Sheet" DAILY : How has the Genentech-Roche relationship affected Genentech?

McCracken: It was the ultimate win/win deal. A lot of people would suggest that, but for that alliance neither Roche nor Genentech would be the companies they are today. Roche's growth has exceeded most of the big pharma companies over the last few years. Their most successful products, which have driven a lot of that growth, have come from Genentech.

At the same time, if you go back to 1990 when that relationship was established, Genentech had a pipeline that Genentech, and presumably Roche, thought was valuable, but a fairly low revenue base that wouldn't enable the company to maximize the value of its pipeline unless it was willing to spend 50% of its revenues on R&D. As an independent public company, I don't think we could have done that.

Roche's initial relationship with us was one where they bought 60% of our shares, and that was the beginning and end of the relationship. But that did enable us to invest almost as much as we wanted of our revenues into R&D, and to maximize the value of the pipeline....And in 1995 the relationship was expanded, and the agreement gave Roche the option to be the first party to commercialize our products outside the United States. But still, that was the extent of our relationship.

Throughout the years, and even today, the only interactions we have with Roche other than at the board, are on our joint project teams. And they're just like joint project teams that we have with Novartis and OSI, and all of the other companies.

We don't have Roche people here. [They don't] participate in our management committees. The [Swiss flag] is not flying down there on every corner with the Stars and Stripes and the California bear. They've allowed us to operate independently.

"The Pink Sheet" DAILY : Do you think that could ever change?

McCracken: As long as Roche's [return on investment] for Genentech is equal to or exceeds their investment in their own company, they're going to leave us alone. The day that their investment in Genentech has a lower return than investment in their own company, they're going to try to come in and fix us - and they should.

And so for a lot of people at Genentech it's very clear, as long as Genentech performs well, we get to operate independently. And we like that. And I think that has benefited Roche substantially.

But it's been a 15-year-old relationship. It might have been 10 years before it was really obvious to Roche or to Genentech just how great that relationship is. The return on investment to Roche was probably small in the first four or five years. So they were very patient, but I think they liked what they saw.

"The Pink Sheet" DAILY : Will the approval of Amgen's colorectal cancer therapy Vectibix (panitumumab) have any impact on Genentech?

McCracken: It's much more of an issue for Bristol-Myers Squibb and Imclone because the approval was for a monoclonal antibody to the EGF receptor, very similar to Erbitux . We're not developing a monoclonal antibody to EGF. We have products that target other targets in that same pathway, but they have very different mechanisms of action, different spectrums of activity. So for us, it's not really a major event.

[Genentech announced Oct. 11 that it would cap annual patient expenditures for Avastin at $55,000; Amgen announced a similar cap in September for its newly approved Vectibix (⁵ (Also see "Genentech Adds Patient Assistance Program Along With Avastin Lung Cancer Indication" - Pink Sheet, 12 Oct, 2006.)).]

"The Pink Sheet" DAILY : You used to work for Genentech in Tokyo. What was your role there?

McCracken: Genentech had a kabushiki kaisha in Tokyo in 1990 to 1995. I set up a small operation there, which had, really, three goals. One was to act as a liaison and to serve our existing partners who were commercializing our products in Japan. Two was to identify and nurture relationships primarily with Japanese academic institutions to establish scientific collaborations. And the third was to plan for the future, and to learn about Japan and Asia.

In 1995, when Genentech modified its relationship with Roche, there were a couple of things that happened. There had always been a call option in the Genentech stock. In 1995 there was a put as well as a call option in the stock. And then Roche also got the option to commercialize all of Genentech's products outside of the United States. At the time, Genentech had a fully integrated sales and marketing organization in Canada. We were building that in the major countries of Western Europe. And we merged all of those operations into the Roche operation. And I left just before Genentech took down the flag in [Japan].

"The Pink Sheet" DAILY : Is Asia still an interest for Genentech?

McCracken: Asia is absolutely an interest in many, many respects. Certainly from a scientific point of view, a research point of view, a development point of view, a manufacturing point of view. Although if you're speaking about commercialization and the markets of the countries in Asia, they're of interest to us, but Roche has the option to commercialize all of our products through 2015, possibly beyond.

Roche is in some respect the classic multinational company. They've been in Asia for a long time, and they really know those markets well. So it's very efficient for us to leverage the existing infrastructure and experience of Roche outside the United States, as well as other partners like Novartis, which markets Xolair and Lucentis outside the United States. And Genentech can focus, at least our commercial business, here in the country that we know, the one that's near to us, the one that's the largest country market, and today the most profitable.

- Jonathan M. Block ([email protected]) & Joshua Berlin ([email protected])

[Editor's note: "The Pink Sheet" DAILY has been featuring a series of interviews with biopharmaceutical industry leaders. Recent interviews include AstraZeneca's John Goddard (⁶ (Also see "AstraZeneca’s New Head Of Strategic Planning & Business Development John Goddard: An Interview With “The Pink Sheet” DAILY (Part 1 of 2)" - Pink Sheet, 22 Sep, 2006.)); Novartis' James Shannon (⁷ (Also see "Novartis Head Of Pharma Development James Shannon: An Interview With “The Pink Sheet” DAILY (Part 1 of 2)" - Pink Sheet, 21 Jul, 2006.)); and Merck's Barbara Yanni (⁸ (Also see "Merck VP & Chief Licensing Officer Barbara Yanni: An Interview With “The Pink Sheet” DAILY" - Pink Sheet, 19 Jun, 2006.)).]