1. Gene-
Gene-alyzing GENENTECH
Strategic Management
for Executives
GROUP 8 – HCEMBA’09
Primary Contributor: Manas Kanungo
Copyright: Manas Kanungo 2009

2. THE BIOTECH & PHARMA INDUSTRIES
Agriculture
Agri - Food
Aqua/Marine
PHARMA BIOTECH
Animal Health
Animal Health
- Chemistry Based, Orals - Proteins & Peptides, Fluids
- “Small Molecules” - “Large Molecules”
- Patents for Formulations - Patents for Discovery, Process
Human Therapy
Copyright: Manas Kanungo 2009

3. Biotech Industry Landscape – Room to Grow
Few Large, $B Companies – 40% Amgen $16B
Many Small Players < $50M ea
1000 Companies ~ $85B
Genentech $14B
Amongst Top 5 Biotechs:
Baxter $12B
Others 60%
3 are Biotherapeutics Cos: Monsanto $11B
(Amgen, Genentech, Baxter)
2 are in Agriculture: Baxter $12B
(Syngenta, Monsanto)
Copyright: Manas Kanungo 2009

4. Key Drivers for Biotech Industry Trends
Increasing Biotech Markets from Globalization,
New Indications, in several Segments
Therapeutic demand driven by insurers’ willingness
to reimburse new, off-label treatments (CURES!)
vs. saturated pharma
Formative FDA approval & regulatory processes:
Whoever gets in first gets to pave the way…
Copyright: Manas Kanungo 2009

5. Key Drivers for Biotech Industry Trends ..contd
Large, fast growing, high ROI market potential
Small biotech companies can co exist with large
ones if they have research expertise, specialization
New original patents for Large Molecule Technology
Plus Process vs. small molecule chemistries only
Thinning Pipelines w/Generics Entry, Saturated
Disease Areas, Cost Pressures, Leading Pharmas to
Consolidate or buy Biotechs
Copyright: Manas Kanungo 2009

6. BIO-
BIO-THERAPEUTIC INDUSTRY TRENDS
Mass Patients THERAPY Personalized Medicine
New
NUCLEIC ACIDS &
OLIGONUCLEOTIDES
I ROI
N
D
I PHARMAS
C Consolidation
A
- Few Major Players
T
I
BIOTECHS - Niche Market
LARGE MOLECULES, INJECTIONS - High Prices
O PROTEINS, PEPTIDES, ANTIBODIES - Low Volumes
The Few & The Proud - Large Capital Need
N
- Research & Tech
S
- Process & Marketing
GENERICS
Coming out of the woodworks
Known DISEASES New
Copyright: Manas Kanungo 2009

7. BIOTHERAPEUTIC INDUSTRY & APPROVALS 1982 - 2007
All Biotech Approvals Genentech
• 1982 – 1995: 42 20: ~ 50% !!
• 1996 – 2007: 243 15
35
30
1996:
Biotherape
7.5% of all drugs utic Era: 25
26
25
marketed 28 23
Approved!
21
20 19
20% CAGR: 32% of all 18
17
18
17
pipeline research 15
16
programs 15
10 9
6 6
5 4 4
3 3 3
2
1 1
0 0 0
0
Copyright: Manas Kanungo 2009
Approvals

8. Top 25 Biotherapeutic Drugs = $70B
Drug Company $B ’07
100% Biotech Companies: Top 5 & 12/25
Rituxan Genentech $ 5.5
Enbrel Amgen $ 5.3
Amgen 5/25 $ 15.7B (22.4%)
Hercepti Genentech $ 4.8
Avastin Genentech $ 4.1
Aranesp Amgen $ 3.6 Genentech 3/25 $ 14.4B (20.6%)
Remicade J&J $ 3.3
Lantus Sanofi-Aventis $ 3.2 Rest Pharmas: by acquiring smaller Biotechs
Humira Abbott $ 3.1
Gleevec Novartis $ 3.0 Roche, Sanofi 2/25 ea $ 3.7 / 6.1B
Others: 1 each ... Including 1 Generic! (Teva)
Indications: Chronic, End-stage , Life Saving, Rare Diseases
Cancer: Breast, Colon, Lung, Prostate, Gastric, Head/Neck,
Non-Hodgkins Lymphoma, Tumors
Others: Anemia, Crohn’s, Chemo Infection, Diabetes, Hepatitis B/C,
Hemophilia A, Various Types of Arthritis, Multiple Sclerosis
Copyright: Manas Kanungo 2009

