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Roche to Acquire Up to 56% Interest in Foundation Medicine

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Companies in the healthcare sector often collaborate for development and commercialization of products or to bring together their expertise, technical knowhow and resources.

Oncology major Roche (RHHBY - Free Report) recently announced that it has entered into a strategic collaboration agreement to acquire up to a 56.3% stake in Foundation Medicine, Inc. , a molecular information and genomic analysis company, on a fully diluted basis through a tender and acquisition of newly issued shares.

Terms of the Agreement

As per the terms of the agreement, Roche is expected to tender for approximately 15.6 million shares of Foundation Medicine for $50 per share with an aggregate tender value of approximately $780 million. The offer price represents a 109% premium over the closing price of Jan 9, 2015. Additionally, Roche will invest $250 million in Foundation Medicine at a per share issuance price of $50 (5 million shares) to fund its operations and development.

The transaction is expected to close in the second quarter of 2015.

Moreover, Roche will fund potentially more than $150 million in R&D for a minimum of five years along with its expertise and breadth in oncology to Foundation Medicine.

R&D Collaboration

The collaboration will allow Roche to further advance Foundation Medicine’s strong position in molecular information and genomic analysis. In exchange, Roche will secure an opportunity to optimize identification and development of novel treatment options for cancer patients.

The R&D collaboration agreement will initially focus on developing genomic profile tests for cancer immunotherapies and continuous blood-based monitoring.

Roche will also obtain rights (under the Foundation Medicine brand) to existing and future co-developed Foundation Medicine products outside the U.S. On the other hand, Roche will employ its medical education team in providing medical information to pathologists in the U.S.

Upon the closing of the deal, Foundation Medicine’s board of directors will be increased to nine, including three designees of Roche.

We note that Foundation Medicine also has agreements with other large-cap pharma companies such as Johnson & Johnson (JNJ - Free Report) and Novartis (NVS - Free Report) among others.

Our Take

Roche is well placed in the breast cancer market with drugs like Herceptin, Perjeta and Kadcyla, and continues to strengthen its already dominant position. Apart from providing therapeutic products and services for diverse medical needs, the company focuses on innovative diagnostic solutions for the early detection and treatment of diseases, thereby making its portfolio more comprehensive.

Given the recent rise in cancer cases and need for timely diagnosis and cure, the emerging field of molecular information and genomic analysis is expected to play a significant role in future medicines and diagnostic solutions for cancer patients. We are encouraged by Roche’s collaboration with Foundation Medicine.

Shares of Foundation Medicine surged 95.3% after the announcement. Shares gained a further 2.89% the subsequent day. On an overall basis, the company’s shares have almost doubled since the announcement. Meanwhile, shares of Roche have remained more or less static.

Both Roche and Foundation Medicine currently carry a Zacks Rank #4 (Sell). A better-ranked large-cap pharma is Allergan (AGN - Free Report) , carrying a Zacks Rank #1 (Strong Buy).

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