Deals of the Week: Beyond Vytoringate

The sky is falling! The sky is falling! It sure seems that way this January Friday morning. Global markets slid early in the week thanks to a certain R-word and its association with the US economy. Meanwhile, in pharma land the brouhaha over Vytorin data--or lack thereof--has officially morphed into a scandal, with the addition of the "gate" suffix. (Take our poll!)

As of Thursday, both houses of Congress had initiated investigations, pressing Merck and Schering-Plough for information on the timing of executive stock sales in the wake of the delayed release of results from the so-called ENHANCE trial. Adding to the bad news, comes this New York Times report, which draws the American Heart Association--remember, the group came to the defense of Vytorin just last week--into the scandal thanks to financial ties to both companies.

In the wake of such scrutiny, it's not surprising that Vytorin prescriptions have fallen. Any doubt that these two pharmas have a serious image problem should be erased by this spoof from YouTube, where the omniscient narrator voices, "Nobody knows if Vytorin is safe or effective, but with enough scientific fraud, we can sure make it look like it is."

2008 is off to a great start. Thank goodness for Deals of the Week, where we promise not to mention Vytorin, Merck, or Schering Plough again--at least in this edition.



Teva/Cogenesys: On Tuesday, the Israeli generic drugs company announced it's acquisition of Cogenesys, the albumin fusion technology play spun out of Human Genome Sciences in 2006, for $400 million. Yet again, proof of a trend we've detailed several times: pharmaceutical firms continue to bulk up their large molecule capabilities. But for generics giant Teva, this deal is as much about deepening its stake in the ill-defined, yet surely valuable, follow-on biologics arena as is it about biologics capabilities per se. And that got us thinking. How much different is this deal, really, than Glaxo's take-out of Domantis, BMS's buy-out of Adnexus, or Wyeth's acquisition of Haptogen? Pharma's made a tremendous amount of money on next-generation (or me-too) small molecules. Stands to reason that as these firms jump into biologics, this might be just the space to play in--after all, new technologies allow the pharmas the opportunity to create IP-protected versions of existing large molecules that have largely been derisked. (Note: It's probably a good thing for Cogenesys that Teva inked the deal Tuesday not Wednesday. On Wednesday came news that HGS's own albumin-fusion protein, Albuferon for the treatment of Hepatitis C, may have adverse lung-related side-effects when dosed at the 1200 microgram level. HGS says it will shift patients in the Phase III trial to a 900 microgram dose biweekly and still expects to have late-stage data on the drug by spring 2009, with a marketing application to follow later that year.)

Roche/Ventana: Requited love--isn't it romantic? On Tuesday,came the news that after attempting to pledge its troth five times--and upping its share price to $89.50--Roche finally won Ventana's hand. We advised Ventana to take the outsized $75-a-share price late last summer, as $3 billion for a company with no near-term products seemed an outrageous return. Looks like we were wrong. That extra few months of wrangling won Ventana shareholders an extra $400 million in value, with the purchase price coming very close to the $90-per-share target Ventana CEO Gleeson had been gunning for all along. But even this happy news hasn't quelled the on-going rumor-mill. Forbes is reporting that although Ventana’s board has approved the deal it was over the objections of Chairman Jack Schuler and Vice Chairman John Patience. Neither have agreed to sell their shares to Roche. That’s 12% against the deal. Larry Feinberg, manager of the $1 billion Oracle Partners hedge fund owns another 8% of Ventana’s stock. He started buying in 1999 and tells Forbes: “My strategy has been to go along with those guys.”

Estee Lauder/Allergan: Last week the self-help guide "How Not to Look Old” made its debut on the New York Times best-seller list at No. 8 in the advice and how-to category, proof that the quest for eternal youth remains a constant in our society. This week comes news that Estee Lauder Cos' Clinique Laboratories is teaming up with Allergan to develop and market a new up-scale skin care line that will only be available from physicians. The new line will be priced at a premium compared to both Clinique's retail products and Allergan's physican dispensed offerings, which include Prevage MD and Forte. "The big idea here was: How do we become a leader in skin care?" says Allergan's CEO David Pyott. Allergan, is of course, the company that brought the world Botox, and has been a leader in showing the world how lucrative it can be to blend cosmetics with aesthetic medicine.

