Roche gains a majority stake in Foundation Medicine with $1.2B deal

Roche ($RHHBY) is throwing the full weight of its global rep and more than a billion dollars behind Foundation Medicine's ($FMI) ambitious sequencing technology for guiding the personalized treatment of cancer as well as the development of new oncology meds. The pharma giant has wrapped a deal to buy up a majority stake in the molecular diagnostics company for $780 million at $50 a share--a premium rate that's more than twice Friday's close of $23.93.

In addition to gaining control of the Cambridge, MA-based biotech, Roche is injecting another $250 million into the company--buying new shares, also at $50 a share--while reserving a further $150 million-plus for a collaboration on drug combinations, clinical trials and next-gen companion diagnostics. Roche will be left with around 56% of the company's stock.

Foundation's main claim to fame today is its FoundationOne product, which sequences cancer samples in order to come up with a full genomic profile that can be used to guide treatment as well as match patients to clinical studies of new cancer therapies. And Roche, which has staked out a big place for itself in companion diagnostics and new cancer meds, clearly thinks that Foundation's business can lend a big assist in realizing its plans in the rapidly changing oncology field.

Daniel O'Day, the COO of Roche's pharma division and former chief of diagnostics, is joining the Foundation board in this deal.

In the past, Roche has travelled a sometimes rocky road as it bagged new tech outfits and tried to assimilate the developing science into their operations. But this time, the pharma giant is taking a different path, not unlike the one it has followed with some close development partners like Chugai and earlier with Genentech, before coming back for the whole thing. Rather than buying the company, which it probably could have done for a smaller premium than the one revealed today, it's leaving Foundation CEO Michael Pellini and his crew as independent operators, free to continue their work under Roche's wing. Foundation can keep its entrepreneurial roots intact, and Roche stands to benefit from their future evolution.

The deal with Roche, says Pellini, "accelerates the business we have been building over the course of the past 4 or 5 years": taking a molecular approach to changing the way cancer is treated. Specifically, he adds, it allows Foundation--which now has about 300 staffers with plans to keep growing--to collaborate with Roche on circulating tumor DNA geared to monitoring disease and taking a diagnostic approach to immunotherapeutics, a central focus at Roche's R&D groups.

O'Day, for his part, says that taking a majority stake in the company was the best way to ensure that Roche got what it was looking for: An innovative partner who would make all things Roche a top priority at the company.

"You need significant ownership to make sure there's unfettered collaboration and it can go broad and deep," says O'Day. "This is not a business that is core to Roche today. This is a molecular information business, not diagnostic."

Foundation CEO Michael Pellini

Roche has long been intrigued by Foundation Medicine. A little more than two years ago Roche's venture arm came in on a round to back the fledgling FMI and its work on a commercial diagnostic test that could be used to match cancer drugs with patients--billing it as a key tool for drug development companies.

Foundation Medicine attracted plenty of positive attention for its diagnostics test work in oncology. The company was named a Fierce 15 biotech in 2012, the day before Roche joined Google ($GOOG), Third Rock and others as a key backer. And Foundation then went public soon after the biotech IPO window opened wide in 2013. The company closed Friday with a share price of $23.93 and a market cap of $677 million.

The deal for the company is all but done. Three shareholders--Third Rock Ventures, Kleiner Perkins Caufield & Byers and Google Ventures, which control 31% of the company--have already committed to vote for it. And the news marks the busy beginning of deals week in San Francisco, as the industry gathers to review the year ahead in biotech at the annual JP Morgan event.

This is the time when industry players like to flex their financial muscles to demonstrate some heavy lifting capabilities. And Roche is clearly willing to play in the heavyweight category.

- here's the release

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