Roche Stands Out From Big Pharma's Other Noisy Chest-Thumpers


Photo: AP Images

Roche Holding Ltd. just made its second bet on a new Alzheimer’s treatment. Investors who are now evaluating the Swiss pharmaceutical giant’s shares should remember that its managers take more of a long-term stance than many of the other noisy chest-thumpers in the industry.Widely known for its cancer-fighting drugs such as Avastin, Roche’s unit Genentech had in 2006 bought the rights to crenezumab, an antibody discovered by AC Immune S.A. that is designed to bind to plaques that form in brains with Alzheimer’s. Now Genentech signed another deal for the rights to compounds intended to defend the body from Tau protein problems that can lead to abnormal tangles in the brain. Roche is paying AC Immune an undisclosed amount up front and potentially 400 million swiss francs more, depending on the success of the research into anti-Tau antibodies.

“This underlines Genentech’s trust in AC Immune’s proprietary technology platform,” AC Immune’s CEO Andrea Pfeifer said in a statement Monday. “We are confident in our joint abilities to develop not only first-in-class but also best-in-class medication.”

Roche’s CEO Severin Schwan and his team have taken actions suggesting that they aim for more than just the highest earnings numbers. For example, they offered in January to pay around $44.50 per share in cash, or $5.7 billion at the time, for a company called Illumina that provides integrated systems for DNA sequencing. As Illumina’s board resisted, Roche raised its bid to $51 per share in March. After institutional Shareholder Services advised Illumina’s shareholders against backing Roche’s bid, Schwan could have easily started doing business with his ego, stubbornly pushing ahead with ever higher offers. If he had ended up paying through his nose as a result, his estimation of Illumina’s value as an asset could have boosted Roche’s earnings for years until it came time to make a painful adjustment. Instead, Schwan opted for the immediate embarrassment of walking away from Illumina for the long run benefit of his shareholders.

Schwan also chooses to report his earnings conservatively rather than risk disappointing investors later. Roche’s financial statements reflect an AGR score of 94 as of March, indicating less accounting and governance risk than the vast majority of comparable companies. In contrast, only 14% of the 7,067 pharmaceuticals GMI tracks have AGRs in the conservative category, while nearly half are average.

Also, Roche’s managers have been willing to rein in some of their own freedoms for the sake of better governance. In March 2008 Roche divided the powers of its then-chairman and CEO Franz Humer, keeping him on the board and making Schwan the new CEO. Then in 2009, Roche introduced a “say-on-pay” vote giving its shareholders the ability to vote on what senior executives earn.  Roche’s board of directors comprises 14 members, nine of whom are considered independent by GMI standards.

Due to such factors as well as others, GMI gives Roche an A on its corporate governance overall. Only 4% of the 1,902 pharmaceutical companies that GMI grades have As, while more than half are Cs.

Of course, this is not to say that Roche is always perfect or that its senior managers won’t change tacks in the future. But for the moment, they appear to think more about the long run than others. If their bet on the new Alzheimer’s treatment turns out right, odds are they’ll end up touting the success for what it is rather than confuse their investors.

Region:  Western Europe
Sector:   Healthcare
Industry: Pharmaceuticals – Diversified
Market Cap: CHF 108,054.1mm (Large Cap)

ESG Rating:   A
AGR:   Conservative (94)


Read more posts on GMI Ratings »

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