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Roche Was Content With Original 454 Alliance When CuraGen Approached It as Potential Buyer

Roche last week said it plans to acquire 454 Life Sciences in a deal valued at up to $154.9 million, but the Swiss drug and diagnostics company would have been happy to continue the firms’ existing marketing and distribution alliance had CuraGen not decided to sell its stake in 454, according to a Roche executive.
“Two years ago, there was no reason to think about” acquiring 454, Manfred Baier, head of Roche Applied Science, told In Sequence last week. “Our strategic intent was getting access to sequencing, and nothing else.”
CuraGen approached Roche, as well as others, as a potential buyer after it announced last July its plan to divest 454, Baier said. Since Roche wanted to maintain the partnership and secure its long-term investment in sequencing, “we finally concluded that under these given circumstances, it is the right thing to do the next step” and acquire 454, he said.
Ownership frees Roche from any legal limitations on using the technology for regulated diagnostic applications, a use not included in the companies’ 2005 alliance. But it is far from clear if or when 454’s sequencing technology will be used in this area.
Roche is aware of studies that test “to which extent sequencing provides a better, or a more precise, sensitive answer in different areas of diseases,” including virology and oncology, Baier said (see In Sequence 3/20/2007, GenomeWeb Daily News 7/24/2006), and will continue “to support users in medical research as much as we can in order to let the technology migrate into diagnostics applications.”
“When that will happen, nobody knows,” Baier said. “To what extent that happens, I guess also nobody knows, including the experts, but we follow our customers and will support them.”
Was 454 a Steal?
The purchase price — $154.9 million in total — differed from what other recently acquired next-generation DNA sequencing shops have cost. In January, Illumina acquired for Solexa for $615 million in stock, and last July, Applied Biosystems bought Agencourt Personal Genomics for $120 million in cash.
At the time of these acquisitions, Solexa had just ended the early-access program for its Genetic Analyzer and had not booked any revenue from the instrument, while APG was far from having a commercial instrument. 454, on the other hand, generated $37.3 million in revenues last year and was on track to become profitable this year, according to CuraGen.
According to CuraGen CEO Frank Armstrong, “454 … was valued on the basis of financial multiples which are appropriate for a company that is generating revenue.”
“You must also recognize that 454 is a company that needs continued investment,” and has no capital to finance its technology development, he told In Sequence last week.
Solexa, on the other hand, had $47 million in cash and cash equivalents at the end of September, shortly before Illumina announced it would acquire the company.
“We think [the purchase price] is a very fair price, it is a significant commitment into sequencing, in addition to what we have invested already,” Baier said.
Indeed, Roche has invested substantially in 454 since the companies penned their original research, licensing, and distribution agreement in 2005. Under the deal, which would have run out in 2010, 454 was eligible for up to $62 million in license fees, milestones related to instrument releases, minimum royalties, and research funding.
Since 2005, Roche has paid 454 $28 million in milestones and contributed $1.5 million to 454’s research last year.
Genome Sequencer customers have dealt with Roche since 2005, and now users of 454’s sequencing service will, too. Roche will soon look into how to “exploit and develop the value and the asset [of the service center] further,” Baier said. “I see many very satisfied customers using the service center, both for routine services, but also as an expert center to identify solutions for new questions.”
Dissecting the Deal
As part of the acquisition, 454 shareholders stand to gain up to $154.9 million in cash from the deal, which is expected to close in the second quarter. Roche will pay the shareholders up to $140 million in cash, of which $25 million will be placed in escrow for 15 months.
In addition, 454 shareholders may receive up to $14.9 million in cash from holders of outstanding stock options and warrants, if they are exercised.
454 was founded in June of 2000 as a CuraGen subsidiary with $40 million in funding from CuraGen, Soros Fund Management, Cooper Hill Partners, and members of CuraGen’s senior management team and board of directors. In September 2003, 454 received an additional $40 million in equity financing from CuraGen and several existing stockholders.
Armstrong said in a conference call last week that CuraGen had invested $36.6 million in total in 454.
Roche has had a five-year research and marketing agreement with 454 since October 2005, under which Roche Applied Science, a business area of Roche’s diagnostics division, exclusively distributes 454’s Genome Sequencer. That agreement excluded the use of 454’s technology for regulated diagnostic applications.

“Two years ago, there was no reason to think about” acquiring 454. “Our strategic intent was getting access to sequencing, and nothing else.”

The Swiss giant, which employs almost 75,000 people worldwide, plans to maintain 454’s Branford, Conn., facility with its 167 employees, and integrate it into the Applied Science business area of its diagnostics organization.
Roche also plans to maintain 454’s management team, Baier said, which Roche “see[s] as a key asset,” as well as the 454 brand name. “That has a very good reputation in the market [and] there is no reason to change that brand,” he said.
Last year, Roche Diagnostics, which has almost 21,000 employees, posted CHF8.7 billion ($7.2 billion) in revenues, of which CHF632 million, or 7 percent, came from Roche Applied Science.
Sales in this business area grew 12 percent last year, driven primarily by the LightCycler480, an RT-PCR-based gene expression and mutation analysis platform, and the 454 GS 20, according to Roche’s 2006 annual report.
Roche Applied Science also supplies industrial reagents and substrates, “which account for a major part of its sales revenues,” and were also important contributors to Applied Science’s revenue growth last year, the report stated.
The news of 454’s sale was hardly unexpected: CuraGen, which owns two thirds of 454 and anticipates receiving $85 million from the sale before fees and expenses, had announced in July that it was looking into strategic options for its investment in 454 in order to obtain funding for its cancer drug development pipeline (see GenomeWeb Daily News, In Sequence’s sister publication, 8/1/2006).

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