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voila—there is a response or even a remission. This pattern echoes what has happened in blood cancers such as chronic lymphocytic leukemia (CLL), in which old-fashioned chemotherapeutic agents have been replaced by biologics like rituximab (Rituxan) and are being augmented or, eventually, replaced again by kinase inhibitors like ibrutinib (Imbruvica). This will likely happen in solid tumors as well: chemo as we know it will be scaled back (though, like that other blunt instrument, surgery, it will likely never completely disappear) and physicians will chase cancer cells through various waves of genetic mutations, each of which demands a different targeted therapeutic or biologic to hold it at bay. In that world, the company that is most on top of the mutation patterns and treatment patterns and can incorporate those into both its drug development efforts and its sales pitch wins (or at least has an edge).
Diagnostics will likely be an important part of immunotherapy as well, an area where Roche is currently weak. Right now companies like Juno Therapeutics (NASDAQ: JUNO), Kite Pharma (NASDAQ: KITE), Bellicum Pharmaceuticals (NASDAQ: BLCM), and Novartis are taking baby steps with a form of cellular immunotherapy known as CAR-T, in which a patient’s T cells are genetically modified to seek out and kill tumor cells. Most companies are focusing on surface antigens like CD19 that are widely expressed and therefore do not require molecular diagnostics. But to realize the full potential of these therapies, companies will need to match patient-specific tumor profiles with panels of off-the-shelf biologic reagents and cell engineering products. That’s where Foundation’s tests might come in.
• Foundation is setting new standards in cancer genome analysis. Foundation has raised the bar in the accuracy of genome-based tumor profiling (sensitivity, specificity) by something like a factor of three, and built robust and scalable informatics and analytics. Roche was already using the Foundation platform on a limited basis and realized that it was simpler to expand that use rather than to try to copy it.
Since the last few pharma mega-mergers, the industry’s biggest players have gone in wildly different directions. Novartis embraced gene therapy and gene editing. AstraZeneca doubled down on the biologics franchise it obtained with the acquisition of MedImmune. Bristol-Myers Squibb and Merck have raced ahead in checkpoint inhibitors. Merck, Sanofi, and to some extent Pfizer have rapidly expanded investment in “beyond the pill” and “digital interventions” (apps as drugs). And Roche took up diagnostics and genetics. For Roche, drug development, especially in oncology, is all about “genetics-driven medicine,” which in their view requires “genetics-driven drug development” and “genetics-driven marketing.” No one else has placed such a big bet on genetics, though all pharma companies are certainly exploring it (For example, AstraZeneca, Johnson & Johnson, and Sanofi recently announced a collaboration with Illumina to develop a “next-generation-sequencing based test system for oncology.”) In some sense, if Roche wins this one, others—e.g., those betting on checkpoint inhibitors and CAR-T cells—might lose out.
In CBT Advisors’ world of venture-backed biotech companies, this landscape poses significant challenges. Gone are the days when a biotech’s innovation would be appreciated by as many as five or ten pharma companies at the same time (there are barely fifteen left that regularly carry out M&A) and there could be a big bidding war. The biotechs’ leverage is not what it used to be. Counterbalancing that is the obvious productivity flop in pharma R&D. Biotech is the only place pharma can turn for real innovation. And turn they do, early and often.
This creates a bonanza for firms like mine that assist early, science-driven companies in managing their public positioning and their business development pitch from day one to create the largest possible exits. Now more than ever, the right story sells, just maybe to only one or two bidders. In Foundation’s case, the billion-dollar number was probably what it took to get the company’s pre-IPO investors (which included Google Ventures and Bill Gates, not to mention smart funds like Casdin Capital) to give up on at least some of their dreams of long-term returns in exchange for a sweet 10-12 times (I’m guessing) on their last pre-IPO investment from early 2013.
From Foundation’s point of view, the deal does three things, all of them good:
• Cashes out the early investors at a price they can accept.
• Delays, perhaps indefinitely, the need to break even on selling tests and shifts the focus to drug development and companion diagnostics
• Relieves the constant pressure to market the company’s analytic services to multiple pharma companies in deals that have been the main source of revenue for Foundation to this point. That pressure was undoubtedly going to become heavier as Foundation’s pharma partners realized that, quarter after quarter, there was no reimbursement coming from Medicare and little from other payers, leaving pharma to provide the vast majority of the company’s source of revenue. (A first small insurer in Grand Rapids, MI, announced coverage of FoundationOne and another Foundation test in October, 2014.)
Back to why the acquirer had to be Roche: remember that over the last 25 years, Roche has had the undoubtedly humbling—but ultimately very profitable—experience of owning Genentech. Revenues and product pipeline from that acquisition long ago overtook those products from Roche’s own drug development in volume and importance. In some sense, Genentech has come to own Roche. Since Roche is nowhere near as advanced in gene therapy as Novartis, nor as advanced in checkpoint inhibitors as Merck and Bristol, the move to own Foundation is an attempt to be the best it can be as a genetics-driven drug developer and marketer. No other pharma would have seen this deal that way. When and if Foundation’s investment bank called around looking for better offers, I bet no one called them back.
For Roche, the deal will either turn out to be a leapfrog or, maybe, a dead end. But if cancer therapies, especially for solid tumors, really do wind up getting developed and marketed in a genome-driven way—and many trends point in that direction—then this move will have turned out to be prescient indeed.