The week started off with a bang for biotech as Swiss pharma Roche AG nabbed Intermune Inc. in an $8.3 billion all-cash deal. The price of $74 per share represented only a 38 percent premium to Friday's close but was a 63 percent premium to what Roche described as the "unaffected" closing price of Intermune's shares (NASDAQ:ITMN) on Aug. 12. The following day, Reuters reported that Intermune was working with financial advisers to evaluate its strategic options in potential pharma takeover talks, though no suitors were named.

After that, Intermune's stock went on a run on the takeover speculation, on Friday hitting $53.93 – $1.31 shy of its 52-week high – before closing at $53.80. After the Roche deal was disclosed Sunday afternoon, shares roared nearly to the transaction's striking point ahead of Monday's opening bell, closing the day at $72.85 for a gain of $19.05 on volume of more than 51 million shares.

Terms call for Roche to launch a tender offer this week to acquire Intermune's outstanding shares. The second step merger, financed with a combination of available funds, commercial paper lines and newly issued bonds, is expected to close this year, subject to expiration or termination of the Hart-Scott-Rodino waiting period and other customary conditions. The merger agreement was approved by the boards of both companies.

Roche expects the transaction to be neutral to core earnings per share in 2015 and accretive from 2016 onwards, with its 2014 financial guidance unaffected by the deal.

The acquisition of Intermune, of Brisbane, Calif., becomes the largest by Basel-based Roche since it purchased Genentech Inc. in 2009 for $47 billion in a deal that took eight months to seal. (See BioWorld Today, July 22, 2008, and March 13, 2009.)

Recently, however, Roche has been on something of a buying spree, closing three smaller deals over the past three months. Those included a potential $1.725 billion transaction – including $725 million in cash – for San Diego-based Seragon Pharmaceuticals Inc. and its portfolio of oral selective estrogen receptor degraders through the Genentech unit; a potential $450 million grab of Danish RNAi specialist Santaris Pharma A/S; and a $125 million buy of Genia Technologies Inc., of Mountain View, Calif., and its DNA sequencing platform. (See BioWorld Today, July 3, 2014, and Aug. 5, 2014.)

Alluding to the recent transactions, Roche CEO Severin Schwan maintained on a conference call with analysts Monday that the five-year drought since the company's last mega-deal was due not to lack of interest but of opportunity. Rebuffing a suggestion that the Intermune buy was a turn away from investing in drug platforms to focus on a single product, he maintained the deal was "an extremely good example" of a consistent M&A strategy.

"We really focus on targeted, bolt-on acquisitions where we can complement our existing franchises," Schwan said. "That can be products. That can also be technology and platforms. What stands out is the size of the deal," which he said reflected the expected market for Esbriet and "the imminent approval of the product in the United States."

LONG AND WINDING ROAD FOR ESBRIET

The Intermune acquisition gives Roche ownership of the idiopathic pulmonary fibrosis (IPF) drug Esbriet (pirfenidone), approved in Europe and Canada, which had sales of $35.7 million in the second quarter of 2014. The orally active, antifibrotic agent inhibits the synthesis of TGF-beta, a chemical mediator that controls many cell functions, including proliferation and differentiation, and plays a key role in fibrosis. Pirfenidone also inhibits the synthesis of TNF-alpha, a cytokine known to have an active role in inflammation.

Esbriet, aimed to expand Roche's respiratory product portfolio, is under review by the FDA and Roche said it expects to launch the drug before year-end. A progressive, irreversible and ultimately fatal disease characterized by progressive loss of lung function due to fibrosis in the lungs, IPF is thought to affect approximately 100,000 patients in the U.S. and another 100,000 in Europe, although Roche officials conceded numbers are somewhat fluid.

The drug has had a long and winding road. In 2002, Intermune licensed global rights to pirfenidone, then in phase II development, for all fibrotic indications from Marnac Inc., of Dallas, and the company's co-licensor, KDL GmbH, of Basel. Terms were not disclosed, but Intermune made an up-front payment and agreed to milestones and royalties. (See BioWorld Today, April 9, 2002.)

At the time, Intermune's primary asset was Actimmune (interferon gamma-1b), which was approved in the U.S. for chronic granulomatous disease and severe, malignant osteopetrosis and was completing a phase III trial in pulmonary fibrosis. That trial missed its primary endpoint, however, and data from a follow-up observation period failed to confirm the robust survival benefit the company initially reported. (See BioWorld Today, Aug. 29, 2002, and Jan. 8, 2003.)

