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Seeking Stronger Foothold in Clinical Sequencing, Roche Proposes to Acquire Illumina in $5.7B Hostile Takeover


By Julia Karow

This article has been updated from a previous version with information from 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 and gain a stronger foothold in the personalized medicine market through close collaboration with its pharmaceutical arm.

Late last night, 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 yesterday, and a total of about $5.7 billion. Illumina's current market capitalization is $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, the company said. Roche noted that its hostile takeover bid comes after unsuccessful direct discussions with the company in recent weeks.

By acquiring Illumina, Roche hopes to strengthen its position in DNA sequencing and microarrays "to address the growing demand for genetic/genomic solutions." More importantly, however, is the hope that Illumina's technology will "help accelerate the transition of DNA sequencing into clinical routine diagnostics," the firm said.

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."

Daniel O'Day, chief operating officer of Roche's diagnostic division, said in a statement that Illumina will provide "complementary solutions" to its current portfolio that will help with biomarker discovery and the selection of patients for targeted treatments. Illumina's capabilities will also help Roche to "develop new diagnostic tests that serve patients and customers even more effectively."

During a Roche conference call this morning to discuss the planned acquisition, Roche's CEO Severin Schwan said that it would allow the company to further strengthen its leading position in diagnostics. 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.

O'Day said in the call that 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."

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 that market.

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

"The reality is, the information generated by sequencing is increasingly being used to make treatment decisions" in cancer, he said. "More and more, we understand the genetic basis of disease, we understand the mutations that are involved in cancer, and we also have therapies more and more that we can direct to those particular mutations.

"And as the number of mutations that are actionable grows, the need for determining the complexity of these genetic variations increases, and that's where sequencing comes into play," he said. In combination with other technologies, like tissue diagnostics and PCR, sequencing will allow cancer patients to receive tailored therapies.

"Whereas today, sequencing is used at major cancer research hospitals around the world for some subset of patients, in the future, this need, demand, and technology improvement will mean that all hospitals around the world" will sequence every cancer patient, O'Day said.

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

Further, Illumina could 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.

Developing an IVD instrument and assay is very different from developing a research-grade instrument, he said, "and there are a lot of pitfalls associated with that because the regulations are constantly changing, so you really have to be very up to speed with what's required by the different authorities around the world." This includes knowing what documentation is required, how to make the instrument robust for validated manufacturing principles, and how to introduce the platform in the market "to a different customer base."

"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.

Sequencing is already being used clinically today for applications such as HLA typing for bone marrow transplants, HIV deep sequencing, and, in some cases, oncologic mutation analysis, he said.

But the uptake of sequencing in the clinical world will likely happen more slowly in the US than in other parts of the world because of regulatory hurdles. There will be "one pace in the United States, and a different pace outside the United States," he said.

Roche and other industry players have already had several meetings with the FDA about how the agency intends to regulate sequencing. "I think that's still in a state of evolution, and it will take us to continue to provide input there to drive that forward," O'Day said. "Outside of the United States, we have CE marking, which allows things to be used and adopted in the clinic much more quickly."

"It won't be a black-and-white situation, it won’t be one day it's in research world, the next day, it's in the clinical world, but it will evolve, and it will evolve quicker in Europe than it will in the United States," he added.

With regard to reimbursement, O'Day said that some healthcare providers and insurers already reimburse for sequencing tests "in select populations," but reimbursement for "broader segments" of patients, for example with cancer, will need to be approached "country by country."

"I am confident that as with other diagnostic applications, that once you have robust clinical data around it, which is something we are quite keen on at Roche, and we amortize across the Roche group, the next step is of course reimbursement," 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.

But for sequencing to become a companion diagnostic, Roche will first have to turn it into a validated in vitro diagnostics platform, O'Day said. Also, there must be a need to characterize several mutations simultaneously. "Sequencing comes into play as you get more and more mutations," he said. "The more complexity with the mutations, the more sequencing becomes a potential companion diagnostic in the future. That will come as we continue to identify targets in our pharma pipeline and around the world."

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.

'Multiple Efforts'

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.

In the call, Schwan, who called Illumina a "great, successful company," said Roche approached Illumina about a merger in December. "Unfortunately, the board of Illumina has not been interested to negotiate a business combination," so Roche is now approaching shareholders directly.

The company said it will present the complete terms, conditions, and other details of its offer in a filing with the US Securities and Exchange Commission. Following the filing, Illumina has 10 business days to review the offer and respond to it in detail.

In a written response to the offer early this morning, 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."

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.

O'Day noted that the Penzberg site is "an important site for diagnostics." Roche's pharmaceutical business also has a presence there, giving Roche "some unique advantages in terms of being able to collaborate across the researchers [in] both businesses."

He said that 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. In addition, Illumina's sequencing and microarray technologies are complementary to other Roche technologies, such as PCR and tissue diagnostics.

The two companies' businesses 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.

Roche plans 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. If adopted, these measures "would result in Roche-nominated directors comprising a majority of the Illumina board," Roche said.

According to Roche's new CFO, Alan Hippe, Roche intends to finance the deal largely from available cash on its balance sheet as well as from credit facilities.

Market Shifts

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 gain 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 also working on a nanopore-based sequencing system that is still in development. It is unclear how an acquisition of Illumina by Roche would affect that partnership, or the existing 454 platforms.

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