Roche's Genentech and the Culture of Innovation

Swiss pharma giant Roche (RHHBY -2.24%) impressed investors in 2013 after drug approvals and profit growth helped its stock post a total return of 43%. Last year was not an anomaly, however, as shares have more than doubled in the last five years. Part of the secret to this company's success has to do with its 2009 acquisition of ground-breaking biotech company Genentech, and the culture of innovation that this subsidiary has helped to foster.

In the following video, analyst Max Macaluso discusses this company with Bernard Munos, an innovation expert and founder of the InnoThink Center for Research in Biomedical Innovation. A transcript follows the video below.

Max Macaluso: Bernard, is there one company that comes to mind, that embraces the culture of innovation more than the others that we've talked about so far?

Bernard Munos: I think there are several, and maybe I will illustrate by zeroing up on one -- and we've already talked about it -- it's Genentech. Three years ago, I had the privilege of being invited by Francis Collins to present at his Leadership Forum. This is him and his 27 directors, and a few other people. He had invited a handful of people, among whom were Marc Tessier-Lavigne and Art Levinson, and I was there, and there was Dr. Pizzo, the head of the Stanford Medical School, and maybe another person.

I remember, vividly, being in the audience when Art Levinson went onstage and made his presentation. It was overwhelming. Here is a CEO of a very large -- back then, it was 2010 so Art Levinson was actually Chairman Emeritus of Genentech at the time. A year before, Roche had bought Genentech, which at the time was worth $100 billion, so clearly Art's achievements were well-known. He went onstage and made a presentation about science at Genentech, but with a level of passion that was overwhelming.

I honestly couldn't help make comparison. If I had been a scientist at Genentech at that time I would have felt very enabled, because no matter how bold I tried to be, there's no way I could be bolder than him. He made it very safe for the people working in Genentech to really stretch themselves and come up with the great ideas. He didn't penalize people for being bold thinkers, for going in directions that may not have been the favored direction of the leadership.

This is a sort of culture that used to be widespread across the industry, which I think has been obliterated in the 1990s and over the last 15 years. Now, as I said, half a dozen companies have reacted against that, and have worked very hard -- and successfully -- to recreate a culture of innovation, and the second half, we'll have to see what happens there.

But today, below the top 12 pharmaceutical companies, you have a group of companies -- a few dozen at least -- that I would call the challengers, where that culture of innovation is very much at work. Think Regeneron. Think Vertex. Think Gilead, Celgene, Onyx, BioMarin. You've got a number of them out there, and it's all about being bold and bringing to market innovations that make a difference.

That culture is very much alive, and it works for them just as it used to work for the big pharma. This is a culture that made big pharma big pharma, and it's currently helping these mid-tier companies grow, and sometimes outgrow, big pharma. Look at the market cap of Celgene. Look at the market cap of Novo. Look at Regeneron.

Roy Vagelos, when he was at Merck, made Merck the most admired company in the world, seven years in a row. Needless to say, he was probably compensated very richly for that. His achievements at Regeneron, and his reward for those achievements, dwarf what he was able to accomplish at Merck.

It raises an interesting question about Art Levinson. Art Levinson built Genentech. By any standard, it was a fabulous success.