By Angela Xia, Adithya Rajeev and Karthik Neelamegam of The University of Cambridge - Date: 08/06/2019
Overview of the deal
Acquirer: Roche Holding AG
Target: Spark Therapeutics
Estimated value: $4.3 billion
Announcement date: 25th February 2019
Acquirer Financial Advisor: Citigroup
Target Financial Advisor: Centerview Partners, Cowen Group
Acquirer Legal Counsel: Davis Polk & Wardwell
Target Legal Counsel: Goodwin Procter
Roche Holding AG has agreed to purchase biotechnology company Spark Therapeutics for an all-cash deal worth $4.30bn ($114.5 per share), including a 122% premium over Spark’s closing price.
The strategic rationale behind the deal for Roche, in short, stems from a gateway to valuable, mid to late-stage gene therapy assets and a chance to increase its market share in a growing research field. The gene therapy space is a growth driver for the company, given the tough competition in their cancer treatment segment.
Buying the Pennsylvania-based biotech firm will make Roche a frontrunner alongside Novartis AG in developing a new area of medicine with great potential, and emphasises the increasing enthusiasm for a field that has become the epicentre of a plethora of deals.
“Roche has shown a willingness to sacrifice on price to reach more patients in the past. The Spark deal creates an opportunity for Roche to be an even bigger leader in pricing.” - Max Nisen (Bloomberg Opinion Columnist)
Company Details (Roche)
Roche is an international firm that specialises in both pharmaceuticals and diagnostics. This dual-focus strategy has enabled the firm to become a leader in personalised healthcare. Roche is the world’s leading biotech company, with unique medicines in many fields, ranging from oncology to immunology.
- Founded in 1896, headquarters: Basel, Switzerland
- CEO: Severin Schwan
- Number of employees: 82,100
- Market Cap: $222.9bn
- EV: $238.1bn
- LTM Revenue: $60.5bn
- LTM EBITDA: $22.9bn
- LTM EV/Revenue: 3.9x
- LTM EV/EBITDA: 10.4x
Company Details (IDT)
Spark Therapeutics is an integrated biotechnology company that focuses on the R&D of gene therapy products aimed at victims of debilitating genetic diseases, and aims to challenge the inevitability of genetic diseases, such as blindness and haemophilia.
- Founded in 2013, headquarters: Philadelphia, Pennsylvania
- President and CEO: Jeffrey Marrazzo
- Number of employees: 370
- Market Cap: $4.1bn
- EV: $3.9bn
- LTM Revenue: $64.7mn
- LTM EBITDA: -$186.1mn
- LTM EV/Revenue: 59.6x
- LTM EV/EBITDA: N/A
Projections and Assumptions
Short term consequences
Roche’s investors have been concerned for a while as to whether Roche could compete long term without having a gene therapy in its arsenal. Acquiring Spark Therapeutics would benefit Roche by allowing the firm to enter the gene therapy market with Luxturna (voretigene neparvovec-rzyl) as well as a number of other gene therapies. Additionally, the deal would provide Roche with access to the only platform “with a proven track record for getting gene therapy to the market”, making this transaction highly attractive.
On the other hand, Roche’s global reach and wealth of resources would also enable Spark to accelerate its discovery and development of gene therapies.
Buying Spark would lead to Roche becoming a leading player in the gene therapy industry. At the same time, it would help protect the Swiss firm’s increasingly significant hemophilia franchise, while also widening its drug-development pipeline to counteract the erosion of sales of antiquated cancer treatments.
In the short run, there should be no substantial financial impact for Roche, but the acquisition is value-accretive in the long term and should improve its cash flow generation. Having said that, we expect further value-accretive deals like this in the future, given the company’s healthy balance sheet and considerable cash flows.
Long term upsides
This acquisition is part of the Swiss company’s expansion outside cancer, where its competition is becoming harder to survive against due to modern medicines and less expensive replicas of Roche’s old drugs. It is dabbling in new areas such as multiple sclerosis and hemophilia.
Purchasing Spark Therapeutics signals that the Swiss drugmaker is in a position where it is able to make a substantial commitment to gene therapy. Understandably, Roche is concerned about its Hemlibra waning out. However, paying more than $4 billion for a mere insurance policy and Luxtarna’s lower sales potential is quite steep. A system where gene therapies are welcomed for their intrinsic value rather than hindered by their prices would, in the long-term, benefit Roche greatly. The company’s robust pipeline and stable shareholder base will allow it to ride out any short-term pain.
However, there are some challenging problems when it comes to pricing these drugs and these issues will undoubtedly concern Roche. For example, the cost of Luxturna is a staggering $425,000 per eye, yet hemophilia therapies still eclipses that. Therefore, for this deal to work in favour of Roche, a lot more than scientific success will be needed. Roche has shown a willingness to sacrifice on price to reach more patients in the past. The Spark deal creates an opportunity for Roche to be an even bigger leader in pricing.
Risks and Uncertainties
As of April 25th, the proportion of Spark Therapeutics’ shares that has been validly tendered and received for Roche’s offer decreased from 29.4% (on April 2nd) to 26.1%. Considering that Roche requires more than 50% of the shares to successfully complete the acquisition, this retreat could potentially suggest that the deal risks not going through, at least at the current valuation. However, this behaviour is not uncommon as a large number of shareholders tend to tender their shares near the end of the offer period. Thus, the level of tendered shares may not be a valid indicator for shareholder support for the deal.
Furthermore, shareholders of Spark Therapeutics have filed many lawsuits against the Swiss drugmaker, arguing that Roche’s offer undervalues Spark’s shares, despite the price being at a 122% premium. In addition, they claim that the Spark’s board failed to present thorough information for investors to come to a proper conclusion as to whether to tender their shares. In response, Roche stated that their proposed price was “full and fair” and contended that they had received unanimous approval from Spark’s Board of Directors.
The Federal Trade Commission (FTC) in the U.S. is still conducting a review of this potential acquisition and are taking longer than was initially expected, potentially hinting difficulty for the deal to go through as intended by Roche. To provide the FTC with more time, Roche has withdrawn and refiled its Premerger Notification and Report Form and extended the deadline for its tender offer, which now sits at June 3rd. Their terms and conditions of the offer remain unchanged.
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