9. Top Pure Biotherapeutics Companies $40B
Company Tkr Rev $B Cap $B x Rev 52Wk Lo Now 52Wk Hi EPS P/E Beta
Genentech DNA 11.7 89 7.6 66 85 99 3.02 28.10 0.64
Amgen AMGN 14.8 60 4.1 39 52 74 3.91 14.70 0.80
Gilead Sc. GILD 4.2 45 10.7 36 50 57 2.09 23.70 0.93
Celgene CELG 1.4 25 17.9 45 54 77 -3.76 -14.30 1.00
Genzyme GENZ 3.8 19 5.0 56 71 84 1.50 47.40 0.85
Biogen Idec BIIB 4.1 15 3.7 37 52 74 2.64 19.40 0.90
HIGH Low
Significant Lead in Revenue by Amgen & Genentech Over Others
Genentech w/Highest Market Cap Even if NOT w/Highest Revenue or EPS
Stock Prices Significantly Higher Than Pharma Stocks in Current Environment
Copyright: Manas Kanungo 2009

10. Gene-
Gene-sis of Gene-n-tech
Gene- $ 35 -- $ 88
Went Public: 1980 1980’s
Process
External Contributors Out-Licensed Sales:
Innovation:
Lilly, Roche
Genomics, Proteomics,
Identification
FDA: Growth Hormone
Microarrays, Heart/Blood Clot
Cloning
Sensitive Assay Technologies, 1st Sales: 1985
Antibodies
Molecular Biology FDA Enforced
Humanizing
Discoveries, CUSTOMER
TRACKING
Therapy
Economic Boom …
Focus: BioOncology
Internal Capabilities Genentech is Formed:
1976
Boyer & Swanson
Technological Innovation: Genetic Engineering
1977 - 1979
Identify absent, defective, excess protein;
Discovery: Engineer protein or molecule for therapy;
rDNA Technology Splice Genes in Fast Growing Bacteria
70’s to Produce Therapeutic Proteins
Boyer: Biochem
Chohen: Genetist
1st Cloning: Human Protein in E.Coli
Licensed to Eli Lilly: Human Insulin, Growth Hormone
Copyright: Manas Kanungo 2009

11. 1990’s: Building & Leveraging Core Competencies
Hamel – Prahalad / Internal, or Inside-Out Strategy Model: Specific, Inherent, Integrated, and Applied KSAs
$$$$ $2.1B Roche Merger
Smith Kline – Hep. B
Biogen Idec – NHL
Internal – USA Alkermes - Nutropin
External: Roche Customer Service - SPOC
Out-License
BIOTECH MANUFACTURING
Vacaville Plant
Internal Cost Leader
Difficult for Others to Imitate 3
PRODUCT DEVELOPMENT
FDA Approvals – Int/Ext
Internal External Partnerships Out-License
Strategic Portfolio: High Value Customer Benefits 2
Founders Research
RESEARCH: Access to Wide Variety of Products & Markets
1 Center
Various 1st:
Internal External Partnerships In License
Monoclonal Antibodies
Targeted Therapies
Oncology Immunology Specialty Biotherapeutics
Copyright: Manas Kanungo 2009

12. 2000’s: Genentech’s Sustained 1st Mover Leadership
Due To:
• Process & Filing Expertise for Biologics
FDA Approvals To Date: • Robust Clinicals w/HCP & Patients Inputs
35
Largest
New Products Pipeline • Huge Staff w/most R&D Spending: 21%
• Foster Basic & Outcomes Based Research, Partners
Global
Reach w/o
Marketing & Significant • US Internal: Strategic, Targeted Plans w/Execution
Sales Investment • Co-Marketing & Sales to Leverage Partners’ Strengths
Profits, Manufg:
Capacity, Cost Best In • Optimized Volumes to Minimize Costs
Class • Strategic Partnerships, Purchases for Expansion
Copyright: Manas Kanungo 2009

