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Seeking Greater Share of Oncology Dx Market, Roche Makes $3B Bid for Unresponsive Ventana

This story originally appeared in Biocommerce Week, a newsletter that has been discontinued.
 
Pushing to make its fourth acquisition in four months, Roche this week made an unsolicited offer to buy diagnostics firm Ventana Medical Systems for around $3 billion, or $75 per share — a 45 percent premium to Ventana’s closing price of $51.74 on Monday.
 
The acquisition would provide Roche with a tissue-based diagnostics platform, which it currently lacks and sees as an important piece of the oncology diagnostics market. Ventana management has been unresponsive to Roche’s overtures over the past several months, which forced Roche to go public with its bid.
 
The acquisition would build on Roche’s recent moves to broadly expand its diagnostics and molecular biology research products portfolio through the acquisitions of 454 Life Sciences, BioVeris, and NimbleGen Systems.
 
Roche officials suggested during a conference call this week that the recent flurry of M&A activity is in line with the firm's traditional growth strategy, rather than a new plan.
 
“Roche has always had a strategy of taking targeted acquisitions to complement the existing field,” Severin Schwan, CEO of Roche Diagnostics, said during the call. “If you look at the acquisitions over the recent months, in the diagnostics field … each of these acquisitions has been very targeted and represents the building blocks to organically develop our existing business.”
 
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). Though Roche officials said at that time that customers would determine which applications 454’s platform is used for, it is likely it eventually will be used for diagnostic purposes.
 
Last week, Roche inked a $272 million deal to acquire microarray firm NimbleGen Systems (see BioCommerce Week 6/20/2007). The tools Roche gains from that acquisition are highly complementary to its current research products portfolio, but also provide the firm with more options as it migrates some of those tools into the diagnostics and pharmacogenomics markets in the future.
 
The firm this week also completed the $600 million acquisition of BioVeris, which developed an electrochemiluminescent technology that can be applied to research and diagnostic applications.
 
Asked during the call whether Roche was done for the time being adding businesses to its diagnostics group, Schwan said, “Science never stands still. There will always be new technologies arriving in this field. This is a fast-moving, dynamic environment, and as such we will keep our eyes open and screen the market, and if another opportunity arises we will seize it,” he said.
 
Roche believes that the acquisition would enable the firm to broaden its diagnostic offerings and would be a complement to its current in vitro diagnostics and cancer therapies.
 
Franz Humer, chairman and CEO of Roche, said that the firm already offers a wide variety of tumor markers, usually serum-based, for oncology. However, for therapy selection “what you need is tissue-based tests to achieve the necessary sensitivity and specificity to really tailor the therapy,” he said during the call.
 
Humer said the combination of the firms could provide histopathologists with a comprehensive solution that combines Ventana’s tests done directly on tissue with Roche’s analytical technologies. He also said that Roche’s in-house oncology drug development efforts would be greatly aided by an acquisition of Ventana.
 
Roche tries to identify biomarkers to develop companion diagnostics for every single pharma product that is sent into its pipeline, according to Schwan.
 
“The hurdle we have to overcome if it comes to tissue-based testing is that we do not have a platform out there in the market, and we do not yet have the same strong internal position,” he said. “That is where Ventana’s capabilities come into the game.”
 
Ventana already sells a test that screens patients likely to respond to the breast cancer drug Herceptin, which is Roche’s second-largest seller. Roche also does not have a strong presence in the cancer diagnostics market, and the acquisition of Ventana would position the firm for future growth.
 
The deal would give Roche access to a large installed base of pathology labs that use Ventana’s advanced staining technologies. Ventana holds a 41 percent share of the advanced tissue staining market, according to Roche — slightly more than second-place Dako, which commands 37 percent of the market. However, Schwan noted that Dako is the market leader outside of the US.
 
According to Roche, the $1 billion tissue-based testing market is growing at 10 percent annually, which is “twice the rate of the overall in vitro diagnostics market.” Humer said that the key growth drivers in this market include test automation and standardization, the increasing incidence of cancer, and the increasing number of targeted cancer drugs requiring companion diagnostics.
 
No Answer, No Action
 
Roche officials said that they have been trying to engage Ventana in acquisition discussions for five months, and the firm is still open to negotiating a deal. “We see a certain urgency to move ahead with this transaction,” said Humer.
 
He said Ventana has not replied to Roche’s offer. However, Ventana, which has a market capitalization of just under $2 billion, advised its shareholders through a posting on its website to “take no action at this time,” and said the company’s board will review the offer and will make its recommendation within 10 business days.
 

“The hurdle we have to overcome if it comes to tissue-based testing is that we do not have a platform out there in the market, and we do not yet have the same strong internal position.”

Ventana’s shares surged on the news, closing up 48 percent at $76.43on Tuesday.
 
Roche also published a letter Humer sent to Ventana Chairman Jack Schuler on Monday, which outlines Schuler’s unwillingness to discuss the “compelling” proposal, “or even to take my call today.”
 
The letter also offers a few details of what Roche depicts as several months of one-sided wooing, including a dinner discussion, e-mails, phone calls, and letters on the part of Roche executives to get Ventana to enter discussions about an equity investment, which Humer said would be a “partnership model similar to our longstanding successful relationship with Genentech.”
 
“We have offered to keep them listed, to give them independence, but of course, we have also made it clear to become a member of the Roche group the condition is that we control at least 50.1 percentage points, because then you control the intellectual property,” said Humer during the call.
 
Roche noted in its press release that Ventana made it clear earlier this year that it was not interested in having Roche as a majority stakeholder. That approach having failed, Roche developed the offer for an outright cash purchase at $75 a share, which it asserts represents a 55 percent premium over Ventana’s three-month average and a 39 percent premium over the company’s all-time high bid price.
 
If Roche is successful in completing the acquisition, it intends to keep Ventana as a separate dedicated business unit, said Schwan.
 
“We are not planning to integrate the functions across the other business areas, but work on the synergies in a more collaborative way,” he said. “I do not see any synergies here on the cost side, but it is very much driven by the synergies we have on the R&D side, by the development of targeted medicines, and then on the commercialization if we bring products to the market on a worldwide basis.”
 
Schwan said Roche has “a very decentralized style of leading” certain companies that it acquires. “The best examples are 454 Life Sciences, where we kept the headquarters in the US,” he said. “This company is led by the CEO … and it is led in a very independent way.”
 
He said the same model is being applied to NimbleGen.
 
Ventana employs around 950 people and had $238.2 million in sales last year. Roche officials said the firm would retain Ventana's management team and employees as well as its Tucson, Ariz., headquarters.

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