Roche’s Purchase Of Genia Is A Long Term Move
Roche Holdings (OTC:RHHBY) recently announced the acquisition of Genia Technologies in a bid to strengthen its diagnostics portfolio. Genia is involved in developing a next generation, single-molecule, semiconductor based DNA sequencing platform using nanopore technology. Roche will make an upfront payment of $125 million in cash to Genia, with additional payments of upto $225 million on achieving certain development milestones. [1] The company is hopeful that by leveraging Genia’s technology, it will be able to bring the cost of DNA sequencing down and at the same time, improve its speed and sensitivity. DNA sequencing refers to the process of determining the accurate order of nucleotides in a DNA molecule. This helps in recognizing new genes and their association with diseases, and also helps in identifying drug targets. Targeted therapies are much more effective in treating diseases, and DNA sequencing can help boost advancements in this field. While the direct value addition from this move will be small in comparison to the company’s market value, indirect long term implications cannot be ignored. If DNA sequencing helps Roche in developing 1-2 targeted drugs for cancer and other serious illnesses, the incremental sales could be significant.
The broader attempt appears to be towards strengthening the diagnostics business and gain share as Johnson & Johnson (NYSE:JNJ) falters in this market. In early April, Roche announced the acquisition of IQuum, which is involved in developing point-of-care molecular diagnostics systems. Roche stated that it will make an upfront payment of $275 million and additional payments of upto $175 million on achieving certain development milestones. This is another example of Roche consolidating its position in medical diagnostics market. We estimate that this business constitutes roughly 15% to the company’s value, and is the second largest division after oncology drugs.
Our current price estimate for Roche stands at $39.25, implying a premium of less than 5% to the market price.
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Diagnostic tests are performed to detect diseases, conditions, or infections. Roche’s in vitro diagnostics segment has four subsegments: Professional Diagnostics, Diabetes Care, Molecular Diagnostics and Tissue Diagnostics. Professional diagnostic helps in identifying indications in various therapeutic areas such as oncology, cardiovascular, virology, and infectious diseases. Diabetes care is focused on developing diagnostic instruments for detection of diabetes and also helps in glucose monitoring. Molecular diagnostics business helps to identify molecular characteristics of a disease, whereas tissue diagnostics helps in tissue processing and cancer diagnostics through slide staining.
Roche sells its diagnostic products to individuals suffering from diabetes, blood banks, hospitals, commercial laboratories, clinics, physicians’ offices, government agencies and alternate-care testing sites. Its major competitors in this segment are Abbott Labs, Siemens, GE Healthcare, Johnson & Johnson, Novartis, Hitachi Medical Corp and Philips.
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- Roche acquires Genia Technologies to strengthen next generation sequencing pipeline, Roche Press Release, June 2 2014 [↩]