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As Ventana Board Rejects Takeover Bid, Roche Challenges Arizona Law, 'Poison Pill' Defense

Roche has filed two lawsuits aimed at overturning an Arizona law and invalidating a “poison pill” defense that could delay or block its hostile bid to acquire Ventana Medical Systems for $3 billion.
With Ventana’s board of directors this week rejecting Roche’s offer, the Swiss diagnostics and drugs giant has sought to overturn an Arizona state law that could delay by up to three years Roche’s ability to control the company. In addition, the firm has asked a Delaware court to invalidate a poison pill provision that could potentially dilute Roche’s stake in Ventana.
Roche also continued its recent flurry of spending by acquiring a small stake in RNAi shop Alnylam and forging a collaboration with the firm that could be worth up to $1 billion to Alnylam.
Roche made its unsolicited bid for Ventana a couple of weeks ago, offering to buy the diagnostics firm for $75 per share — a 45 percent premium to Ventana’s closing price of $51.74 the day before it announced the offer (see BioCommerce Week 6/27/2007).
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. It also would provide the firm with a “comprehensive” in-house ability to develop targeted medicines, company officials said during a conference call announcing the bid.
After reviewing the proposal for 10 days, Ventana’s board recommended that the firm’s shareholders reject Roche’s offer, calling it “inadequate in multiple respects and contrary to the best interests of Ventana’s stockholders.”
Ventana’s board also sent Roche CEO Franz 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, adding 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.
Seeking Legal Remedies
In an effort to circumvent Ventana's board, Roche had filed the two lawsuits in late June.
The first suit was filed in the state of Arizona and named as defendants Ventana and state Attorney General Terry Goddard. In that suit, Roche claimed that a 20-year-old state law designed to restrict the voting rights of an outsider who buys a controlling share in an Arizona company is unconstitutional. Though Ventana is incorporated in Delaware it meets the definition of an Arizona company by having its principal executive offices in the state and employing more than 500 Arizona residents.
Under the statute, Roche could be forced to wait three years before obtaining full control of Ventana’s operations. In its filing, Roche said the statute is unconstitutional and that it would “derail the tender offer and irreparably injure” the firm and Ventana’s stockholders if it is not overturned.
Roche argued, “The Supreme Court of the United States has held that state anti-takeover statutes violate the Commerce Clause insofar as they purport to regulate the internal affairs of foreign corporations, or tender offers for the shares of foreign corporations, even when such foreign corporations maintain their principal executive offices and control substantial assets in those states.”
The second suit was filed in a Delaware court and challenges Ventana’s poison pill, a provision incorporated into a company’s bylaws that, in effect, would significantly dilute the shares of the acquirer. In Ventana’s case, its bylaws would allow existing shareholders to buy more shares of the company at half price if an outsider acquires at least 20 percent of Ventana’s shares.
Roche claims that Ventana’s board had breached its fiduciary duty by not eliminating the poison pill provision. The company also said in its filing that its attempt to buy Ventana does not pose a threat to Ventana’s shareholders or “corporate policy and effectiveness.”
Roche officials declined to comment further on the lawsuits. In a statement issued after Ventana's rejection of Roche's bid, Humer said Roche was "committed to bringing our companies together and continue to prefer to commence discussions with Ventana to effect a negotiated transaction."
Roche said that if Ventana refuses to negotiate, the firm would continue to pursue the deal unilaterally. It said it may take actions at Ventana's 2008 annual meeting including nominating new directors to Ventana's board and/or putting forth proposals to amend Ventana's bylaws.
Another Big Investment
In addition to its efforts to acquire Ventana, which would be Roche’s fourth acquisition this year, the firm licensed non-exclusive rights to Alnylam’s patents covering RNA interference for use in drug research. Roche said such research will initially focus on oncology, respiratory, metabolic, and liver indications, and the firm believes the RNAi technology will complement its current use of small molecules, monoclonal antibodies, and peptides.
In addition, Roche acquired Alnylam’s European research site in Kulmbach, Germany, along with 40 employees. The site will serve as Roche’s Center of Excellence for RNAi therapeutics.

Roche said the statute is unconstitutional and that it would “derail the tender offer and irreparably injure” the firm and Ventana’s stockholders if it is not overturned.

The firm also acquired a stake of nearly 5 percent in Alnylam through the purchase of 1.975 million shares of Alnylam common stock for $21.50 per share — a 41.4 percent premium to Alnylam’s closing price of $15.20 the last trading day before the deal was announced. Alnylam’s shares closed at $23.30 on Tuesday.
Roche said it would pay Alnylam $331 million in upfront cash payments plus the equity investment. But the total value of the deal could rise to more than $1 billion including milestone and royalty payments.
RNAi has recently become a hot area of investment for pharmaceutical firms, with some paying a big price for access to the technology and/or pipelines of emerging RNAi technology companies. Roche rival Novartis purchased a 19.9 percent stake in Alnylam in 2005 for $11.11 per share.
Early this year, Merck completed the $1.1 billion acquisition of Alnylam competitor Sirna Therapeutics. And just last week, AstraZeneca inked an siRNA collaboration with Silence Therapeutics that is worth up to $402 million, depending on milestone and royalty payments.
The deal with Alnylam is the latest in a series of significant investments made by Roche this year to expand its capabilities across its research, diagnostics, and drugs operations. Prior to the bid to acquire Ventana, the firm either acquired or announced deals to acquire three other companies this year.
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.

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