Roche Holding AG (ROG), the world’s largest maker of cancer drugs, is strengthening its portfolio of medicines for respiratory ailments with an agreement to buy InterMune Inc. (ITMN) for $8.3 billion in cash.
Roche will pay $74 a share for InterMune, an unprofitable biotechnology company that’s awaiting U.S. approval of its biggest drug, the Basel, Switzerland-based company said yesterday in a statement. The agreement reflects Roche’s confidence in pirfenidone, potentially the first drug in the U.S. for a rare lung disease that typically kills in five years.
The deal’s one of several this year involving a handful of disease areas where the medical need is great, treatment options are few and prices may be substantial. Roche’s interest was piqued when research released in May showed pirfenidone cut in half a patient’s risk of dying from idiopathic pulmonary fibrosis after the first year of treatment. While the disease is only diagnosed in about 48,000 Americans annually, analysts have predicted the drug could generate $1 billion a year.
“This is an extremely good example of what our M&A strategy is about, we really focus on targeted bolt-on acquisitions where we can complement our existing franchises, that can be products, that can also be technology and platforms,” Roche Chief Executive Officer Severin Schwan said on a conference call today.
“What stands out here is the size of the deal,” he said. “That reflects the imminent approval of the drug in the U.S.”
Pirfenidone will add to existing respiratory medicines sold by Roche that include Pulmozyme for cystic fibrosis and Xolair for asthma, both approved more than a decade ago. The agreement with Brisbane, California-based InterMune reflects Roche’s strategy of adding specific brands that will enhance its product offerings, rather than diversifying or expanding with a mega-merger, Schwan said.
Roche’s shares rose less than 1 percent to 267.70 Swiss francs at the close in Zurich, giving the company a market value of 230 billion francs ($251 billion). InterMune jumped 35 percent to $72.85. Before today, the stock had risen 18 percent since Aug. 13, when Bloomberg News reported that the company had drawn takeover interest from Roche, Sanofi and others.
The deal makes sense because Roche already has a sales force for pulmonary drugs, Tim Anderson, an analyst at Sanford C. Bernstein & Co. in New York, wrote in a report today. Investors are likely to question the price, since Roche is buying a company with one product in a therapeutic area that will get more competitive over time, he said.
InterMune’s “valuation reflects an unfortunate reality in the world of biotech M&A –- good assets (especially late-stage ones) don’t come cheap, and drug companies are generally either forced to pay a high price or walk away empty handed,” Anderson wrote.
As it worked on the InterMune deal, Roche was considering buying out Chugai Pharmaceutical Co. (4519), its Japanese partner on cancer and arthritis drugs, with a bid of about $10 billion for the 38 percent it didn’t own, according to a person familiar with the matter. The Swiss company decided against pursuing the deal after the Japanese management signaled opposition to a bid, and instead focused on InterMune, the person said. Chugai slid 9.2 percent to 3,325 yen at 4:05 p.m. in Tokyo.
The $74 a share bid for InterMune is 38 percent more than the Aug. 22 closing price for the California biotech company, and 63 percent higher than on Aug. 12, when news of a potential sale first emerged. Analysts predict pirfenidone will generate in excess of $1 billion a year in global sales by 2019 by slowing the progression of IPF, which causes tissue deep in the lungs to become thick and scarred over time.
The price of the deal suggests that Roche believes the drug will generate more than $1 billion in peak sales and that it can slash InterMune’s current expenses by folding it into Roche’s existing operations, Michael Yee, an analyst at RBC Capital Markets in San Francisco, said in a note yesterday.
Roche will begin a tender offer for InterMune shares by Aug. 29. It’s not likely that another bidder will come in with a higher price, Yee said.
Roche has struggled to expand outside of oncology, halting development of diabetes and heart disease drugs in recent years.
The purchase is Roche’s largest since 2009, when it acquired the 44 percent of Genentech Inc. that it didn’t already own for about $46.8 billion. The company paid off almost three-quarters of the debt it took on for the purchase as of June 30, giving it more power for acquisitions.
Roche and InterMune have been working together to develop drugs for hepatitis C since 2006. Their U.S. and European locations are close together in California and Switzerland, easing the integration of the two companies, officials said.
Drug and biotechnology companies have announced deals valued at $265.2 billion in the past year, almost quadruple the value in the same period last year. The 2014 tally doesn’t include Pfizer Inc. (PFE)’s $117 billion offer for AstraZeneca Plc (AZN), which Pfizer dropped because of opposition from the target.
The InterMune acquisition may lead to renewed speculation of bids for Actelion Ltd. (ATLN) of Switzerland and United Therapeutics Corp. of Silver Spring, Maryland, said Ori Hershkovitz, a partner at Sphera Funds Management Ltd., a Tel Aviv-based health-care fund.
Both companies make drugs for pulmonary arterial hypertension, a deadly artery-narrowing disease, he said. Potential bidders include Roche, Bayer AG, Gilead Sciences Inc. (GILD) and Biogen Idec Inc. (BIIB)
The boards of Roche and InterMune have both agreed to the deal, which the companies said they expected to close by the end of the year. It will be paid for with cash on hand and newly issued bonds, Roche said. The acquisition will have a neutral effect on core earnings per share next year and add to profitability starting in 2016.
InterMune attracted interest from rival drugmakers as pirfenidone worked its way closer the U.S. market, including GlaxoSmithKline Plc (GSK) and Actelion, people familiar with the matter said earlier this month. The drug, also known as Esbriet, is already sold in Europe, Canada and Japan. It would be the first medicine available in the U.S. for the disease that kills 40,000 Americans annually.
Roche’s existing sales and support staff, led by its Genentech unit, will speed pirfenidone’s U.S. start-up and help get insurance coverage for the medicine, the company said. The company’s size and global reach should also expand access to the medicine, it said.
Action by the U.S. Food and Drug Administration is expected by Nov. 23, based on regulatory requirements tied to when the company filed for approval.
Patients typically live two to five years after a diagnosis with IPF, a progressive disease with periods of stability interrupted by unpredictable bouts of disease progression, according to the National Heart, Lung and Blood Institute. About 128,000 Americans suffer from the condition, according to the Coalition for Pulmonary Fibrosis.
There is no known cause of the disease.
Citigroup Inc. advised Roche and Davis Polk & Wardwell LLP provided legal counsel. InterMune worked with Centerview Partners LLC and Goldman Sachs Group Inc. as well as law firm Cravath, Swaine & Moore LLP.
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