Roche acquires majority stake in Foundation Medicine

Last night, Roche and Foundation Medicine (FMI) announced a strategic collaboration under which Roche will become the majority owner in Foundation Medicine. Roche will become Foundation’s marketing partner and intends to use the company’s tests for its drug development projects.

Roche is paying $1.03B for 56.3% of the company, representing a price per share of $50 (109% premium over Friday’s close). For investors, the deal validates the bull thesis  for Foundation (which I discussed here) as the undisputed leader of NGS-based tumor profiling. Turns out that being first matters also in the diagnostics business!

What’s in it for Roche ?

For Roche, the deal makes sense both as a pharma as well as a diagnostics company.

As a drug developer, Roche will utilize Foundation’s panels as a patient selection tool for its investigational drugs and subsequently as companion Dx when those drugs get approved. This is becoming a crucial element in oncology as regulatory agencies require companies to have an approved companion Dx as a condition for drug approval. Roche will also get access to Foundation’s huge database of genomic profiles and will be able to use the information for drug discovery.

As a diagnostics company, Roche will become the leader in the fastest growing segment in the industry, representing a global opportunity of ~$5B. This figure may underestimate the true potential of NGS-based products as they can be expanded beyond the current tumor profiling metrics. For example, Roche is committing $150M to explore the utility of Foundation’s platform for cancer immunotherapies and “continuous blood-based monitoring”, which is currently not within the scope of FoundationOne.

It appears that Roche intends to replicate the Ventana model, allowing Foundation to sell to and collaborate with other drug development companies. Foundation will stay independent and will be able to work with other partners such as Agios (AGIO), Clovis (CLVS) and Novartis (NVS).

What’s in it for Foundation Medicine?

As the global leader in oncology and one of the biggest diagnostics companies, Roche is the ideal partner for Foundation. The deal with Roche provides Foundation with two crucial elements: Funding and a global marketing infrastructure.

Roche will inject $400M as research funding and investment, which should secure Foundation’s future for the next couple of years. In addition, as Roche’s exclusive vendor of NGS-based tests, Foundation is looking at a meaningful revenue stream from the sale of companion Dx tests for Roche’s products.

Under the commercial agreement, Roche will sell and market Foundation’s tests outside of the US. In the US, Roche will help to promote Foundation’s tests, which will continue to be marketed by the latter. This will give an important boost to Foundation’s marketing efforts and should enable it to stay the global leader in NGS-based genomic profiling.

Overall, the deal is very positive for both companies. It enables Roche to leapfrog competitors like Labcorp and Quest and become the global leader in what is expected to become multi-billion dollar market. For Foundation, the deal provides the marketing muscle needed to maintain its leadership position, a huge long term “customer” for companion Dx tests and financial support.

What to do with the stock?

I intend to keep a position in Foundation Medicine as I expect the deal with Roche to have a dramatic impact on its business growth. As this is the 2nd largest position in the portfolio, I might have to sell a portion as I always prefer not to have more than 10% of the portfolio in a single stock.

64 thoughts on “Roche acquires majority stake in Foundation Medicine

  1. Dan – I am also surprised by that. My rationale was that acquisition of 50% of outstanding shares by an investor that will not sell shares on the open market should bring shares to $50 simply based on supply and demand. I will sell FMI in my portfolio on one of the the next portfolio updates (hopefully this sunday). I already sold a portion of my holdings in my personal portfolio.
    Re: AVEO – not sure.

    Mike – Don’t know them well but their P2b data look good (7 mmHg reduction), similar to Rhopressa in its P2b (6.3). Took them a lot of time to reach pivotal studies as results were published in 2012.

    Ohad

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  2. The deal is excellent for fmi so just because the fluctuations between 45 – 54 you are selling?
    in a year wont it be over 2B market cap in a “multi-billion dollar market”. ?

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  3. Yes, I am also confused about ARRY news, but very happy to see the price reaction today. Although this sounds like a great deal for Array, I am wondering why Novartis would agree to this. Any light you can share, Ohad, would be much appreciated. Thank you, as always …

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  4. Ohad,
    Regarding FMI – are you saying that due to the failure of FMI below $50 you’re planning to sell your entire holdings or are you still sticking to the thesis that in the long term it will rise due to Roche’s involvement and planning to hold on to a portion?
    Regarding ARRY – I’d love to hear your opinion about the recent deal. From what I managed to understand they’re buying the rights for practically nothing and in addition Roche will continue to run the trials and add full coverage of out-of-pocket expenses + 50% coverage of other expenses. This sounds like a fantastic deal with no downside and the market seems to take it as such.

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  5. Debra: Norvartis was forced to give the drugs to Arry by European regulators as part of the Galxo- Novartis deal. Novartis per terms of their contract with Arry are also responsible to fund the trials.

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  6. Hello,
    I’ve been following your posts, but this is first time posting. Thank you so much for your invaluable advices btw Ohad. I was just curious whether you have any opinion on Eleven Biotherapeutics(EBIO).

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  7. Alex (FMI) – I am selling only because FMI represents more than 10% of total portfolio holdings (thanks, Chris).

    Chris (ARRY) – The news are quite positive. They actually got this drug almost for free and NVS is obligated to fund a significant portion of ongoing activities. I still don’t know whether encorafenib will have utility outside of BRAF+ melanoma but that’s another free call option.

    Debra (ARRY) – Sounds like NVS were forced to do this since no other partner was willing to fund combination studies with ARRY ( encorafenib may have limited value as a stand alone basis given competition from approved agents).

    Aviv – Re: FMI, I am sticking with my original thesis. Roche owning 50%+ of outstanding shares should provide a support going forward. Re: ARRY, completely agree with your assessment.

    Ji – Thanks. Unfortunately I don’t know EBIO that well…

    Manish – Yep, nice to have positive surprises for a change 🙂

    Ohad

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  8. Hey Ohad
    thanks for your reply!
    one more question regarding FMI; do you see this as a long-term, core holding that will continue to appreciate as the market expands and the technology/personalised medicine become mainstream?
    Thanks
    Dan

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  9. Thank you to Ohad and also to DJ for your insights on the most recent ARRY news. It is only January, but Ohad’s prediction that 2015 will be a transformational year for the company certainly seems to be right on.

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