On December 22, 2017, Roche Holding Ltd. (ADR) (OTCMKTS:RHHBY), big pharmaceutical company, announced an agreement to acquire Ignyta Inc. (NASDAQ:RXDX). Under the contract, the buyer will be paying $ 27.00 per share in an all-cash transaction, which represents a premium of 71% and 89% to Ignyta’s 30-day and 90-day volume weighted average share price on 21 December 2017 respectively. The total transaction value is $1.7 billion on a fully diluted basis.
The merger has been approved by the boards of Ignyta and Roche. Additionally, it was said in the press release that “Roche will promptly commence a tender offer to acquire all outstanding shares of Ignyta common stock.” It seems that the transaction will be fast.
We believe that many market participants will be interested in the deal, thus we decided to have a look at it.
The buyer is large
Roche Holding AG, headquartered at Basel 4070, Switzerland, operates in the pharmaceuticals and diagnostics businesses worldwide. It is a large company giving work to 94,052 employees and with a lot of financial resources. The following are some of the stats that you need to know. Be sure to note that the company has enough cash standing in the balance sheet to acquire RXDX at least four times.
- Market Cap: CHF210 billion
- Enterprise Value: CHF222 billion
- Enterprise Value/EBITDA: 10.39x
- Enterprise Value/Revenue: 4.11x
- Total Cash: CHF 6.94 billion
Undoubtedly, Roche has all the resources to acquire RXDX. That will not be a problem at all.
The target is small as compared to the buyer
Ignyta, which is headquartered in San Diego, California, “is focused on precision medicine in oncology aiming to test, identify, and treat patients with cancers harbouring specific rare mutations.”
The following are Ignyta’s candidates:
The most interesting candidate is Entrectinib, which targets “tumours with one of two genetically defined gene rearrangements: ROS1 fusions in non-small cell lung cancer (NSCLC), and NTRK fusions across a broad range of solid tumours.”
The company has been able to demonstrate that the drug is safe and the response to the treatments is positive. We believe that Roche followed the results very closely and decided to acquire the company before the commercialization of Entrectinib commences.
Read the following information:
“In the recently announced interim data including patients from the STARTRK-2 trial, in patients with ROS1 fusion-positive advanced NSCLC, entrectinib demonstrated a 78 percent (25 out of 32; by Investigator) and 69 percent (22 out of 32; by blinded independent central review, BICR) confirmed objective response rate (ORR). Entrectinib also showed a median duration of response of 28.6 months and median progression free survival of 29.6 months in this population, with 53 percent of patients remaining on study. Moreover, entrectinib showed 83 percent (5 out of 6 by BICR) confirmed intracranial ORR in patients with measurable brain metastases. Safety was consistent with previous studies of entrectinib. With over 200 patients treated at the recommended phase 2 dose, most adverse events (AEs) were Grade 1-2 and reversible, and only 3 percent of patients discontinued from the study due to treatment-related AEs.” Source
What will happen now?
The next phase is executing dual NDA submissions in NTRK tumour-agnostic and ROS1 NSCLC. If the clinical data supports the treatment, the company will launch the product in the US.
Why is Ignyta selling now?
We believe that Roche will bring a lot of expertise and know-how to the company. Additionally, Ignyta does not have the necessary network to commercialize the new product and a lot of financial resource will be needed.
Check the following stats of Ignyta:
- Market Cap: $1.03 billion
- Enterprise Value: $923 million
- Total cash: $144 million
- Book Value per share: $1.56
Competitors in the same area?
The following is information from the annual report. It will interest the readers assessing antitrust issues:
“With respect to entrectinib, we are aware that Loxo Oncology is developing larotrectnib (LOXO-101) for patients with TRK-positive solid tumors, and has initiated a Phase 2 basket trial in adult cancer patients whose tumors harbor TRK fusions and a Phase 1/1b trial in pediatric cancer patients. We are also aware of three agents that have been approved by the FDA for ALK-positive NSCLC –Pfizer’s Xalkori ® /crizotinib, Novartis’ Zykadia ® /ceritinib and Roche’s Alecensa ® /alectinib. Alectinib is also approved for this indication in Japan. In addition, we are aware that Pfizer’s Xalkori ® /crizotinib has also been approved by the FDA for ROS1-positive NSCLC.” Source
Loxo Oncology Inc. (NASDAQ:LOXO) is a public company and may also interest other readers looking for other targets focusing on the same subject. It has a market cap of $2.5 billion.
Terms of the agreement
The following conditions are included in the merger agreement:
- Tender Offer: $27.00 per share in cash
- Majority of Ignyta’s outstanding shares being tendered in the tender offer
- Termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements
- The transaction is expected to take place in the first half of 2018.
- No financial condition
Citi and Sidley Austin LLP worked with Roche and BofA Merrill Lynch, J.P. Morgan Securities LLC, and Latham & Watkins LLP worked with Ignyta.
We believe that the target is small and antitrust will not be a problem here. Additionally, we believe that the transaction will close fast, which will be appreciated by some readers.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in RXDX over the next 30 days.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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