Forest/Novexel: Forest Laboratories plans to shell out $109.5 million in up-front fees to license North American rights to Novexel's preclinical intravenous beta-lactamase inhibitor, NXL104, which is being developed in combination with Forest's ceftaroline. (For those who don't remember, Forest acquired that product as a result of its 2006 acquisition of Cerexa.) If development work bears fruit--the combination is scheduled to enter the clinic in 2009--Forest will owe an additional $109.5 million. In addition, Forest also won first negotiation rights on another combination antibiotic--NXL104 plus ceftazidime, another cephalosporin with a slightly different activity spectrum compared to ceftaroline. This is the seventh major in-licensing deal for Forest in the last two years. While other pharmas have looked to biologics and other novel technologies to rejuvenate their pipelines, Forest is proving it has the know-how to license and succeed with primary care products, from anti-infectives to hypertension medicines such as Daiichi Sankyo's Azor to irritable bowel syndrom drugs such as Microbia's linaclotide. In other words, this spec pharma is proving it can succeed in big pharma's sandbox. For more on Forest's efforts in the primary care space check out this article from the December issue of The RPM Report.

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Ventana Accepts $3.4 Billion

Roche finally nabs its man. Or in this case, its diagnostics company. All it took was an extra $14.50 per share. From the companies' press release:

This offer represents a premium of 4.9% to Ventana's closing price on January 18, 2008, a 19.3% premium to Roche's initial offer on June 27, 2007, and a 72.3% premium to Ventana's closing price on June 22, 2007 (the last trading day prior to the announcement of Roche's initial offer). The acquisition of Ventana, a leader in the fast-growing histopathology (tissue-based diagnostics) segment, will allow Roche to broaden its diagnostic offerings and complement its world leadership in both in-vitro diagnostic systems and oncology therapies.

Here's a recap: Roche spent most of 2007 getting turned down by Ventana, which played down the pharma's $3 billion offer multiple times. First they said please, then highlighted its belief in the importance of its diagnostics business by promoting its dx head Severin Schwann to CEO of the whole Roche Group. We suggested soon thereafter that Ventana should do the deal (this is why we are not CEOs, we suppose), and in late November they agreed to let Roche behind the curtain with an eye toward a more equitable arrangement (ka-ching!). Roche again extended its offer for the company earlier this month, and that brings us to this morning's $89.50 per-share-deal announcement.

We've outlined the rationale for this deal before (follow several of the links above). Roche clearly believes that personalized medicine is the future, and is sure that Ventana will help them get there. $3.4 billion sure.

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Ventana Plays Ball

Chris Gleeson, the CEO of Ventana, must be one heck of a poker player. After rebuffing Roche's hostile $75-a-share price offer four times, his company announced in after hours trading that it had accepted a confidentiality agreement from the Swiss pharma, giving the drug giant access to the non-public information.

The hope, of course, is that once Roche execs get inside Ventana's data room that they will come to their senses and realize how grossly inadequate--insulting,even--was their original offer. Or as the press release states:

Ventana's Board believes that the due diligence conducted by Roche and related discussions that will accompany the due diligence process will allow Roche to recognize the significant additional value inherent in Ventana's business.

But that doesn't mean the company believes Roche's original offer was in any way fair. The release goes on to say:

Ventana’s Board of Directors reiterated that Roche’s $75 offer is grossly inadequate and not an appropriate starting point for negotiations as reflected by that fact that Ventana’s share price has consistently traded well above Roche’s offer and our stockholders have overwhelmingly rejected that offer four times. Furthermore, the Board continues to believe Roche’s offer does not appropriately compensate Ventana’s stockholders for the inherent value of the Company or its synergistic value to Roche.