13. GENENTECH – Setting & Achieving Goals – ’99 to ‘05
Target Actual
Avg EPS/yr Growth 1.25% 33%
Approved Products / Indications 5 7 w/Multi-Indic
w/Multi-
Late Stage Clinicals 5 6 w/21 Indications
Rev from Alliances / Acquisitions $500M $300M
Net Income as % of Op. Revenue 25% 21%
(Rituxan w/Several Indications, need to share with other partners)
2010 Vision & Goals
Leader in revolutionizing treatment of patients w/cancer, immunological
diseases, and angiogenic disorders, utilizing science and biotechnology
Approved Products /Indications 15
New Molecules to Clinical Development 20
US Oncology Market Position 1
Avg EPS/yr Growth 25%
Cumulative Free Cash Flow $12B
Copyright: Manas Kanungo 2009

14. Genentech’s External Strategy
Decisions Red Ocean - Sharks Blue Ocean - Dolphins
Market – Compete in Existing Space Create New Space
Therapeutic (Mass Pts, Small Molecules) (Personalized Meds, Large
Products Molecules)
(Pharma) Try to Beat, Eat, or Look Out Ignore – Make Them Irrelevant
Competition
Patients / Exploit / Steal Existing Patients Create & Capture New Patients
Demand
Make Trade-offs: Brand or Willing to Pay More: For Unmet,
Value Offering
Generic Aspirin? Life Saving Cancer Solutions
Systems & Activities to Chose Systems & Activities for BOTH
Internal Low Cost or Differentiation: Low Cost & Differentiation: :
Alignment Make/Buy, Other Compromises Own Biotech Mfg:
Low Cost, High Profits
Although Kim & Mauborgne did not propose their Blue Ocean Strategy in HBR till
Oct 2004, Genentech’s inherently innovative culture extended beyond their R&D
Staff to develop a business strategy with a path of least resistance and execute
with precision for superb results. Copyright: Manas Kanungo 2009

15. Genentech’s Value Based Management Strategy
McKinsey’s 7 – S Framework Model
Innovative, Co-operative, “Best Companies
Partnership, Citizenship to Work For”
Clear, Challenging, Achievable Style
Goals……..stay Focused! Very High Caliber People, Subject Area
Experts……R&D: Nobel Laureates
Strategy Skills
Guiding Principles
• Scientific Excellence Shared
• Long-Term Planning values Built Streamlined Systems and
• Execution Processes to Lead in Manufg,
Technology, Approvals, Performance
• People & Culture
Staff Systems
11K People w/ > 1000 Scientists;
Unique Manufg & Mktg Staff; Structure
RaaRaa – Responsibility
w/Authority, Roles w/Accountability Centralized, Close Knit Family Atmosphere;
Basic Research feeds Value Based Screening
for Product Development; Execution Oriented
Copyright: Manas Kanungo 2009

16. Financials ($B): Consistently Outperformed Industry
2004 2005 2006 2007 2008
Rev Growth 39.0% 44.0% 41.0% 26.0% 15.0%
NI Growth 39.0% 66.0% 62.0% 33.0% 21.0%
NI % of Sales 17.0% 20.0% 23.0% 24.0% 25.0%
OI Growth 23.0% 73.0% 68.0% 31.0% 26.0%
OI % of Sales 24.0% 29.0% 34.0% 36.0% 40.0%
16.0
14.0
12.0
10.0
Cash Flow: $4B from ‘08 Operations
8.0
6.0
4.0
2.0
0.0
Revenue Net Income Operating Income
2001 2.0 0.15
2002 2.6 0.064 0.03
2003 3.3 0.563 0.898
2004 4.6 0.785 1.1
2005 6.6 1.3 1.9
2006 9.3 2.1 3.2
2007 11.7 2.8 4.2
2008 13.4 3.4 5.3
Copyright: Manas Kanungo 2009

