Swiss Pharmaceutical giant Roche Holdings (RMMBY) caught Wall Street by surprise in June when it launched a $75-a-share hostile bid for Ventana Medical Systems (VMSI). The Tucson company pulled in just $238 million last year selling tools that help doctors analyze tissue samples to diagnose cancer. Roche's bid values the company at about $3 billion.
Today hardly anyone wonders if Roche's offer is too rich. Ventana's stock has been floating above $80 for most of the past two months, partly because Ventana Chief Executive Christopher M. Gleeson--who scoffs at the $75 price--has released new information about research partnerships Ventana has forged throughout the drug industry. Those alliances, expected to bear fruit in about five years, define a game plan so seductive--and so well matched to Roche's bigger global strategy--that many analysts think Roche could up the ante before the tender offer expires on Nov. 1.
What Roche and Ventana share is an intimate understanding of the next revolution in medicine. In the coming decade, pharmaceutical products--especially cancer drugs--will be created in tandem with diagnostic tests that tell doctors which patients are likely to benefit. Right now, physicians often feel they're flying blind. Each patient arrives at the hospital with a unique genetic makeup, which affects whether a prescribed drug will kill tumor cells, cause devastating side effects, or possibly do nothing at all. If a new generation of gene tests can help predict these different outcomes, patients will be spared expensive and unhelpful ordeals. The pool of target patients for many medications will also shrink. But if doctors are confident a drug will help somebody, they'll prescribe it aggressively, and insurers will be more likely to foot the bill.
Roche is the most ardent evangelist for this pairing of drugs with gene-based diagnostics--an approach called personalized medicine. And though the company declined to discuss its Ventana bid, analysts point to a handful of success stories that vindicate its strategy. One is the cancer drug Herceptin, developed by Genentech (DNA), of which Roche owns 56%. It's prescribed to breast cancer patients only if they have a telltale gene abnormality called HER2. Nevertheless, it's a blockbuster, with yearly sales in excess of $1.2 billion. "Roche seems to understand" the need for customized treatments, says Edward Abrahams, executive director for the Personalized Medicine Coalition, a medical trade group. The goal "is to figure out which drugs work for which people."
Most of Ventana's current products aren't designed to match drugs to a patient's DNA. Still, they brought in $71.8 million in sales last quarter--up 21% from the same period last year. Partnerships with Genentech and eight other drugmakers should lead to much more profitable "companion diagnostics" for new drugs, Gleeson believes. All told, the pipeline includes "approximately 30 projects across different phases of the drug development cycle," he says.
Ventana and Roche both are facing regulatory hurdles. At present, the Food & Drug Administration has separate channels for reviewing drugs and diagnostics, and no procedure for reviewing them in combination. "There isn't a proven pathway at the FDA," says Dr. Raymond Woosley, president of the Critical Path Institute, a nonprofit body that advises the FDA on diagnostics.
Roche doesn't have a perfect track record in this new field. Recently, it undercut a novel gene test called AmpliChip, designed to help doctors fine-tune prescriptions of antipsychotics and other drugs, by pricing the product too high. It does profit from Genentech's Herceptin success. But such wins have been rare for a company that spends more than $500 million a year on diagnostics research.
For experts like Abrahams, the logic in pairing tests and treatments is irrefutable. "Many drugs don't work for many people," he says. Personalized treatment is "the wave of the future."
By Conrad Wilson