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.