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Roche Holding Agrees to Buy InterMune for $8.3 Billion

Roche CEO Severin Schwan
Severin Schwan, chief executive officer of Roche Holding AG, speaks during an interview in New York, on Sept. 19, 2013. Photographer: Scott Eells/Bloomberg

Roche Holding AG agreed to buy InterMune Inc. for about $8.3 billion in cash, gaining access to what may be the first drug in the U.S. for a lung disease that can be fatal within five years of diagnosis.

Roche will pay $74 a share for InterMune, a biotechnology company with 450 employees, the Basel, Switzerland-based drugmaker said today in a statement. It is 38 percent more than the Aug. 22 closing price for Brisbane, California-based InterMune, and 63 percent higher than on Aug. 12, when news of a potential sale first emerged.

The purchase gains Roche pirfenidone, which analysts predict will generate $1 billion in global sales by 2019. The treatment targets idiopathic pulmonary fibrosis, a disease that causes tissue deep in the lungs to become thick and scarred over time. Roche, the biggest maker of cancer drugs, has struggled to expand outside of oncology, halting development of diabetes and heart disease drugs in recent years.

“This will allow Roche to grow and strengthen its pulmonary franchise globally,” said Roche Chief Executive Officer Severin Schwan, during a conference call. “It’s a perfect fit from a portfolio point of view. We plan a smooth transition ensuring readiness for an expected launch of pirfenidone in the U.S. in 2014.”

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.

Targeted Acquisitions

Schwan reiterated in July that the company was looking for targeted acquisitions of products and technologies to bolster its existing drug and diagnostic businesses. In the first half of the year, Roche generated almost $7.9 billion Swiss francs ($8.6 billion) of free cash flow.

The InterMune purchase is a good example of the type of bolt-on acquisition Roche has been looking to do, Schwan said. It complements and extends existing products rather than creating a mega-merger or diversifying the company, he said.

“It’s right on what our M&A strategy is,” he said. “It allows us to create value in a very targeted way for patients, employees and investors.”

As it worked on the InterMune deal, Roche was considering a bid for the almost 40 percent of its Japanese partner Chugai Pharmaceutical Co. that it doesn’t already own for about $10 billion, according to a person familiar with the matter. The Swiss company earlier this month decided against pursuing that deal after the Japanese management signaled opposition to a bid, and instead focused on buying InterMune, the person said.

Working Together

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 this year valued at $245.9 billion, up from $67.9 billion in the same period last year. The 2014 tally doesn’t include Pfizer Inc.’s $117 billion offer for AstraZeneca Plc, which Pfizer dropped because of opposition from the target.

Companies are buying rivals to provide a broader range of therapies in a handful of disease areas where the medical need is great, treatment options are few and drug prices may be substantial. The InterMune acquisition may lead to renewed speculation of bids for Actelion Ltd. 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.

Hypertension Drugs

Both companies make drugs for pulmonary arterial hypertension, a deadly artery-narrowing disease, he said. Potential bidders include Roche, Bayer AG, Gilead Sciences Inc. and Biogen Idec Inc.

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 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.

Current Stable

Pirfenidone will join Roche’s current stable of pulmonary medicines, including Pulmozyme for cystic fibrosis and Xolair for asthma, both marketed more than a decade ago. It is working on another medicine, lebrikizumab, for asthma, one of the company’s most promising compounds, Schwan said.

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, with another 48,000 diagnosed each year, 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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