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Illumina Will Weigh Roche's $5.7B Hostile Takeover Bid; Asks Shareholders to "Take No Action" Yet


By Julia Karow

This article, originally posted Jan. 25, has been updated with information from company statements and a Roche conference call to discuss the proposed acquisition.

Roche has made a $5.7 billion hostile takeover bid for Illumina to bolster its clinical sequencing capabilities, following unsuccessful direct discussions with the company in recent weeks.

Late on Jan. 24, Roche said it is offering to acquire all outstanding shares of Illumina for $44.50 per share in cash, an 18 percent premium over Illumina's closing share price of $37.69 prior to the announcement, and a total of about $5.7 billion. Illumina's current market capitalization is approximately $4.58 billion.

Roche pointed out that its offer represents a 64 percent premium over Illumina's stock price on Dec. 21, the day before rumors about Roche's advances drove up Illumina's share prices, according to the company. Research analysts, however, agreed that Roche will likely have to increase its offer in order to win Illumina shareholders over (see other article, this issue).

Roche said it has "made multiple efforts to engage with Illumina in order to reach a negotiated transaction" but that Illumina "has been unwilling to participate in substantive discussions," prompting it to make its tender offer to acquire the company's outstanding shares.

The company maintained that it is its "strong preference to enter into a negotiated transaction with Illumina" and that it "will remain willing to engage in a constructive dialogue with Illumina" to develop a strategy for combining the firms.

By acquiring Illumina, Roche hopes to strengthen its position in DNA sequencing and microarrays "to address the growing demand for genetic/genomic solutions." Also, its own experience in the diagnostic market and its global presence "will help accelerate the transition of DNA sequencing into clinical routine diagnostics," the firm said in a statement.

In addition, "DNA sequencing is expected to help to discover complex biomarkers that could become companion diagnostics and be paired with specific treatments in the long term."

Roche intends to merge its Applied Science business, which is part of its diagnostics division and includes Illumina rivals 454 Life Sciences and Roche NimbleGen, with Illumina and to move the new business unit's headquarters to San Diego, where Illumina is currently based. It also plans to maintain operations in Penzberg, Germany, Roche Applied Science's current headquarters.

Following the acquisition, Roche "contemplates continued employment of Illumina's management and employees" and said it intends to maintain the Illumina brand.

Late last week, Roche formally commenced its tender offer and presented the complete terms, conditions, and other details in a filing with the US Securities and Exchange Commission. Unless extended, the offer will expire at the end of Feb. 24.

Illumina has 10 business days to review the offer and respond to it in detail.

Illumina's Reaction

In a written response to the offer shortly after Roche's announcement, Illumina said that its board of directors will "thoroughly review" Roche's proposal and make a recommendation to its stockholders "in due course" that it believes will be in their "best interests."

Illumina advised its stockholders "to take no action at this time pending the board's recommendation."

A day later, Illumina's board adopted a so-called "poison pill" shareholder rights agreement to discourage a hostile takeover of the company. Under the agreement, if anyone acquires 15 percent or more of Illumina's common stock, all others who were shareholders as of Feb. 6 are entitled to purchase Illumina shares at a favorable price. In addition, those shareholders would have the right to purchase shares of the acquiring company at a favorable price.

Illumina said it took the measure to ensure that its stockholders "receive fair treatment and protection" when someone proposes to acquire the company, and "to provide stockholders with adequate time to properly assess" such a proposal "without undue pressure," as well as to safeguard their "opportunity to realize the long-term value of their investment in the company."

Roche responded that "although not unexpected," it is "disappointed" with the Illumina board's unwillingness "to participate in substantive discussions about a negotiated transaction" and its adoption of the shareholder rights plan.

Late last week, Illumina said it will respond to Roche's offer and make a recommendation to its shareholders within 10 business days, at which time it will also report its earnings for the fourth quarter of 2011, which were originally scheduled for this week (see other article, this issue).

Takeover Plan

In a conference call to discuss the proposed acquisition last week, Roche CEO Severin Schwan said that Roche approached Illumina about a merger in December. "Unfortunately, the board of Illumina has not been interested to negotiate a business combination," he said, so Roche is now approaching shareholders directly.

