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. Congrats Ohad! Thanks you as always for your great write ups and your amazing picks. Your FMI bill thesis was spot on.

  2. Great Job Ohad!
    Thanks for your inistence with FMI. I am an investor. Things sometimes move very fast!
    Dan

  3. Wow, great news this morning. Great call, Ohad. Your bull stance had been predicting a buyout of some kind in 2015 but who knew this would happen in January!

  4. Congrats! I was on the fence and did not acquire shares. However, you were spot on and I thought of you when I heard the news this morning.

  5. Congratulations Ohad! Thanks for the bull case for FMI. You convinced me to get into it although I was hesitating because of Illumina. Make sense for Roche to do this and I had money on them simply because they wanted Illumina last year. Also thanks fo CLVS.

    Took your clue and got into MRNS. SAGE is too expensive for me.

  6. Fantastic call, Ohad! Congratulations and thank you for all of the helpful analysis about FMI these last few months!

  7. Ohad
    SGEN – Great call! You were right about a combo of ADC and PD-1.
    The news today is that BMS and SGEN will collaborate on the combo trial.
    I was very skeptical about the prospects of the “old” ADC technology, but it looks that the game is far from over for ADC. ::))
    Do you think they will focus only on CD30 or expand later to other targets?

  8. You continue to kill it ! Seriously awesome work. I am sure you work is continuing to help many, many people make good investments.

    I dont know how you continue to find the time to do this, but it is very much appreciated. Best information out there.

  9. Thankyou Ohad !!! I dont have much knowledge on Oncology, but I do follow all the updates you do to this blog. Great fan of yours.
    All picks that you have done within the last 2 years were all winners.

  10. Ohad, I know you can’t comment the CAR-T space due to your ties to KITE. What’s about the TCR space? Do you see similar potential? For example Medigene and Immunocore are working in this area. Thanks Toby.

  11. Thanks for the kind words, everybody.

    andre (SGEN) – For now the collaboration appears specific to Adcetris. PD-1 will be combined with every effective drug, regardless of class. The problem is finding ADCs with good activity and so far there haven’t been a lot of those.

    Toby – KITE is also working in the TCR space so I prefer not to comment.

    Ohad

  12. Ohad…ever look at acrx? 325.18M market cap
    1p3 submitted for approval and 3 in p2

    Also what is your specific interest with adcentris and pd1?…data looks so good for both this might end up just being some point of diminishing returns scenario…though I assume they are targeting different expressions of the same tumor so their may be some synergistic effect? Or would they be competing in anyway to where one boxes out the other?…curious to your perspective…TY

  13. Robert – Sorry, don’t know ACRX well.
    Re: Adcteris+PD-1 , you might be right about reaching a therapeutic plateau with either drug alone. This has to be borne out in clinical trials. I am optimistic given the totally different MOAs and limited overlap in toxicities but nothing is guaranteed.

    Alex- Thanks. I am not optimistic about INFI (and TGTX for that matter) given the weak performance of GILD’s idelalisib and the intense competition in the NHL/CLL markets.

    Ohad

  14. Hi Ohad,

    I appreciate that you are holding onto your FMI positions because of the potential for Roche to accelerate FMI revenue streams. I am curious to understand, if you think it would make sense to take advantage of the increase to 50 dollars by selling the position then wait for the revenues to catch-up to the instant jump in valuation? Or is too difficult to predict for market timing for the entry back into FMI? Is the current valuation justified or does the decline back down in share price make sense?

  15. Ohad,

    What do you think about anti PD-1 vs inhibitors. someone said anti PD-1 will displace inhibitors in ten years in cancer area. I dont believe that will happened. what do you think?

    Thanks

  16. Elyas (FMI) – I always prefer to go with the latter (i.e, it’s impossible to predict short term dynamics). I agree that current run rate does not justify $50 per share and that marketing efforts by Roche will take time to bear fruit, however, increased recognition by the market/reimbursers, healthy cash position and the fact that 50%+ of shares are held by Roche (who probably will not sell them on the market) could support shares in the near-term.
    Bottom line, I will sell some FMI but intend to stay with a core 10% holding.

