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Roche's Bid for Illumina Likely to Increase, Other Suitors May Emerge, Analysts Say


By Julia Karow

This article, originally posted Jan. 26, has been updated with information from additional analyst reports.

Roche is likely to increase its bid for Illumina, and other suitors of the sequencing and array firm may appear on the scene, according to research analysts commenting on Roche's hostile takeover bid for Illumina earlier last week.

Late last Tuesday, Roche said it was offering Illumina stockholders $44.50 per share, or a total of $5.7 billion, representing an 18-percent premium over Illumina's closing share price that day, and a 64-percent premium since Dec. 21, when rumors about Roche's interest in Illumina surfaced (see other story, this issue). Roche said it was making the offer because Illumina had been unwilling to discuss a friendly acquisition. The company had offered Illumina $40 per share in early January, which it rejected.

The day after Roche's hostile bid, Illumina's shares closed at $55.15, up 68 percent over the previous day's closing price of $37.69. Early this week, Illumina shares closed at around $51.

According to some analysts, a merger between the two firms would have advantages for both, and given Roche's company purchase history, it is a question of when, rather than if, Roche will complete the acquisition.

"Strategically the move makes sense," according to research analysts from Oppenheimer, who noted that it enables Illumina to widen its sales channels for the MiSeq and to develop infrastructure for the diagnostic market, while allowing Roche to add to its existing next-gen sequencing business and to expand sequencing to diagnostics and, eventually, companion diagnostics. Considering Roche's "historical persistence when they commit to acquisitions of this sort, we believe Roche will ultimately acquire Illumina," they wrote.

Analysts also commented on Illumina's "poison pill" shareholder rights agreement, which it adopted last week. The measure will "encourage the companies to negotiate with one another, instead of publicly through Illumina shareholders," said analysts from R. W. Baird.

Wall Street observers also said there is reason to believe Roche's offer will go up. According to analysts from Credit Suisse, Illumina's share price was recently not only boosted by takeover rumors, but also by its positive earnings preview for the fourth quarter of 2011 and bullish expectations for 2012. Thus, they said, Roche's current offer is "far below the level of premium that we believe a company with technology such as Illumina deserves."

"We don't believe Illumina would agree to a deal for anything near the 18-percent premium offered (which is 44 percent below the 52-week high), and we expect the process to drag on for some time," Leerink Swann analysts agreed.

Several analysts also pointed to an earlier Roche takeover of a diagnostic tool company, tissue biopsy company Ventana Medical Systems, as evidence that the initial bid may increase.

Roche made a hostile offering for Ventana in mid-2007. After protracted negotiations, the companies eventually agreed to an acquisition in early 2008 at a price that was almost 20 percent higher than the original bid. "Like Illumina, Ventana was a fast-growing company with a dominant position in oncology testing," said analysts from R.W. Baird.

"The Ventana bidding process dragged on for seven months, and we expect this current effort will be similarly long and drawn out absent a substantial increase in Roche’s offer," according to the Leerink analysts.

Illumina is also in a good position to demand a higher premium because of its current leadership in the market, which could attract other bidders, according to the Baird analysts. "We cannot rule out the entrance of other large diagnostics/strategic companies into the Illumina acquisition fray."

According to the Credit Suisse analysts, other potentially interested parties include General Electric or Siemens.

The Oppenheimer analysts agreed that Siemens would be a likely acquirer, "given Siemens' recent partnership with Illumina for the application of NGS to clinical infectious disease testing" (CSN 11/9/2011). Later, they said they wondered "if other big pharma companies will be interested in NGS technologies."

"Well-capitalized conglomerates" such as General Electric or Siemens, as well as companies investing in next-gen sequencing, such as IBM, could be among those interested in Illumina, according to analysts from William Blair.

The Leerink analysts, however, doubt that other bidders will appear on the scene. While other firms might be interested in Illumina, "we don't believe any are strategically ready to counter Roche's bid," they said. "Thus, we see no white knight, and imagine the drama in any bidding battle will pit Roche against the Illumina bulls."

Some analysts addressed regulatory concerns that might exist because Roche already owns a sequencing firm, 454 Life Sciences, and would dominate the sequencing market if it acquired Illumina, the market leader.

According to the Credit Suisse analysts, "the combination of Roche and Illumina would not offer an extreme antitrust risk," and Roche would "likely be willing" to sell its 454 business "to obtain Illumina's more attractive one."

R.W. Baird analysts increased their share price target for Illumina to $60 on Wednesday, 35 percent higher than Roche's offer.

Credit Suisse analysts agreed that "it will take an offer of around $60/share or so to convince a majority of Illumina's shareholders to agree to sell," and even more for some who bought Illumina's stock at its height of over $70 per share last summer.

Likewise, analysts from Mizuho upped their price target for Illumina shares to $62. "Illumina is clearly an outlier in the space for innovation, product traction and potential growth profile," they wrote.

William Blair analysts estimated Illumina's share price could range from $47 to $80 and said they "believe there could be other bidders and/or Roche could increase its offer in an effort to get shareholders on board."

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