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Roche Continues to Pursue Ventana But Won't Raise Bid; MDx Revs Fall on Expired PCR IP

This story originally appeared in Biocommerce Week, a newsletter that has been discontinued.
 
Roche is pressing forward with its plans to acquire Ventana Medical Systems in a hostile takeover, but company officials said last week that they would not increase their offer of $75 per share.
 
Roche sees the acquisition of Ventana as an important piece of its personalized healthcare strategy for the oncology market and believes it is offering Ventana’s shareholders fair value for the firm. The Swiss drugs and diagnostics giant also reported last week that first-half 2007 sales for its molecular diagnostics segment fell 3 percent due primarily to the expiration of some key PCR patents.
 
In conjunction with the first-half results, Roche announced that Roche Diagnostics CEO Severin Schwan will take over Franz Humer’s role as CEO of the entire Roche group so that Humer can focus on his role as chairman of Roche Holdings. Company officials said during the call that Schwan will assume the CEO role next March.
 
The company has yet to name a successor to Schwan for the diagnostics business.
 
“I have repeatedly discussed with the board when is the appropriate moment to split the two functions,” Humer said during the firm’s first-half conference call last week. “We came to the conclusion … that 2008 is the right time.”
 
He cited the firm’s financial strength and management team, which “can support such a transition. At the same time, we have a next generation of managers coming along,” he said, explaining further why next year is the proper time for the transition.
 
‘Very Fair’ Premium
 
Roche officials said during the call that they are moving forward with their plans to acquire Ventana, even though Ventana’s board of directors has urged shareholders not to accept Roche’s bid and has refused to negotiate a deal with Roche (see BioCommerce Week 7/11/2007).
 
The $75 per share bid values Ventana at roughly $3 billion. Two weeks ago, the Ventana board sent Humer a letter offering a list of reasons for snubbing the offer, and calling the offer “so far below a reasonable starting point for negotiations” that it will not engage in discussions with Roche about a deal in any way.
 
“Simply put, we believe that Roche is trying to capture value for its stockholders that rightly belongs to Ventana's stockholders,” Ventana Chairman Jack Schuler wrote. He added that Roche was making a grab for a “unique” strategic position in a market that offers a more lucrative future to company shareholders if Ventana keeps after its current strategy.
 
But Roche has remained undeterred, vowing to take unilateral action and deal directly with Ventana’s shareholders if the firm’s board and management refuse to negotiate a deal.
 
Humer said during the call last week that Roche had offered “a very full and very fair premium, and we have no intention to increase that price. This acquisition will allow us to move into the fast-growing commercial market for tissue-base diagnostics, and equally important it will strengthen our ability to enter into personalized healthcare in the field of oncology,” he said.
 
However, Humer’s letter to Schuler two weeks ago, in which he said “it has been and remains Roche’s preference to conclude a negotiated transaction with Ventana,” would seem to suggest that Roche would be open to sweetening the offer.
 
Last week, Ventana posted second-quarter revenue of $71.8 million, a 21 percent increase year over year. The firm also raised its revenue outlook for all of fiscal 2007 to between $292 million and $296 million, and its 2008 revenue guidance to between $370 million and $385 million.
 
The bid for Ventana is the latest in a series of acquisitions either completed or proposed by Roche this year aimed at expanding its genomics tools and diagnostics offerings. In late March, Roche acquired next-generation sequencing firm 454 Life Sciences in a deal valued at $155 million (see BioCommerce Week 4/4/2007).
 
Then, last month it inked a $272 million deal to acquire microarray firm NimbleGen Systems (see BioCommerce Week 6/20/2007). Roche also recently completed the $600 million acquisition of BioVeris, which developed an electrochemiluminescent technology that can be applied to research and diagnostic applications.
 
“The real strategic advantage for us comes if you put this all together,” said Schwan, referring to the acquisitions made so far this year. “All of those acquisitions are very targeted around our existing business. They’re very targeted around molecular biology.”
 

“With the expiry of the foundational PCR patents this business has literally become generic. The prices have come down, and as such sales have been declining.”

“Our focus is on the increasing importance of personalized healthcare,” added Humer.
 
Asked during the conference call whether the recent spate of acquisition activity was planned to happen all at once or if it was just coincidence, Schwan said, “It is certainly true that we very intensively screened the [diagnostics] market over the last 18 months.”
 
However, he said the timing of the deals was more of a coincidence. He said the firm was in parallel discussions, which led to the rapid succession of deals. “So, [we] don’t expect that this will continue,” he said. “However, in the end science never stands still. Technologies develop and we want to be at the forefront.”
 
MDx Sales Decline
 
For the first half of 2007 sales of Roche’s molecular diagnostics products declined 3 percent. Overall, Roche Diagnostics’ revenue rose 7 percent year over year to CHF 4.6 billion ($3.8 billion), with molecular diagnostics bringing in revenue of CHF 574 million. The applied science segment of the diagnostics business brought in CHF 331 million in revenue.
 
Roche’s applied science sales were driven by its LightCycler 480 and the Genome Sequencer 20 and GS FLX systems that were acquired along with 454.
 
The decline in molecular diagnostics sales is “entirely due to the industrial business, where we deliver Taq [polymerase] and other things to other life science companies,” said Schwan during the call. “With the expiry of the foundational PCR patents this business has literally become generic. The prices have come down, and as such sales have been declining.”
 
The foundational PCR patents expired in 2005, but Roche and partner Applied Biosystems hold patents for real-time PCR that are still in effect and bring in substantial royalty revenue.
 
Overall, the Roche Group reported first-half 2007 revenue of CHF 22.8 billion, a 15 percent increase year over year. The firm’s net income soared 29 percent to CHF 5.9 billion.

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