|Trends & Perspectives|
Persistence has paid off for Roche Holding AG (Basel, Switzerland). After trying for nearly seven months and extending its offer five times, Roche has acquired Ventana Medical Systems Inc. (Tucson, AZ). The deal was valued at roughly $3.4 billion.
With $8.6 billion in sales from its diagnostics division last year, Roche has been building its diagnostics business during the past year because that is where it sees the most growth. To do so, Roche has been targeting certain disease states, one of which is cancer. One of the drugs that Roche distributes internationally is Herceptin. Herceptin is made by Genentech (South San Francisco, CA), in which Roche has majority ownership interests.
Herceptin is given to women with HER2-positive metastatic breast cancer, which is an aggressive form of the disease with a likelihood of recurrence and a poor prognosis. Nearly a third of women with breast cancer have tumors that overexpress HER2. HER2 is also overexpressed in a number of other cancer types, including endometrial, gastric, and prostate. Ventana is the leading producer of the diagnostic equipment that identifies the HER2 protein from tissue samples of cancer patients.
Bruce Jackson, a healthcare equity research analyst with RBC Capital Markets (Minneapolis), believes Roche was eager to buy Ventana because it will help the company to sell more Herceptin, especially for gastric cancer indications. “It wasn't simply a matter of buying Ventana for its own revenue,” he says. In 2007, Ventana had projected sales in the $290 million range.
The acquisition is yet another element in Roche's strategy to become the top company in oncology testing and therapeutics, Jackson says.
Jackson does not believe that Roche's offer was too sweet even though the price it ended up paying per share—$89.50—represents a 72% premium to Ventana's closing price on June 22, 2007. While Roche made its initial offer of $75 per share for Ventana on June 23, 2007, it was repeatedly rebuffed. Ventana's board said it believed that the initial offer did not fully reflect the intrinsic value of the company or fairly compensate stockholders for its strategic and synergetic value to Roche. Roche had to raise its offer by 19% to win over Ventana's board.
“The transaction may appear expensive,” Jackson says, “but very few companies have Ventana's sales growth and profit margins, and those characteristics deserved a premium.”
Manfred Scholz, PhD, president of Scholz Consulting Partners (Medford, MA,) agrees that Roche wanted Ventana for its tissue-sampling technologies. The Ventana acquisition makes sense in light of Roche's acquisitions last year of NimbleGen Systems Inc. (Madison, WI) and 454 Life Sciences (Branford, CT), Scholz says.
“Roche is a leading IVD company in clinical chemistry and immunochemistry technologies that use primarily bodily fluids as samples. The acquisition of NimbleGen and 454 as well as its traditional PCR technologies provide it with a comprehensive collection of technologies for testing on cellular or tissue samples,” he says. “Ventana adds the appropriate tissue sample technologies needed to leverage the value of its nucleic acid testing technologies.”
Given what Ventana adds to Roche's portfolio, Scholz believes Ventana is worth more in Roche's hands than it is as a stand-alone company.
Another reason Roche was willing to pay so much, Scholz says, is that Roche saw Ventana as a better fit than any of its alternatives, which were buying another existing company such as Dako (Glostrup, Denmark), a world leader in cancer diagnostics; buying several smaller competitors in the pathology market; or developing tissue-based diagnostic technologies internally.
No one knows whether Dako would have been available or whether it could have been acquired for a reasonable price, Scholz says. “A roll-up or internal development would have taken time and may not deliver an adequate intellectual property portfolio. Hence, buying Ventana was seen as the most reasonable strategic deal.”
While strategically Ventana was a good acquisition, Scholz says, given how much Roche had to pay for it, it may turn out to be a questionable decision.
“I am not convinced that the Ventana deal will deliver an adequate financial return on its own,” he says. “Some convergence and integration of the pathology-related technologies will have to happen to offer new high-value companion diagnostic products.”