In 2004, Actimmune failed to reverse cirrhosis, or liver fibrosis, in a phase II trial. Intermune ultimately halted the drug's development in cancer and IPF to focus on a hepatitis C candidate and pirfenidone, for which it secured the remaining rights from Marnac/KDL in 2007. (See BioWorld Today, Jan. 22, 2004, Feb. 6, 2006, March 7, 2007, and Nov. 27, 2007.)

Actimmune, meanwhile, went to Dublin-based Vidara Therapeutics International Ltd. in 2012 for $55 million in cash plus royalties for two years. Earlier this year, Horizon Pharma snagged Vidara in a deal valued at about $660 million in a tax inversion deal. (See BioWorld Today, May 23, 2012, and March 20, 2014.)

In a bit of M&A irony, Genentech received approval to market Actimmune in chronic granulomatous disease in 1990 before licensing all rights to the drug to Connetics Corp., of Palo Alto, Calif., which spun out Intermune in 1999 to develop the drug in a deal with outside investors worth about $11 million. (See BioWorld Today, April 30, 1999.)

In 2008, pirfenidone was approved in Japan as Pirespa to treat IPF following submission of a new drug application (NDA) by Intermune's partner, Shionogi & Co. Ltd., of Osaka, Japan, which holds rights to the drug in Japan, Taiwan and South Korea. But, although an FDA advisory panel backed approval of the drug in 2010, the agency ruled against pirfenidone in the U.S., rejecting the pooled data from two phase III studies, CAPACITY 1 and CAPACITY 2 – only one of which hit its primary endpoint – and sending it back for a confirmatory trial. (See BioWorld Today, March 10, 2010, and May 5, 2010.)

To give the phase III ASCEND trial a better chance of success, Intermune modified the patient population criteria, looking for a more homogenous group compared to the CAPACITY studies, and testing pirfenidone for a shorter treatment duration. (See BioWorld Today, May 27, 2011.)

By that time, the drug, branded Esbriet, had gained EMA approval in all 28 member states and was gearing up for its launch in Europe, where the drug now is marketed in 15 countries. Esbriet gained approval in Canada and South Korea a year later. (See BioWorld Today, March 4, 2011.)

From there, the Intermune story grew stronger. Earlier this year, the company reported stellar data from ASCEND, which analysts also generally favored over the phase III findings of Boehringer Ingelheim GmbH's tyrosine kinase inhibitor nintedanib in IPF, despite the lack of a head-to-head trial. (See BioWorld Today, Feb. 26, 2014, and May 20, 2014.)

Intermune reported total revenues of $66 million for the first half of the year, recording a net loss of $124.8 million. The company had cash of $560.2 million as of June 30.

The ASCEND data were included in Intermune's resubmitted NDA in May. In July, the FDA granted breakthrough therapy designation to pirfenidone in IPF. All eyes now are on the drug's PDUFA date of Nov. 23, with Roche assuming risk of approval.

'THIS IS A GROWTH STORY'

Daniel O'Day, Roche's chief operating officer, described the commercial fit between Roche/Genentech and Intermune as "hand-in-glove." Through Genentech, Roche markets Pulmozyme (dornase alfa) and Xolair (omalizumab) in the U.S. and is developing other therapies targeting respiratory illnesses – notably lebrikizumab (RG3637), a humanized monoclonal antibody designed to block the action of the interleukin-13 cytokine, that is in phase II studies in IPF, with regulatory filings expected as early as 2017.

Bolstered by the strong ASCEND results, which showed significantly reduced IPF disease progression and mortality from treatment with pirfenidone compared to placebo, O'Day said the pharma will leverage its global infrastructure, patient access and physician education programs to seek a strong U.S. launch following approval and to expand its footprint in Europe.

Schwan went further, maintaining the deal will work only if Roche meets those goals.

"This is a growth story," he said. "It is not a cost story."

In a company note, Leerink Partners LLC analyst Howard Liang acknowledged the vindication for Intermune, writing that "the announced Roche acquisition in our opinion represents a favorable ending of the ITMN story, which has endured an arduous road in pioneering the development of the first approved treatment for idiopathic pulmonary fibrosis in Europe and potentially in the U.S."

