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Analyst: Illumina Shareholders Unlikely to Vote for Roche Offer, but Options Remain

NEW YORK (GenomeWeb News) – As Illumina shareholders prepare for a vote that could determine the future of Roche's hostile bid for the San Diego company, an investment analyst today said that Roche is unlikely to make any headway in getting a deal done and only has a couple of other options.

Tomorrow, nearly three months after Roche launched its initial $5.7 billion bid for Illumina and less than a month after it increased that bid to nearly $6.7 billion, Illumina will hold its annual shareholders meeting. Those shareholders will have the opportunity to either back Illumina's directors who are currently up for re-election, including CEO Jay Flatley, Chairman William Rastetter, Blaine Bowman, and Karin Eastham, or vote for a slate of candidates nominated by Roche.

On a conference call today, Jon Groberg, an analyst at investment bank Macquarie Securities, said that Roche will probably be forced back to square one after the vote.

"It seems pretty clear that Roche is unlikely to make much of any progress in the vote tomorrow," Groberg said, noting discussions he's had with top Illumina shareholders, as well as opinions by three proxy firms favoring a rejection of Roche's nominees.

At Wednesday's meeting, Illumina shareholders will vote on two main points: whether to re-elect the four Illumina board members, or to replace them with the Roche candidates, and whether to change Illumina's bylaws, allowing for an expansion of the board and paving the way for Roche to stack it with its candidates.

Roche has nominated a total of six candidates — Barry Bailey, Earl Collier, Dwight Crane, David Dodd, Michael Griffith, and Jay Hunt — to serve on the Illumina board. The Swiss drugs, diagnostics, and research products giant believes a change in board members would force Illumina to negotiate a deal — something Illumina has been unwilling to do thus far.

Without getting its nominees onto Illumina's board, Groberg said, Roche could still proceed with its offer, but because Illumina implemented a poison pill provision meant to dilute the value of its stock in the event of a hostile takeover, "it makes little sense for [Roche] to tender shares even at the current $51 stock price."

Roche would essentially be left with two options — raise its offer, or walk away completely.

Most analysts have said that a price range of between the mid-$50s to about $70 would be necessary to get a deal done, and Groberg said today that a mid-$50s price point would be difficult for both Illumina shareholders and management to ignore. If Roche raises its bid, and Illumina continues to refuse to negotiate, Roche "would most likely walk" away, he said.

But, he added, at this point Roche does not appear inclined to increase its bid.

One scenario that could play out is that Roche chooses not to technically walk away from a deal, but instead, leaves its $51 deal standing indefinitely. Such a move would put the onus on Illumina to prove that the offer is too low, which, Groberg said, could be a challenge for Illumina.

Illumina's potential outside of the traditional tools space may be "much greater than any of the other tools companies that have been sold before," Groberg said, but with an explosion in next-generation sequencing technological capabilities and a price war already happening, Illumina could find it challenging to reach its 2012 revenue guidance of $1.10 billion to $1.18 billion.

Illumina has instituted a price increase, but big customers are refusing to pay the higher price, Groberg said, which could impact sales of both the MiSeqs and HiSeqs. In addition, platform launches by competitors could eat into Illumina's market share and drive instrument prices down.

"If Roche sits around and waits, I think it's likely that Illumina in the second-half of the year has a bit of a challenge in hitting some of the lofty targets," Groberg said.

He added that if Roche walks away from a deal, Illumina's stock, which has been trading in the mid-$40s to mid-$50s since Roche's bid, will like fall into the high-$30s to $40 range.

In late afternoon trading today on the Nasdaq, shares of Illumina were down 2 percent at $43.96.

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