The news of a confidentiality agreement comes at an odd time. After all, in mid-October, the company reported a 28% increase in its third quarter revenues, widely beating analyst expectations, thanks to strong sales of its tissue-testing products. And even if Roche hasn't seen the light, the company's shareholders have converted: according to an October 29 press release, less than 0.2% of the Ventana's 35 million outstanding shares had been tendered to Roche after the third extension of the original hostile offer. Which leads this IN VIVO blogger to wonder: why bother playing nice at all?

Maybe because the company can't afford not to. Despite strong revenues, Ventana's third-quarter net income was tiny--just $263,000 or 1 cent per share. Compare that to last year's third quarter results, where the company reported net income of $7.8 million, or 22 cents per share. Listen to the webcast of the company's earnings call and it's not hard to find the reason for the drop: $12.5 million in special charges that included hefty legal fees to fight off Roche's takeover bid. Clearly that fight is starting to take a financial toll--a scenario we partially envisioned back in August.

And with no end to the fight in sight, no White Knight emerging, and a direct hit to the bottom line, Ventana's board must have seen the writing on the wall. Continue to resist and risk continued hits on earnings--a scenario which could drive investors away and the send the share price on a downward spiral that would put pressure on them to accept Roche's original offer. (Roche's strategy, by the way, is outlined in this IN VIVO piece from this past summer.) Their best hope, then, of convincing Roche to sweeten the pot was to show them why Ventana is worth the money--and that means giving them access to the data room and the people inside.

In other words, you should listen to your mother. You can catch more flies with honey than vinegar.

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Take The Money and Run

On Tuesday August 21, this IN VIVO reporter had the opportunity to interview Christopher Gleeson, CEO of Ventana Medical Systems. It was an interview arranged by an outside public relations firm, ostensibly to talk about the growing importance of companion diagnostics. But there was a Swiss elephant in the room: Roche, whose $3 billion hostile offer for the diagnostic company was set to expire in a couple of days.

Gleeson confirmed his company has had no conversations with Roche since the end of June. "We would prefer not to comment on this matter," says Gleeson. But he maintains, "We continue to look at every way possible to maximize value to our shareholders." Forgive my confusion, but it seems like an odd time to seek out a meeting with a reporter and then dodge the most pressing issue facing the company.

Instead, Gleeson presented the broad case for molecular diagnostic content, invoking Genomic Health's success with Oncotype Dx, and his belief that valuable tests of this ilk can command premium price tags. Frankly, we at IN VIVO have been hearing this argument for a while now--with little formal movement.

Gleeson himself acknowledged that, to date, the relationships Ventana has developed with pharmas are primarily fee-for-service contracts for assay development using the drug company's own proprietary biomarkers. In other words, those pharmas haven't been willing to part with any kind of royalty in exchange for having a diagnostic co-listed on the drug label.

So why even bother speaking to IN VIVO at all? To convince me that a company with 2006 revenues of $260 million is worth more than Roche's $75-a-share offer?

Now, I know that the market for in vitro diagnostics is hot. A quick search through Windhover's Strategic Transactions Database shows 22 IVD acquisitions this year alone, and none of these take-outs have been cheap.

Remember Biosite? Beckman Coulter tried to buy the company for $1.44 billion, only to be out-bid by Inverness Medical. (See here for Windhover's coverage.) Especially in the over-heated molecular diagnostics arena, acquisition targets are commanding stunning multiples. Qiagen bought Digene, for instance, for $1.42 billion, a 9.3x multiple on the HPV-test maker's annual revenues.

But Roche's $3 billion offer for Ventana exceeds even that--assuming the Swiss drug maker doesn't sweeten its deal, it's nearly a 12x multiple on Ventana's 2006 sales. Said one industry insider who's been following the saga, "The price is scary."