According to Roche, its chairman, Franz Humer, and a member of its board met with Jay Flatley, Illumina's CEO, on Dec. 13. Roche then made the company an all-cash offer of $40 per share on Jan. 3, which Illumina's board rejected on Jan. 17.

Roche only owns a "very small quantity" of Illumina shares at the moment, Schwan said.

As part of its takeover plan, Roche intends to nominate "a slate of highly qualified, independent candidates for election to Illumina's board of directors" and to propose "certain other matters" to Illumina's shareholders at the firm's upcoming annual meeting, a date for which has not been set yet. If adopted, these measures "would result in Roche-nominated directors comprising a majority of the Illumina board," Roche said.

According to Roche's CFO and chief information technology officer, Alan Hippe, Roche intends to finance the deal largely from available cash on its balance sheet as well as loans from credit facilities.

Continued Investment in Sequencing

During the call, Schwan said that Roche's global footprint and its expertise in the research and diagnostic markets would "certainly help to accelerate the transition of sequencing into research and clinical diagnostics around the world." Further, the acquisition would strengthen in-house collaborations between Roche's pharma and diagnostics units to develop more targeted medicines.

"Combining the strengths and capabilities of Roche and Illumina makes a lot of sense, both from a strategic and an operational point of view," Schwan said.

Schwan called Illumina a "great, successful company," and said he believes Illumina's shareholders will find the offer "extremely attractive," adding that it represents "full and fair value" of Illumina. "Together with the management and employees of Illumina, we want to bring our combined business to the next level."

Daniel O'Day, chief operating officer of Roche's diagnostics division, said that Illumina's sequencing technology was the best to go after because of the company's history of innovation.

"Illumina is clearly the leading technology in sequencing today, has been for many years. And we're confident, with that type of track record, it would continue to do well vis-à-vis the competition," he said.

Nevertheless, Roche's strategy will be to "invest heavily in the next generation of technology," he added, including single-molecule methods, "to make sure we stay ahead of the technology curve."

With regard to looming competition from sequencing technologies still under development, he said that it will be a while before these might become serious contenders. "We're constantly monitoring the competitive environment," he said, "and so far, I think the technologies that could be even stronger than what we see here today are still in a very early feasibility stage and have a lot to prove."

According to O'Day, one of Roche's strengths has been its broad portfolio of technologies, along with its commercial presence in more than 130 countries. Roche's Applied Science life science research business, which Illumina would merge with, has been important to its overall strategy, he added, because it has allowed the company to get into "some of the most innovative technologies" in diagnostics. "It's an extremely important part of our strategy, and one that we intend to strengthen with this acquisition."

O'Day noted that the Penzberg site, where the Applied Science business is currently headquartered, is "an important site for diagnostics." And because Roche's pharmaceutical business has a presence there, the location will give Roche "some unique advantages in terms of being able to collaborate across the researchers [in] both businesses."

Yet, he said, it will make sense to move the headquarters of Applied Science to San Diego, since the "fastest growing areas" of the combined company would be Illumina's sequencing and array businesses.

Unlocking Commercial Potential

Explaining the rationale for the acquisition, Day mentioned four key points: an increase of Roche's participation in the sequencing market, a strengthening of its overall technology portfolio, unlocking the commercial potential of the two organizations, and the eventual entry of Illumina's technology into in vitro diagnostics.

Sequencing today is a market of more than $1 billion, he said, and Roche expects this market to grow to more than $2 billion by 2015. This growth will be driven in part by the research market, and Illumina would enable Roche to "penetrate much, much deeper into the research market."

In addition, he said, sequencing is expected to enter the in vitro diagnostic market, for example in oncology.

While there will be challenges in terms of the funding environment, the development of new technologies, and their transition to IVD, "those challenges are best met with the combination of the skill sets of the two organizations," he added.

Illumina's short-read technology and Roche's existing long-read technology from its 454 Life Sciences business are "quite complementary" and can be used in conjunction with each other, he said. In addition, Illumina's sequencing and microarray technologies complement other Roche technologies, such as PCR and tissue diagnostics.

"There is room and space for both short-read and long-read" technologies, O'Day said. "They are complementary but very different, and we perceive that being the case moving forward as well."