    Steve – If by “inhibitors” you refer to kinase inhibitors, I don’t see them going away anytime soon as they have tremendous therapeutic benefit especially in biomarker- defined indications. (e.g EGFR, FGFR, ALK, ROS , RET inhibitors etc.)

    Ohad

  17. Hi Ohad,

    What odds do you give of MEIP’s HDAC succeeding in the P2 MDS trial?

    Would a lack of statistical significance be bad given its a small trial?

    Thanks.

    Rick

  18. Rick (MEIP) – If I had to assign a number I would give it a 25% probability of success, results must be stat. significant in order to be perceived as real. I have been considering this name during 2014 but the recent update at ASH made me more cautious regarding differentiation from other HDAC inhibitors.

    Ohad

  19. Hi Ohad
    first time caller (lol)
    do you have any opinion on SRNE ?
    Appreciate your generous contributions,

    Gene

  20. hello Ohad,

    2 young european mab companies are Argen-X from Belgium/Netherlands and Affimed from Germany (bispecifics)

    certainly early, but market caps not very extended.

    have you looked at any of them?

    Christian

  21. Ohad
    about FMI tender offer – are we going to be asked to tender some of our shares?
    FMI will issue additional 5M shared, but the rest (about 16.5M) should come from somewhere.
    If I have to tender some shares, it will automatically reduce my FMI holdings to below 10% and I do not need to sell anything to follow your rule of 10% max holding per position.
    –thanks — andre

  22. since it is not a full takeover, I don’t think any shares will be refunded automatically. you would officially have to accept the tender offer to “get rid” of shares.

    ——-

    Ohad, regarding your 10% rule: my thinking is that such a plateau can be flexible. if it is a very diversified biotech, it could e.g be 15% or even 20% of the portfolio. if on the other hand it’s e.g. a “one-trick-pony”, even 5% can be high.

  23. Hi Ohad,
    As always a general thank you for the invaluable help you provide to all of us. FMI was a great call. I sold half my position and like you am going to see how the new venture evolves with the remainder.

    Different subject- Trillium (TRIL) which is developing a CD47 inhibitor. This is a name change and reverse split of Stemline Therapeutics, a TSX listed company (SSS). Wondering if you have looked at them.
    I tried searching this site for CD47 but came up empty, do you or the community have any thoughts to share on this mechanism?
    thanks
    Jeff

  24. hi Jeff,

    Celgene recently announced a near IND for a CD47 antibody if I remember correctly. If they think it’s a viable target, it’s certainly not to neglect.

    Others working on it are the people at Stanford
    http med.stanford.edu/news/all-news/2013/05/anti-cd47-antibody-may-offer-new-route-to-successful-cancer-vaccination.html

    I am a little bit long (risky bet…) and it had a nice run the last days

    Whether the SIRP FC fusion protein from Trillium is more or less suitable is a question for the experts here…

  25. Thanks Christian, I will explore further and look forward to any more comments from the community.

  26. Gene (SRNE) – Welcome 😉 I somewhat skeptical regarding their lead program and the timelines they describe as required for approval. The immuno-oncology platform appears diversified but very early. Therefore, bottom line, too expensive at $330M market cap.

    Alex – Don’t know them that well.

    Christian – Yes I know both companies fairly well. Both have good antibody discovery/engineering capabilities (in their respective fields) but I can’t find exciting programs in their pipelines (at least not advanced stage).
    Regarding the 10% rule, I tend to agree but I would put a high bar for the definition “diversified”. None of my current holdings qualify as a truly diversified company.

    Jeff (TRIL) – I really like CD47 as a target, for which there is beautiful pre-clinical data from Irving Weissman’s group at Stanford. Note that there are 2 CD47 programs in P1 that I know of (Celgene and Stanford) so TRIL is 1-2 years behind. From what I recall they claim to have a differentiated agent.