I give Gleeson a lot of credit. He's playing a tricky game of brinkmanship. It's clear Roche wants this company badly--Ventana's cell-based assays fit with the company's professed long-term strategy to entwine drug development and personalized medicine. And the company spent 6 months pursuing Ventana privately before launching its hostile bid. When Roche finally went "hostile," it opted for a rich price, seemingly designed to frighten off competitors. As the summer wanes and the hostile bid gets extended yet again, it seems less and less likely that a white knight will appear to rescue Ventana.

Roche may decide to sweeten its offer in order to get the deal done, but that seems less likely after yesterday, when an Arizona court ruling granted a motion preventing Ventana from using a state anti-takeover position. (A ruling to prevent Ventana from issuing new shares to block the proposed deal--a so-called "poison-pill"--is still pending.) That's okay. Gleeson has done his job for shareholders: $3 billion is a rich price for a diagnostic company, especially one that isn't likely to be launching significant numbers of new companion diagnostic tests until 2011.

Seems like now is the time to take the money and run.

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Schwan Song

Roche’s announcement that Severin Schwan, the head of its Diagnostics division, is set to succeed Franz Humer as CEO of the Roche Group next March came just hours after we’d filed a story for the upcoming issue of IN VIVO looking at Roche’s recent acquisitions, including its ongoing $3 billion hostile tender offer for anatomic pathology specialist Ventana Medical Systems. Given his recent history in diagnostics, the Schwan news would’ve made an excellent punch line to the article, which talks about the firm’s belief in diagnostics and its bet that personalized medicine--an area where innovative platforms and molecular test content will play significant if separate roles—will be key to its long-term growth.

This past Monday, the IN VIVO Blog also cited a rumor that Novartis could be grooming Joerg Reinhardt, the head of its vaccines and diagnostics businesses, as successor to CEO Dan Vasella.

Is it a coincidence that both firms are turning to Dx veterans? Novartis doesn’t have an in vitro diagnostics business anything like the scope of Roche’s, nor does it have a life sciences research tools unit. But Novartis knows blood banking, to which it has applied a nucleic-acid test (NAT) based platform for virology testing. And like Roche, Novartis has a significant investment in targeted cancer therapies, for which companion diagnostics are assumed to play a vital part. (Ventana, for example, markets a molecular test to gauge patients’ potential to respond to Novartis’ Gleevec).

So maybe it's a good time to examine Roche’s strategy.

Unlike other Big Pharmas (including Novartis), Roche has dedicated itself to the in-house development of companion tests. Its molecular diagnostics unit has developed know-how around adapting microarray technology to clinical diagnostics--one of the most complex aspects of the approval process for drug-diagnostic tandems--via a series of collaborations with Affymetrix, leading to tests for mutations in the p450 and cystic fibrosis genes. Roche is applying the same tools to developing its own drugs, including a p53 diagnostic for a cancer drug that binds wild type p53. And before Roche took rights to Plexxikon’s PLX4032 cancer program, which inhibits a gene mutation present in roughly two-thirds of melanomas, the two companies had begun a diagnostics collaboration around a molecular test for the mutation. Indeed, one reason Roche paid so much for the Plexxikon compound was that the companion diagnostic could dramatically expand its market into solid tumors by targeting the same mutation in those far more common cancers.

Roche has the free cash to invest in its diagnostics businesses and is clearly aiming at personalized medicine as a principal way to bolster them long term – and importantly, also support the development of targeted drugs on its pharmaceutical side. On the conference call discussing the Ventana tender offer Schwan said flatly that Roche wants it for strategic reasons relating to its drug business. The Ventana deal “is very much driven by the synergies we have on the R&D side, by the development of targeted medicines. The real value is that we can leverage the different capabilities across the entire Roche Group,” he said. “The earlier you start the exchange of ideas between pharma research and diagnostics, the better chance you have to come in parallel with the development of a companion diagnostic,” added Roche CFO Erich Hunziker.