Roche and Illumina's customers and markets complement each other as well, he said. While Illumina's business currently focuses on "top-tier customers," such as large genome centers and academic facilities, predominantly in the US, Roche's technologies also reach smaller and mid-size research facilities and the company is strong outside the US.

Growth in sequencing will come from both "continuing to supply the large genome centers and the large research centers," O'Day said, but also from Roche's "ability to penetrate audiences that have not been exposed to sequencing yet," and that "still have adequate funding to invest in this." Mid to long term, growth would also come from clinical markets, he added.

Illumina could also benefit from Roche's experience in taking technologies into in vitro clinical diagnostics. "There are many hurdles in terms of being able to do this successfully," O'Day said, "and we routinely do it successfully," starting from IVD systems development to clinical validation to working with regulatory authorities around the world, including the FDA.

"This is something we have a tremendous expertise in, and combined with the expertise of Illumina in sequencing, we feel we can really drive and accelerate this introduction of sequencing into the in vitro diagnostics marketplace," he said.

In the mid to longer term, he added, Roche also sees a role for sequencing in personalized medicine. The company currently has more than 160 internal collaborations between its pharma and diagnostic units, resulting in a "robust late-stage pipeline" of companion diagnostics.

The timing for the acquisition is right, he said, because sequencing technology is now ready to enter smaller research labs as well as routine diagnostics.

Competitive Pressure

Roche's offer comes at time when Illumina's business has started to stumble, after years of continued growth of revenues and profits. Compared to a year ago, the acquisition would represent a bargain to Roche: Until last summer, Illumina's shares traded as high as $79.40 but plummeted in the fall, to a low of $25.57, following a shortfall in revenues that forced the company to lay off 200 employees (IS 11/1/2011).

The offer also follows a period in which next-generation sequencing has been increasingly adopted for clinical applications, both by academic centers and diagnostic providers, for example to diagnose Mendelian inherited diseases, to help with the diagnosis and treatment of cancer, and to diagnose fetal abnormalities during pregnancy (CSN 1/4/2012 and CSN 1/11/2012).

Illumina's sequencing platforms — both its high-throughput HiSeq 2000 and its speedier MiSeq desktop instrument — have so far dominated clinical next-gen sequencing applications, though the company faces limited competition from Roche's 454 GS Junior, and is starting to run into Life Technologies' Ion Torrent PGM. Life Tech is also working on a higher-throughput system, the Ion Proton, that could become a competitor for clinical applications later this year.

For single-gene tests, capillary sequencing systems from Life Technologies still represent the gold standard, but diagnostic providers are increasingly switching to lower-cost multi-gene sequencing panels on next-gen platforms like Illumina's.

Illumina has also been busy entering the diagnostic sequencing market itself, and through acquiring the company, Roche could rid itself of a potential competitor in that area. Three years ago, Illumina launched an "individual genome sequencing" service that provides physician-ordered whole-genome sequencing tests in a CLIA-certified and CAP-accredited laboratory, though it does not include medical interpretation services.

Also, earlier this month, Illumina said it has founded a new business unit, called "Translational and Consumer Genomics," that will focus on the clinical market (CSN 1/11/2012).

For Roche, a deal with Illumina would be its second acquisition of a next-generation sequencing technology, and its second attempt to establish a foothold in the diagnostic next-gen sequencing market.

In 2007, Roche acquired 454 Life Sciences for about $155 million, mostly in cash, but 454's sequencing platforms, the GS FLX and the GS Junior, have been largely overtaken by Illumina's systems, though the GS Junior has a number of clinical research applications.

In partnership with IBM, Roche's 454 is working on a nanopore-based sequencing system that is still in development. In addition, it has a collaboration with UK-based DNA Electronics to develop an electrochemical detection method for the 454 chemistry.

Illumina, for its part, has an equity stake in Oxford Nanopore Technologies and has exclusive rights to market and sell that company's exonuclease nanopore sequencing platform, which has not been commercialized yet.

It is unclear how an acquisition of Illumina by Roche would affect these partnerships.

Have topics you'd like to see covered in In Sequence? Contact the editor at jkarow [at] genomeweb [.] com.