17. Investor Performance – Stocks & EPS
100 Shares @ $35 in May ‘80 IPO for $3500 = 5040 Shares @ $82 worth $43,280
Return of 1,137% (Not Including Dividends!)
100
90 2008 Ind Avg
80 EBIT 5.5B 1.4B
70 P/E 26 30
60 P/B 5.84 6.28
50 LTD/Equity 14.86 30.46
40 ROA 17 8
30
Gross Profit 87% 0%
20
10
0
Yrnd Share Price EPS x10 EPS Growth x 10
2004 55 7.3 388.0%
2005 93 11.8 616.0%
2006 81 19.7 669.0%
2007 67 25.9 315.0%
2008 82 32.1 239.0%
Copyright: Manas Kanungo 2009

18. Biotherapeutic Industry Future
Biotech industry somewhat shielded from economic recession:
• Globalization with Increasing Exports
• Current Unmet Diseases, with Aging Human Market Segments
• Growth in Agricultural, Animal, Aquatic, and Environmental Segments
Therapeutic Industry Revenue will Grow $86B $147B from ‘08 –’13
Growth of 11.4%, or 5 x Avg. US GDP over the same period
Market Driven by High ROIs, Dual Patent Protections, Personalized Meds
CHALLENGES
New Entrants, Pharma Companies Refocusing (Pfizer), Bio-Generics,
Bio-
Market Plateau in Existing Areas, Margin Threats from Cost Controls from
Medicare, Govt , Insurance
Nucleotides (DNA/RNAs) may Substitute Bio-Therapeutics
Bio-
Copyright: Manas Kanungo 2009

19. Future for Genentech - Pros
Unmet Demands for New Indications and Therapies will continue
to ensure Market and Industry Attractiveness
Positive Paradigm Shift to Curative Solutions for Severe
Conditions that People are Willing to Pay (Blue Ocean) vs. only
alleviating conditions with threat of regression
Strong R&D with Over 100 New Products in Pipeline, mostly in
New or Expanded Areas, will ensure Increasing Market Shares
and Revenues
Expertise in Innovative Biotech Processes & Large Scale
Manufacturing will Generate Low Cost Products with High Profits
& Price Flexibility
High Barriers to Entry … Strong Technology & Process IPs
w/New & Expanded Extensions, Capital Intensive Mfg will limit
Competition to a Few Substitutes
Copyright: Manas Kanungo 2009

20. Future for Genentech – Pros .. Contd
Foundation and Strength in Basic Biotech Research also gives
Genentech significant lead in next generation Nucleotides Era.
Excellent Financial Position (Cash, Earnings, Valuations, Stock) :
Invest to Grow Core Competencies – Research & Development?
Explore Further Economies of Scale in Manufacturing?
Share Growth through Out-Licensing, In-Licensing, New Diseases?
Out- In-
Expand Biotech Moat – Agriculture, Marine, Environmental
Invest in the Future – Nucleotides? Theranostics? Disease Management?
Wait for anticipated blockbusters, and buy Roche???
Roche One of few w/+ve Outcomes from Mergers: BMC, Ventana
Copyright: Manas Kanungo 2009

21. Future for Genentech - Con
End of Pricing Honeymoon Around the Corner
- Increasing Cost Control Pressures from Govt and Private Payers
The Vultures are Waiting (Generics & Estrangeros)
Estrangeros)
- Large Pharmas waiting to buy up
- Teva Already a Major Biotech Contender
- Strong Lobby to Allow Bio-Generics
Bio-
- Therapies with Oldest IPs at Risk
- UK, Germany, France, Singapore, South Korea
Government Backed Programs
Forced into a Bad Marriage? (Roche)…..who benefits?
- $4B Cash Dowry too tempting for Roche not to cover debts
- No longer w/family, friends I grew up with….
- Oncology, Core Area, Relocating to Nutley.. Scare
- Career Path Issues Away
- MBO vs. Innovative Incentives, Options Core
- New Decision Making Process Members
- Systems, Reporting, Accountabilities Changes ???
Copyright: Manas Kanungo 2009

22. Sources
• Genentech Website, Archives, SEC Filings
• Roche Website, Archives, SEC Filings
• Analysts Reports
• Morningstar, Guru, Vanguard, Money
• CNBC, Bloomberg, Market Watch
• Pharmaprojects.com, IBIS, UCI Library
• WSJ, USA Today
• BioWorld, BioSpace, Scrips News
• valuebasedmanagement.net
• Business Week, HBJ
• Private consultants
• Personal experience in Roche
Copyright: Manas Kanungo 2009