It’s long been held that pharma holds all the leverage when it comes to drug-diagnostics partnerships. But the demand for innovative test content to run on molecular diagnostics platforms is increasing: witness the recent upswing in deal-making, along with renewed VC interest in diagnostics. It suggests that the area's potential to drive health-care innovation by directing therapy more efficiently is finally being recognized. Even Abbott Labs noted this when, in the wake of the breakup of GE Healthcare’s bid to acquire Abbott's diagnostics businesses, Ed Michael, Abbott’s newly appointed head of diagnostics, commented to us that there are synergies between all of its diagnostics divisions--especially between the molecular and point-of-care testing businesses.

So if pharma companies truly believe in the vision – and more to the point, the necessity -- of personalized medicine, and if the development of tandem drug-diagnostic combos is best started early in development, it makes sense they’d want their senior executives to have hands-on experience with the ins and outs of diagnostics development. Finally.

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Roche to Ventana: We want you so bad

It was apparent from today's Roche investor call that five months of trying to open acquisition discussions with Ventana Medical Systems has left the Swiss firm frustrated and desperate. It may well win the fair hand of Ventana with some combination of a carrot (we'd be so good together) and/or a stick (we're gonna get ya one way or the other), but by putting its cards on the table the way it has, Roche seems to have given Ventana all the leverage.

Several times, CFO Erich Hunziker acknowledged the strength of his firm's desire. "You may ask why Roche sees a certain urgency for this deal," he said early in the call. "Leaving Ventana's successful team unchanged and giving them the support of a global company could be very crucial at a time when key competitors in this market are still aligning their efforts after having just been taken over," he declared. "We are prepared for long discussions but a quick negotiated solution would have clear benefits for everybody involved." Roche has proposed in writing a Genentech-style buyout of a majority of Ventana's shares, as well as yesterday's announced hostile tender plan, which values Ventana at $3 billion, or 44% above Ventana's June 22 closing stock price. Under either scenario, it has promised to keep Ventana independent and in place ("We love you just the way you are..."). Thus far, however, Ventana is still screening Roche's calls.

With Ventana, a specialist in tissue-based oncology assays using both IHC and ISH (in situ hybridization) techniques, in the fold, Roche believes it would have a complete set of diagnostic technologies for the development of oncology drugs and companion diagnostics, including for therapy selection. And importantly, it would have the ability to begin the development process--for itself as well as for other companies that work with it on a service basis--early. "The earlier you start the exchange of ideas between pharma research and diagnostics, the better chance you have to come in parallel with the development of a companion diagnostic," Hunziker explained, adding that at this early stage of the research discussion, "not all of the IP is protected. I think you would shy away from opening up totally with a third party with whom you just have a partnership."

That's fine from Roche's point of view, but our guess is that Ventana does not necessarily share that perspective, and may prefer the potential clout such an interdependency could give it. It is, after all, already collaborating with Genentech (successfully, says Roche), Novartis, and ImClone.

Ventana also surely knows that, like Biosite and others with the rare commodity of molecular diagnostic content, it will command a sizable dowry tomorrow as well as today. Other potential acquirers, like GE, may indeed be wrapped up in merger integration at the moment. Or they may be on the phone with Ventana right now.

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Roche makes Ventana an offer it may or may not be able to refuse: $3 billion

As the market in the US closed today, Roche offered to buy the histopathology company Ventana Medical Systems for $75 per share, or about $3 billion to complement its in vitro diagnostics business. The bid is a 44% premium to Ventana's share price last Friday.

Lovely. The only problem? Ventana isn't playing ball. Which forced Roche to go public with the offer, and even disclose Roche chairman and CEO Franz Humer's "Dear Jack" letter to Ventana CEO Jack Schuler (see the link the the PR, above). Apparently Jack won't even take Franz's telephone calls; Ventana has been unwilling to engage in dialogue, etc. (No word on whether Ventana still sends Roche flowers or sings it love songs. We'll keep you posted.)

Meanwhile, there's a call for investors tomorrow--more to come.

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