    Ohad

  27. Ohad

    I think Alectinib is not a well work RET inhibitor than Cab. and http://www.nature.com/nrd/journal/v13/n7/full/nrd4326.html despite nearly half of malignant melanoma tumours harbouring BRAF mutations, but BRAF+MEK drug class contributed just one-fifth of total US sales, now as Anti-PD1 in second line treatment, what do you think about BRAF+MEK drug in future sale? will BRAF +MEK have more US sales depend on half MM have BRAF mutation?

    Thanks

  28. Ohad,

    Fantastic information, have watched your blog for quite some time & thought I’d jump in finally after mostly having success as a biotech investor (w/limited scientific background) but 15 years analyzing biotech’s & having enough knowledge to prove successful investment wise. I could really use some clarification on CNAT, they have been somewhat evasive & in the liver disease arena, there’s so much competition I don’t know if they still have any great potential. I must disclose I am currently under treatment for colon cancer & I am limited in discussing certain companies due to my employer & treatment course (I’m sure you understand the subtext of my limitations) & uphold ethics 100%.

    Could you provide me w/your best guess on CNAT’s viability (all risk is my own, experienced investor), hold a 6% position in AGIOS, 5% Alkermes, thoughts on Advantix’s run up (personally up 160%) took some profits, like partnership w/CELG, ARRAY any thoughts?

    Last, I know the long, ugly sordid history & lost quite a bit to Galena, so many in this space but I have 3 friends (via treatment facility) that are in the NeuVax trials, seem to be doing well other than a localized reaction. Any thoughts?

    I’ve asked a lot, please comment as you are able, briefly if able, on any you can & I’ll know you’ve done what you can & thank you regardless of response or not. Your blog is VERY helpful and interesting in that it shows the players in same places & allows those of us w/o advanced science research backgrounds to keep up.

    FYI – Prior to dx, accepted to medical school, have deferred for a year to become a practicing physician, hoping to specialize in oncology. Should help my “science speak”, KITE, along w/a few other good outcomes will pay my way.

    Thank you!

  29. Ohad,
    In the past you were positive about KPTI’s XPO1 inhibitor. They are running 3 registration trials (AML, Richter, DLBCL). SINE technology looks innovative.
    I am wondering why they don’t have a partner for any of their programs?
    After the secondary at 33 they are at about 26. Does it look as a good entry point, or it is still too early.
    thanks–andre–

  30. Steve – Alectinib appears to be a very potent RET inhibitor and is more selective than cabo, which is typically an advantage. BRAF+ melanoma represents a modest opportunity for MEK inhibitors, whether MEK will be used with PD-1 antibodies or compete with them is an open question with several ongoing trials. The big potential is in lung, ovarian and colon cancer with RAS/RAF mutations, where MEK inhibitors generated promising results in combination with other drugs.

    Nicole – CNAT is probably the riskiest stock in my portfolio. Their approach make sense to me (with a surprisingly favorable safety profile) but other than that they have no proof their drug can improve outcome for patients with liver diseases.
    Of the names you mention, I am familiar with AGIO and ARRY. Re AGIO, they’re a terrific company with phenomenal drugs and although I totally missed the boat on that one I believe their market cap as hard to justify based on IDH+ AML. ARRY I like a lot after the binimetinib deal plus they have some undervalued collaborations that could be major growth drivers (LOXO, GEN, ONTY).

    Martin (MOLN) – Cool platform with intersting early stage programs but it’s not clear to me whether the lead VEGF DARPin program with AGN is truly differentiated.

    Andre (KPTI) – I agree, their approach is definitely innovative. Single agent activity is modest yet there have very intriguing results (either anecdotal or in combination with dex) which suggest the drug has a future at least in blood cancers. Not sure they are looking for a partner right now, as CEO stated they would like to commercialize selinexor themselves. I also like their PAK4 program, which is about to enter P1. I don’t have a concrete opinion regarding the right entry point, price is becoming more reasonable but still quite high.

