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Acquiring Ventana Could Improve Roche's Chance of Attracting Rx-Dx Collaborations

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If Roche’s unsolicited bid to acquire Ventana Medical Systems succeeds, it could bolster Roche Diagnostics’ ability to engage pharmaceutical companies in drug-diagnostic codevelopment deals.
 
In addition, having Ventana in-hand could also enhance Roche Pharmaceuticals’ strategy to identify biomarkers to develop companion diagnostics for every pharmaceutical product in its pipeline, according to Roche Diagnostics CEO Severin Schwan.
 
Roche announced its bid this week to acquire all outstanding shares of Ventana’s common stock for around $3 billion, or $75 per share, a 44 percent premium over the closing price of the stock the day before the announcement.
 
In a call with investors following its offer, Roche made no secret of the fact that Ventana is a leader in certain US diagnostic markets that the Swiss company is eyeing. Ventana’s leadership in the tissue-based diagnostics market in particular would complement Roche Pharmaceuticals’ expertise in targeted oncologics and Roche Diagnostics’ leadership in in vitro diagnostics, Roche officials noted during the call.
 
If Roche manages to talk Ventana officials into selling the company, it would make it the fourth acquisition for Roche in four months, after 454 Life Sciences, BioVeris, and NimbleGen. During the investor call, CEO Franz Humer said that Roche has been attempting for five months to purchase Tucson, Ariz.-based Ventana, which has been unresponsive to Roche’s attempts to engage it in acquisition discussions.  
 
Ventana may not want to be under Roche’s aegis since it has several co-development deals of its own with Genentech, Novartis, and ImClone. During the call, Roche officials did not comment on how an acquisition of Ventana would impact these deals. Ventana issued a statement soon after Roche’s announcement urging its shareholders not to act until Ventana’s board has had a chance to consider its options.
 
Roche is seeking to own 50.1 percent of Ventana shares, which would enable it to control Ventana’s IP, which in turn could facilitate future Rx/Dx codevelopment deals, said Humer.
 
According to Humer, with Ventana in the Roche group, the company’s diagnostics business would be able to attract more co-development partners by offering pharma a more complete suite of services.
 
“If you look at Roche Diagnostics today, we offer our services to others in the diagnostics and life sciences industry. Other companies are interested in getting the best service they can get,” he said. Saying that pharma partners are attracted to Roche’s ability to provide “comprehensive solutions,” Humer stressed that acquiring Ventana “would actually help get better pharma partners.”
 
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Ventana employs approximately 950 people and generated $238 million in sales in 2006. The company currently leads the $1 billion tissue-based testing market, which is growing at 10 percent annually, twice the rate of the in vitro diagnostics market.
 
“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,” Roche said in a release announcing its bid. “This transaction will position Roche with the most comprehensive diagnostic portfolio for enabling development and commercialization of personalized healthcare solutions in oncology.”
 
The US Food and Drug Administration recently cleared Ventana’s Pathway HER-2/neu (4B5) rabbit monoclonal antibody test for breast cancer patients considering treatment with Genentech’s Herceptin (trastuzumab). There are several HER-2 tests available on the market, including the FDA-approved Herceptest, made by Dako, which is the second-biggest tissue-based diagnostics company.
Roche holds majority stake in Genentech. Herceptin is marketed in the United States by Genentech, in Japan by Chugai and internationally by Roche.
 
According to Roche Dx’s Schwan, the business unit currently focuses mainly on serum-based diagnostics. “However, for therapy selection [in oncology] what you need is tissue-based tests to achieve the necessary specificity and sensitivity to really tailor the therapy,” Schwan said.
 
“The technology capabilities of the two companies provide a comprehensive solution for the pathologist where Ventana on the one hand can apply their capabilities on tests which are done directly on the tissue, and Roche can apply its technologies to analyze the tissue after extraction such as molecular diagnostics or immunology,” he said.
 
The addition of Ventana to the Roche group would also provide a “comprehensive” in-house ability to develop targeted medicines, Schwan said.
 
Finally, buying Ventana would give Roche a worldwide commercialization advantage in the advanced staining market, by leveraging Ventana’s strong market position in the US and Roche’s already strong marketing presence internationally.
 


“Look at the history of Roche’s acquisitions over the last 20 years and you will see [that] whichever group was integrated into the Roche group has actually prospered.”

Playing Hard to Get

 
Despite Roche’s enthusiasm and its generous offer, Ventana has been playing hard to get.
 
During the Roche call, Humer noted that Ventana’s leadership has been reticent to Roche’s attempts to woo the company. Even though Roche has promised to keep Ventana’s existing team intact and give “Genentech-like” operational freedom, Ventana’s leadership has refused to entertain the acquisition offer.
 
Schwan even addressed “Ventana employees that may be listening” to the investor call, reassuring them of Roche’s “decentralized” leadership style. “By keeping Ventana as a dedicated business within Diagnostics, we aim to maintain and further develop the entrepreneurial spirit that has contributed to Ventana’s success to date,” he said.
 
Humer upheld the example of Genentech to highlight Roche’s record of allowing its acquisitions room to grow. “Look at the history of Roche’s acquisitions over the last 20 years and you will see [that] whichever group was integrated into the Roche group has actually prospered,” Humer said. “Look at how Genentech has grown up. This company has a culture of respecting winners, to give them the support to become better.”
 
Roche owns a majority stake in Genentech. The two companies have a deal to develop a PCR gene-expression-based diagnostic for the advanced ovarian cancer drug Omnitarg (pertuzumab).
 
Ultimately, Ventana may have good reason to hold on to its independence, since the company has its own co-development deals with key pharma players Genentech, Novartis, and Imclone.
 
Ventana in May entered into a non-exclusive agreement with Genentech to co-develop and commercialize tissue-based diagnostics for drug candidates in Genentech’s pipeline.
 
The company also has a partnership for its c-Kit rabbit monoclonal antibody diagnostic with Novartis for selecting patients considering treatment with Gleevec and for its 3C6 antibody clone staining technology with Imclone indicating EGFR overexpression and patient candidacy for Erbitux.  
 
Although Ventana has yet to respond to Roche’s offer, the company through a posting on its website urged shareholders to “take no action at this time” and stated that Ventana’s board will make a recommendation in the next 10 days. Schwan said that despite Ventana’s reluctance to engage in discussions, Roche is “still open for a negotiated solution.”

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