Over a Barrel, Roche Had To Deal
By Michael Barbaro [WPost]
Thursday, July 31, 2003; Page E01
At first blush, the deal is a head-scratcher. Why would Roche Holding, a Swiss drugmaking giant, buy tiny Igen International Inc. of Gaithersburg only to give it right back to Igen's shareholders? And why, if it could only squeeze access to a single technology out of the merger, would it pay $1.4 billion for the privilege?
The answer, analysts say, is that the single technology is worth the price and Roche, the swaggering cowboy of the red-hot immunodiagnostics business, has no intention of abandoning its No. 1 position, or absorbing undesired businesses to hold on to it.
Consider the stakes: Roche's ECL line of diagnostic tests, each relying on Igen's patented Origen technology, generates $400 million a year in revenue, with sales up 23 percent in 2002. In the past decade, Roche has invested $350 million into the blood-testing technology, at the very least, and sold 9,000 of the systems worldwide. (The immunodiagnostics market -- blood banks, clinical laboratories, physicians' office labs and the like -- is worth $7 billion a year.)
Igen did not have to drive a hard bargain to persuade Roche to acquire it for a hefty 27 percent premium. All it had to do was block Roche's access to the technology, halting use of its fastest-growing product line, imperiling $80 million in annual net income, jeopardizing Roche's relationship with about 3,000 laboratory clients and opening the door to Roche's top competitors, Abbott Laboratories (No. 2 in immunodiagnostics sales) and Bayer AG (No. 3). On July 9, Igen won the right to do just that when the U.S. Court of Appeals for the 4th Circuit in Richmond ruled Roche had violated its 12-year-old license agreement.
Roche was in a bind. Igen showed no interest in negotiating another license agreement with it. Indeed, Igen had spent six years and more than $30 million trying to pull out of its 1992 sales arrangement with Roche. But a traditional merger made no sense either. As a foreign company, Roche could not conduct Igen's fast-growing biodefense business with the U.S. government. Moreover, Roche had no interest in inheriting Igen's contracts with pharmaceutical and biotechnology companies.
Couldn't Roche just ditch the Origen platform in favor of another testing system? Not really. Origen is the most advanced system in the business, analysts say. It uses light-emitting molecules to measure the presence of biological substances, from viruses in human blood to bacteria in undercooked meat to biowarfare agents in the desert sand.
With its back against the wall, Roche went on the offensive. Chief executive Franz B. Humer declared he would not be "blackmailed" into buying Igen and referred to an imaginary gun pointed at his head. In an interview just hours before the merger was announced, the head of Roche Diagnostics GmbH, Heino von Prondzynski, went further, saying the company was "prepared to step out of this business" if Igen demanded too steep a price for the blood testing.
It was all bluster, close observers say. "Roche could never walk away from this, never," said Dennis Roth, an independent biotechnology analyst in Rockville who has covered Igen for more than three years. He estimates Roche has invested more than $900 million in the ECL products, used to test for infectious diseases, cancer and heart attacks. "All that equipment becomes expensive doorjambs without a license agreement or Roche ownership of the technology."
When Igen announced it would block future sales of the ECL line, Roche returned to the negotiating table ready to cut an unusual deal. It would buy Igen to regain rights to the ECL line, then spin off the company's remaining business. Included in Roche's generous package to the new company: a gift of $155 million in working capital; a license to Roche's lucrative rapid genetic testing technology, known as PCR; and the freedom to sell the blood-testing technology to partners other than Roche.
When it comes to licensing agreements, it seems, David can bring down Goliath with a single stroke. "I don't think there are any unhappy Igen shareholders," Roth said.
Or unhappy Igen executives. Roche's payment of $47.25 for every Igen share leaves chief executive Samuel J. Wohlstadter with stock and options worth $212 million; Chief Operating Officer Richard J. Massey may walk away with $54 million; and Chief Financial Officer George V. Miguasky could pocket $10 million.
But the deal does have drawbacks for Igen. It will be years before the company can replace the $36 million Roche paid it in annual royalties, about 60 percent of its revenue. It can easily find future licensees for its blood-testing technology, but few will have refined their consumer products or penetrated the market as thoroughly as Roche. Analysts value the new company's stock, to be traded on the Nasdaq Stock Market after its creation in about five months, at between only $12 and $20 a share. Igen closed yesterday at $57.37, up 87 cents. Igen's stock has jumped 45 percent since word of the merger leaked July 22. The company declined comment for this article.
"In the short run, Igen could be hurt by this," said John M. Putnam, managing director at Belmont Harbor Capital LLC in Chicago. "In the long run, it should be beneficial."
Michael Barbaro's e-mail address is barbarom@washpost.com. Shannon Henry, whose Download column usually appears in this space, is on leave. |