    Ohad

    Ohad

  31. Ohad
    You actually did not missed to recommend AGIO. You wrote about it on May 4 with your article “6 stocks on my watch list”

    This was the single most terrific call I have EVER read in my short investment life.
    From 6 stocks two BO, and in addition 3 monster runs:
    BLUE + 410% AGIO + 202%; XNPT + 137%
    On May 5 I bought the stocks above – I already had a large position in FMI and AMBI,

    Thank you for invaluable information you provide. I am personally learning a lot how to evaluate stocks – not only from your articles but also from your answers to our questions.

    BTW, if by chance you warm up and buy ZFGN and CLDN into your portfolio, I will have all my stocks covered by you, which will make my life much easier to track my investments ::))

  32. RE: TGTX

    Small market cap, huge cash reserve (90m), and what appears to be a monster drug in TGR-1202 (still in dose escalation) for use in combos. The response rate, drug toxicity, all look very promising for TGTX which will have two p3 trials with SPA on drug response rate. I think the recent pullback is from takeover rumors.. surely this is a buy in opportunity in a speculative play? Thoughts? It looks like the competition all suffer from liver toxicity which TGR-1202 hasn’t encountered.

  33. andre – Glad to hear that. For me, that post demonstrated how sometimes your watchlist can do better than your actual portfolio, especially in times like these. ZFGN is definitely on my watchlist but I would wait for a market correction.

    beokeh (TGTX) – No drug the drug is active and approvable but its commercial potential in a highly competitive market is questionable imo. GILD’s Zydelig had a weak launch and may have a tough time competing with Btk and BCL inhibitors. Regarding liver tox, could be a distinguishing property although from what I understand some of it is considered on-target toxicity due to re-compartmentalization of cancer cells.

    Ohad

  34. Ohad so since ZFGN is in my actual portfolio i hope it stays on your watchlist.. :-)
    Just kidding! Thank you for everything!! Helps me a lot…
    Regarding ZFGN i think their NASH program seems to be a nice opportunity. (IND in 15) Makes sense to me to go for that indication. You agree?

    Ike

  35. RE:TGTX

    Thanks for the insight Ohad. GILD’s Zydelig isn’t selling well due to tolerability and relatively low ORR. It seems like TGTX’s triple combo therapy is able to target CD20 with Imbruvica and TG1101 and also PI3K delta with TGR-1202. Surely if the trial(s) is/are successful, sales would be good (look at Imbruvica sales, not Zydelig) ? Unless I’m missing sources of upcoming competition (car-t) the company seems it is undervalued. This is all imo though.

  36. ike (ZFGN) – NASH is a hot topic, not sure what the rationale is for MetAp2 there but I guess there is one.

    beokeh (TGTX) – The drug looks good, my concern is competition from other isoform-selective PI3K inhibitors and also the intensifying competition from other regimens.

    Ohad

  37. Hey Ohad
    i am surprised that Fmi is trading below what Roche is buying the shares for. How and when are you going to reduce your holding? Wondering about your thinking regarding this?
    Also, AVEO seems to be readying to submit to EMA – Tivo. Any thoughts?
    thanks!
    Dan

  38. Inotek pharma is ipo’ing and looks like an aerie competititor. Any thoughts regarding comparison. Thank you.

  39. 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

  40. 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”. ?

  41. Alex,
    As I understand,
    Ohad wrote that he would sell a portion so that the position will not exceed 10% of the portfolio.
    Chris

  42. Hi Ohad,

    Have you had a chance to listen to ARRAY’s cc? What’s your opinion about recent news?
    Thanks,
    Chris

  43. 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 …

  44. 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.

  45. 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.

  46. 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).

  47. 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

  48. 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

  49. 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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