Liang added that the acquisition recognizes the potential to develop a fibrosis franchise with pirfenidone as a starting point, "which even as a simple molecule in its unoptimized form appears to provide remarkable therapeutic benefits."

O'Day acknowledged that the pharma had an inside look at Intermune's primary asset through a hepatitis C virus (HCV) partnership between the companies. A potential $530 million deal, inked in 2006, was focused on preclinical ITMN-191. In 2010, Intermune instead sold global development and commercialization rights to the compound, now known as danoprevir (RG7227), to Roche for $175 million in cash, negating the earlier deal. At the time, the companies pledged to continue exploring ways to continue working together on HCV. (See BioWorld Today, Oct. 18, 2006, and Oct. 7, 2010.)

"We've been looking at this product over time," O'Day said. "When we saw the ASCEND trial results, that's when we decided to approach the company to look for a partnership."

Roche officials declined to comment on competitive bidding for Intermune but said additional details about the process will be provided in its tender offer.

Schwan also emphasized the synergies between Roche and Intermune and predicted a smooth transition of Intermune's 450 employees and operations into the Roche organization as the merged entity prepares for the expected U.S. launch of pirfenidone. Intermune's U.S. headquarters is based only five miles from that of Genentech, he pointed out, and the company's European headquarters is just a stone's throw from Roche's compound in Basel.

"There is a very good strategic fit and, I think it's fair to say, a perfect fit from a portfolio point of view," Schwan said. "Very importantly, there's also a very good cultural fit between both companies."

A transaction price is immaterial, he added, unless the companies can be successfully combined.

"Most acquisitions fail not because the price was too low or too high," Schwan observed. "Most acquisitions fail because the integration fails."

'WE DO NOT BELIEVE THERE WILL BE A HIGHER BIDDER'

Although Intermune is exploring additional formulations and analogues for pirfenidone and has several other early stage research programs in fibrotic diseases, Roche officials said the global market opportunity for pirfenidone – not preclinical assets or even tax considerations – drove the deal.

"At Roche/Genentech, we look for high clinical bars and big differences in unmet medical needs," O'Day said. "Certainly, the clinical data on pirfenidone, and what Intermune has done, is impressive for patients."

Given limited existing patent protection in the U.S. and Europe, Esbriet's market potential is now the biggest question mark. The drug is already off patent in Japan and has approximately seven remaining years of exclusivity in the European Union. Once approved in the U.S., the seven-year exclusivity clock will begin to tick. Although Intermune has assembled an additional patent estate on pirfenidone that could potentially extend its exclusivity, Roche is assuming only the existing patents in its commercialization plans, O'Day said.

RBC Capital Markets analyst Michael Yee observed in a note on the transaction that the purchase price – roughly seven times Esbriet's consensus peak sales of $1.2 billion in 2022 – likely is predicated on four key factors. Because Esbriet does not have composition-of-matter patent protection, he said, justification for the deal assumes expected sales of well over $1 billion, the negation of Intermune's expenses of more than $300 million annually, full credit to methods-of-use patents "that go well into 2020s and was likely thoroughly vetted by Roche" and little or no credit to Intermune's pipeline. "We do not believe there will be a higher bidder based on this type of valuation," Yee wrote.

And Wells Fargo Securities LLC analyst Brian Abrahams wrote that Intermune "has a profile that makes it a good fit for a larger company like Roche, including a very high likelihood of U.S. Esbriet approval." Given the adoption of the drug for IPF in Europe and well-established pricing and reimbursement for similar drugs, he predicted Esbriet ultimately could exceed $1.3 billion in global sales by 2021.

"Strategically, we believe the acquisition makes sense," Abrahams added, "as Roche can leverage its vast commercial infrastructure to draw operational synergies and likely reduce some of the considerable launch costs."

Whatever the analyst spin, Schwan professed the deal was the right one for Roche, at the right price.

"I've made skeptical comments in the past about valuations we see in the biotech sector," he admitted. Although biotech valuations have receded slightly over the last year, "for a number of assets I continue to scratch my head," he said.

"Intermune is, indeed, a very unique opportunity, where we can leverage the capabilities of both companies in a pretty unique way," Schwan added. "This doesn't happen so often."