Roche Takeover Ignites FMI Stock Rally
Biotech stocks continued to outperform last week, with one standout in particular catching my eye. I’m talking, of course, about Foundation Medicine Inc (NASDAQ:FMI). You might have noticed its shares jump 29% in a single trading session.
In this report, we’ll take a closer look at the FMI stock explosion, what caused it, and what it means for our FMI stock forecast.
The story begins in 2015, when Roche Holding AG (OTCMKTS:RHHBY), a Swiss company that owns multiple properties in the biotech space, bought 56% of FMI’s tradable shares.
Roche completed the deal via a $780.0-million tender offer. (Source: “Foundation Medicine and Roche Complete Strategic Transaction to Advance Molecular Information and Precision Medicine in Oncology,” Foundation Medicine Inc, April 7, 2015.)
A “tender offer” occurs when Company A says it’ll buy Company B’s shares at a premium. Technically, it can be done without management’s approval, because shareholders are enticed by the immediate return, but in this case, Foundation was on board.
For one thing, Roche’s offer of $50.00 per share was 109% higher than the previous week’s closing price. But more than that, Roche’s shrewd leadership in the genome and molecular space makes it a natural ally for Foundation Medicine.
It was impressed with Foundation’s cancer treatments, namely the “FoundationOne” and “FoundationOne Heme,” two drugs that show promise for people with blood cancer.
Roche also purchased $250.0 million of newly issued FMI stock, in addition to promising the company $150.0 million in R&D over the next five years. The total bill: $1.18 billion.
That was three years ago. Now, Roche is looking to acquire the remaining half of Foundation Medicine. This time, it offered $137.00 per unit of FMI stock, a 29% premium over the previous day’s closing price. And that’s why FMI stock is soaring.
Chart courtesy of StockCharts.com
Details About the Roche Takeover
Although $170.00 per share is the headline number of this deal, there are a few more things you should know. For instance:
- The total transaction value is $2.4 billion,
- The total company value is $5.3 billion,
- The sale price is 68% above the 90-day average,
- And the deal was unanimously approved by both boards of directors.
(Source: “Roche and Foundation Medicine reach definitive merger agreement to accelerate broad availability of comprehensive genomic profiling in oncology,” Foundation Medicine Inc, June 19, 2018.)
You should also bear in mind that the deal is part of a larger strategy. Soon after the initial investment in 2015, Roche absorbed one of Foundation Medicine’s biggest partners, a data company called Flatiron Health, Inc. It wants to keep these firms close together.
An annual report summarized the partnership by saying: “The collaborations established with Foundation Medicine (FMI) and with Flatiron Health mark the next milestone in Roche’s strategy of using high-quality healthcare data and advanced analytics to improve both the development of medicines and decisions in patient care.” (Source: “Annual Report 2015,” Roche, last accessed June 25, 2018.)
It’s a smart move. However, Roche is quick to point out that Foundation Medicine will retain “operational independence,” because they don’t want investors to think the team that made FMI such a good acquisition is suddenly being discarded.
What Does This Mean for FMI Stock?
Quite frankly, it means that FMI stock will cease to exist. Say bye-bye. The Roche takeover renders it a defunct listing. Nevertheless, investors will have received a juicy payout, and at a premium to what was already a winning investment.
But if you just learned about Foundation Medicine, this is poor consolation.
You were looking for an explosive stock, but instead, you found one in its shadow. That’s upsetting. So here’s what you might consider doing:
- Take a look at Roche stock instead;
- Hone in on other companies Roche invested in, but doesn’t own;
- Or find small biotech stocks working on cancer treatments. Odds are that Roche might invest in them as well.
You see, Roche’s older treatments are coming under competitive pressure. In order to contain the damage, it’ll need to buy out or wallop its rivals. And since it seems to be going the buyout route, investors could piggyback off those acquisitions for higher returns.
What’s the End Game?
If you’re wondering why Roche is doing all this, I suggest you look at how cancer care is conducted in the United States. It isn’t nearly as effective as it could be, considering how much technology has advanced in the last decade.
By partnering Foundation Medicine’s genome analysis with Flatiron’s vast arrays of data, the company can pioneer comprehensive genomic profiling (CGP), a potentially game-changing way to approach oncology.
That’s the big idea.
As for execution, Roche has a fabulous history of assimilating companies without much fuss or drama, as you can see from its acquisitions of Genentech, Inc., InterMune, Inc., Bina Technologies, Inc., Ariosa Diagnostics, Inc., or Genia Technologies, Inc.
We’re in an era of mergers. Regardless of the industry, companies are pairing up to weather an economic downturn. Just go down the list: AT&T Inc. (NYSE:T) and Time Warner Inc (NYSE:TWX), Walt Disney Co (NYSE:DIS) and Twenty-First Century Fox Inc (NASDAQ:FOX), Amazon.com, Inc. (NASDAQ:AMZN) and Whole Foods Market Inc., Aetna Inc (NYSE:AET) and CVS Health Corp (NYSE:CVS)—there are billion-dollar deals happening every week.
These deals present an interesting opportunity.
Each one tends to be more expensive than the one that preceded it, suggesting that firms are bidding up the price of acquisitions irrespective of the value they gain. It’s high-stakes showing off. So if you’re holding the smaller stock in the deal—the one being acquired—you’re likely to walk away with an instant return.