The pharmaceutical giant Roche plans to spend $1 billion to acquire majority control of Foundation Medicine, a five-year old company that developed an innovative DNA test to match patients to specific cancer drugs.
We profiled Foundation in back in 2012 (see “Foundation Medicine: Personalizing Cancer Drugs”), highlighting how the spinout of the MIT-Harvard Broad Institute was one of the first to introduce tests to sequence the DNA of a tumor biopsy to pinpoint the exact mutations driving a person’s tumor, and possibly steer treatment. At the time, we described Foundation’s pricey $5,800 cancer test, called FoundationOne, this way:
Foundation’s business model hinges on the convergence of three recent developments: a steep drop in the cost of decoding DNA, much new data about the genetics of cancer, and a growing effort by pharmaceutical companies to develop drugs that combat the specific DNA defects that prompt cells to become cancerous.
Foundation tried something new and important. But it turns out that it’s hard to make money in diagnostics, and the technology of DNA testing is developing and changing very quickly, too. All that helps explain why the company agreed to sell a little over half its shares to Roche, which sells more cancer drugs than anyone. As the New York Times says today:
Roche, which is the world’s largest seller of cancer drugs, said it would use some insights from that testing to develop drugs and better tailor them for specific groups of patients. In addition, Roche, which also has a huge diagnostics business, will sell Foundation’s tests outside the United States.
“I think it just brings personalized health care in oncology to a new level,” Daniel O’Day, who runs Roche’s pharmaceutical business, said in an interview.
The Foundation deal appears to be the largest in a series of takeovers by Roche of innovative diagnostics firms. A few years back, Roche tried and failed to acquire Illumina, the sequencing machine company whose technology underlies the explosion in DNA research. But Roche is finding no shortage of companies that are willing to sell. During the last twelve months, it bought Ariosa, a prenatal testing company, as well as Genia Technologies, which Roche paid $350 million for, and Bina Technologies, which develops bioinformatics software.
Foundation’s test is used to analyze a tumor for several hundred cancer-linked genes. As we reported in 2013, an early and famous customer for this technology was Apple founder Steve Jobs (see “Steve Jobs Left a Legacy on Personalized Medicine”):
It turns out that Jobs was one of the first people—and certainly the best-known—to try this kind of all-in genetic strategy to beat cancer. As recounted in Walter Isaacson’s biography of the Apple CEO, Jobs spent $100,000 to learn the DNA sequence of his genome and that of the tumors killing him. Jobs was jumping between treatments and hoped DNA would provide clues about where to turn next.
The tests didn’t end up helping Jobs, but the bigger problem for Foundation is that it’s hard to make any money in diagnostics. According to the New York Times, the company ran 24,200 tests last year. That was up from around 9,000 in 2013. Yet even though Foundation has said a quarter of the 10,000 oncologists in the U.S. have used its test, the company was still losing money.
One roadblock has been that insurance companies haven’t wanted to pay for such an expensive test. Despite promising anecdotes like one that you can hear over at Forbes (where a young woman named Corey Wood says in a video how the Foundation test helped slow down her lung cancer), the true medical value of the tests remain hazy.
That is partly because regulations in the U.S. have allowed companies like Foundation to offer testing even without rock-solid proof the information helps people. But that is going to change under new Food and Drug Administration rules that will require centralized labs doing DNA tests to show that they really improve patient outcomes. Organizing such studies is going to be a pretty expensive undertaking, and one which Roche might be better able to finance.
What’s more, technology is changing quickly. Even though Foundation had spent millions putting its test on the market, there wasn’t much to stop competitors from offering a similar test, as several had begun to, meaning prices will fall.
Adding to Foundation’s difficulties, a new kind of test—one done directly from the bloodstream rather than a biopsy of tissue sample—is now seen as the future of cancer testing. It’s called a “liquid biopsy” because it works from a simple blood draw (see “Spotting Cancer in a Vial of Blood”).
In August, when I asked Foundation if they were working on these liquid biopsy tests, a spokesman told me “we believe that solid tumor biopsies are the only accurate and comprehensive source sufficiently validated today to analyze genomic alterations driving tumor growth as part of routine clinical care.”
However, Foundation also said that measuring tumor DNA from the blood was a part of its R&D program. And now Roche will be pursuing that idea more aggressively, reports the New York Times:
The companies will work together to develop a so-called liquid biopsy test — analyzing tumors from a noninvasive blood sample rather than a tumor sample obtained from biopsy or surgery. They will also work on tests to help develop new cancer therapies that work by unleashing the immune system and to select patients for those therapies.
Foundation will have lots of competition going forward. Companies planning to get into the liquid biopsy business include Illumina, Sequenom, Genomic Health, and Natera, to name just a few.
So who wins in the Foundation deal?
I’d say if you want to know why any deal really happens, follow the money. To gain control, Roche will be buying just over half the outstanding shares of Foundation Medicine. That means a huge profit for the savvy venture capitalists who backed the startup, and who will be selling their shares to Roche for $50, twice what they were worth last Friday. They almost certainly think Roche is paying more than the company is worth. As Xconomy reports:
Foundation’s top three shareholders, Kleiner Perkins Caulfield & Byers, Third Rock Ventures, and Google Ventures have agreed to support the deal and tender “at least a majority” of their shares. They hold a combined 31 percent of the company. The deal is expected to close in second quarter.
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