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Roche Announces $5.7 Billion Hostile Takeover Bid for Illumina

NEW YORK (GenomeWeb News) – Roche announced late on Tuesday night a $5.7 billion hostile takeover bid of Illumina.

Under the terms of its all-cash proposed deal, Roche would acquire all outstanding shares of the San Diego-based next-generation sequencing and microarray firm at $44.50 per share, representing a 64 percent premium over the price of Illumina's stock on Dec. 21, 2011, the day before rumors about Roche's interest in Illumina drove up Illumina's stock price, Roche said.

The bid price also is a 61 percent premium over the one-month historical average of Illumina's share price and 43 percent premium over the firm's three-month historical average, both as of Dec. 21.

The proposed bid also would be a 30.1x multiple of the company's projected forward earnings based on Wall Street's current consensus estimates for 2012, Roche said.

Illumina's shares were up 46 percent at $54.89 in Wednesday morning trade on the Nasdaq.

Roche said it is making its proposal after "multiple efforts to engage with Illumina in order to reach a negotiated transaction," were rebuffed. Illumina has "been unwilling to participate in substantive discussions," it added, and "Roche has therefore decided to promptly commence a tender offer to purchase all of the outstanding shares of common stock of Illumina for $44.50 per share in cash."

Additionally, Roche plans to nominate "a slate of highly qualified, independent candidates" for election to Illumina's board during Illumina's next shareholder meeting "and propose certain other matters for the consideration of Illumina's shareholders," Roche said. If adopted, Illumina's board would be comprised of a majority of directors nominated by Roche.

In a letter dated Jan. 25 to Illumina President and CEO Jay Flatley and made public by Roche, Franz Humer, chairman of Roche Holding, said, "As I have expressed to you previously, we are mindful that you and your management team have contributed greatly to Illumina’s success. Roche contemplates continued employment of Illumina’s management and employees following the consummation of a transaction and we are prepared to work with you to develop mutually satisfactory employment arrangements."

In a Jan. 18 letter to Roche, Flatley said Illumina's board was not interested in being acquired by Roche, Humer said in his letter.

Quintin Lai, an analyst at RW Baird, said in a research note that Roche made an offer of $40 per share to Illumina on Jan. 3, which was rejected by Illumina.

In the statement released last night, Roche CEO Severin Schwan said the “all-cash offer of $44.50 per share represents full and fair value for Illumina and we expect that Illumina’s shareholders will welcome the opportunity to sell their shares at a significant premium to current market prices. It is our strong preference to enter into a negotiated transaction with Illumina, and we remain willing to engage in a constructive dialogue with Illumina to jointly develop an optimal strategy for maximizing the value of our combined business.”

In response, Illumina issued a statement saying that its board will review Roche's offer and then make a recommendation to its stockholders. It being advised by investment banks Goldman Sachs and Bank of America Merrill Lynch and law firm Dewey & LeBoeuf.

This morning, Goldman Sachs removed its ratings and price target for Illumina after being advised by the Americas Investment Review Committee to do so.

Dan Leonard of Leerink Swann said in a research note that he believes that negotiations between Roche and Illumina could drag out for months. "We don’t believe Illumina would agree to a deal for anything near the 18 percent premium offered," over Illumina's closing price of $37.69 on Tuesday.

He noted that the $44.50 bid price is 44 percent below Illumina's 52-week high.

Amanda Murphy of William Blair added that given that Illumina's stock was trading above $70 a few months ago, and its intrinsic value could be as high as $71, Roche will likely need to increase its offer price to gain shareholder support.

Leonard also said that he does not expect a bidding war to develop with other firms interested in Illumina. "We eventually envision that other deep-pocketed suitors would be interested in [Illumina], but we don’t believe any are strategically ready to counter Roche’s bid," he said.

David Ferreiro of Oppenheimer pointed to Siemens as a potential bidder, though, and noted a recent collaboration between it and Illumina to use next-gen sequencing for clinical infectious disease testing.

If completed, the acquisition would combine two of the leading names in next-gen sequencing. In 2007 Roche bought 454 Life Sciences from Curagen for about $155 million.

Illumina, which is scheduled to release its fourth-quarter and full-year 2011 results on Jan. 31, is regarded as the leader in next-gen sequencing with a 50 percent to 60 percent market share, according to analysts.

Its shares plummeted as much as 55 percent in early October after it pre-announced disappointing third-quarter results.

Soon after that announcement, a media report also surfaced that Illumina could be an acquisition target, though several analysts expressed skepticism to GenomeWeb Daily News at the time about a possible deal going through, saying they did not believe management at Illumina was interested in selling the firm.

In addition to being a dominant next-gen sequencing player, Illumina along with Affymetrix are the market leaders in microarrays. Combining Ilumina with Roche's Diagnostics Division would "strengthen Roche's position in sequencing and microarrays to address the growing demand for genetic/genomic solutions," Roche said, adding its diagnostics experience and global presence would accelerate sequencing into the clinic and routine diagnostics.

Daniel O'Day, chief operating officer of the Roche Diagnostics Division, said, "The proposed acquisition will strengthen Roche’s current offering in the life science market by providing complementary solutions to our current portfolio. Our ability to offer a total solution to researchers will help enable the discovery of complex new biomarkers improving drug discovery and the selection of patients most likely to respond to a targeted treatment with high clinical relevance.

"In addition, by building on Illumina’s capabilities Roche will be able to use its scale, global distribution, and diagnostic test development expertise to develop new diagnostic tests that serve patients and customers even more effectively,” he added.

If successful in its bid, Roche would combine its existing Applied Science business with Illumina and headquarter the business in San Diego, while maintaining operations in Penzberg, Germany where Roche Applied Science is currently based.

Roche has hired Greenhill & Co. and Citigroup as financial advisors and Davis Polk & Wardwell as legal counsel for the proposed acquisition.

Roche is scheduled to announce its full-year 2011 financial results on Feb. 1.