Five Reasons Illumina Should Fight Roche’s Insulting Low-Ball Bid

3/5/12Follow @xconomy

Illumina is like the Apple of the genomics business. Tools made by the San Diego company (NASDAQ: ILMN) are revered by genomics researchers around the world just like millions of consumers love their iPhones and iPads. And Illumina holds its dominant position at an enviable moment in history, as we’re heading into a scientific golden age when human genomes will be sequenced for $1,000 or less.

Yet here we are, after more than a month of silly posturing, and Switzerland-based pharma giant Roche is still behaving as if Illumina shareholders are fools who will act on short-term greedy impulse and sell their company for less than it’s worth. The stance is insulting and wrong. If this low-ball takeover deal somehow gets done, it would be bad for Illumina shareholders, bad for the genetic tools industry, bad for science, bad for the San Diego innovation community, and bad for the personalized medicine movement.

This whole Roche/Illumina story burst out into public view on Jan. 25, when Roche said it was making an unsolicited bid to buy Illumina for $44.50 a share, or about $5.7 billion. The press release announcing the move was typically upbeat. Instead of saying the bid was 18 percent higher than the prior day’s closing stock price, Roche spun the story to make the bid look more generous, saying it was 61 percent higher than Illumina’s share price of Dec. 21, the day before rumors leaked that Illumina might be sold. Roche, the world’s largest maker of cancer drugs and a leader in the diagnostics industry, argued that this deal would essentially hasten the arrival of the era of personalized medicine. Roche’s Daniel O’Day, the operating chief of the company’s diagnostics division, said in a statement that Illumina would enable the company to offer a “total solution” which would help researchers discover new biomarkers and pick patients likely to respond to specific drugs.

Roche CEO Severin Schwan described the offer as providing “full and fair value” to Illumina shareholders.

But this offer is nothing close to “full and fair.” It would be more fair to say this action is like kicking a man in the ribs when he’s on the ground. Illumina stock traded as high as $79.40 a share in the last year. The only reason Roche was in position to make such a low-ball offer of $44.50 is because Illumina stock plummeted last fall, after scientific customers stalled purchases in the third quarter because they feared federal research budget cuts. That concern is real, but despite the negative force, Illumina rebounded some in the fourth quarter and now forecasts 4 percent to 11 percent sales growth this year. That’s a strong sign of resilience, when everyone from Life Technologies to Complete Genomics to PacBio and others are trying their best to knock Illumina off its pedestal. During this remarkable stretch of innovation in genomics, Illumina remains the dominant player with a 60 percent share of the next-generation sequencing market. About 90 percent of the world’s DNA sequencing output is now done on Illumina machines, the company said in a Feb. 7 regulatory filing. Forecasting the growth of the market is tricky, but it is expected to grow fast as more scientists get access to genetic analysis machines as they get cheaper.

“The Board believes that Illumina is singularly positioned in a nascent industry, which has the promise and potential to experience extraordinary growth in the years ahead as genetic information becomes broadly applied beyond molecular biology research and into medical diagnostics,” the company said in the filing.

Shareholders aren’t taking the Roche bid very seriously. Roche said that Illumina shareholders had agreed to fork over 102,165 shares at Roche’s desired $44.50 price by its previous deadline of Feb. 24. Given that Illumina has 122 million shares outstanding, Roche still has a lot of persuading to do. But instead of sweetening its offer, Roche extended the deadline to March 23, and started mounting a campaign to win a controlling majority of seats on the Illumina board at this spring’s annual shareholder meeting. Illumina shareholders have continued to bid up the stock, to $51.35 at Friday’s close, which could be a signal that many expect a much higher bid to come.

When I looked over the various company statements and SEC filings on this Roche/Illumina battle late Friday, I tried to come up with a list of “reasons for Illumina to sell” and “reasons to remain independent.” One executive at a genomic computing company—Saeid Akhtari of Cupertino, CA-based NextBio—told me he’s optimistic that a Roche takeover would lead to “rapid development of new technologies offering more efficiency in data production resulting in more research, data and discoveries.” But try as I might to see the advantage of a sale to Roche—even at a price of $60 a share or more—I just don’t think it makes sense. Here are five key reasons why I think Illumina shareholders should stand firm, and reject Roche’s offer.

Reason #1: The price is too low.

JP Morgan analyst Tycho Peterson, in a detailed note to clients on Feb. 9, wrote that Roche’s offer isn’t close to good enough. He has a $70 price target on Illumina shares. “With technology leadership and the potential for open-ended growth, Illumina remains an extremely attractive asset, and we think the stock is likely to command a larger premium,” Peterson wrote.

Peterson’s report has some compelling logic that shows why … Next Page »

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  • http://biotechmarketer.blogspot.com Shawn Baker

    I’m with you all the way up to point #5, but then you lose me. How would keeping Illumina’s HQ in San Diego and adding to it Roche’s Applied Science division (which includes 454 and NimbleGen) “weaken the San Diego biotech community, and American competitiveness.”? They’re not talking about creating an ‘applied science’ division which would contain part of what Illumina is today, but consolidating that whole division (apart from a site in Germany) here in San Diego, adding to what Illumina already has. That seems like a good thing for the local biotech community.

  • Enjay

    Roche is not quite the bad guy you like to paint, it is easy to do the big brother thing and criticize Roche et al. Frankly Illumina are a poorly managed company missing its potential by miles dispite the figures. If Roche don’t get them someone else will that’s for sure and that will spell even worse news for the employees.

    Roche can easily cite twice as many sucessful acquisitions than you cite supposedly unsucessful ones so your article is bias and misleading.

    Rather Roche than Abbott or worse

  • http://molecularfuture.blogspot.com/ Tim Gallagher

    Good article, Luke.

    How about this for reason #6: because the touted “total solution” provided by a Roche + Illumina combination is a fairy tale.

    Illumina sells equipment.
    Roche sells drugs and diagnostics. What tiny bit of equipment that Roche sells (454) hasn’t done well.

    I don’t see how selling Illumina equipment makes Roche’s drug or diagnostics businesses any better.

    What “total solution” becomes enabled by the combo that isn’t possible by Roche just buying a roomful of Illumina (or someone else’s) sequencers?

  • Roger Bumgarner

    Luke,

    I’m not sure it’s so simple. The thing that’s hard to quantify in this area is the risk. In particular the risk of being replaced with the next technology. While Illumina has invested in NanoPore that doesn’t mean they won’t be completely out competed by say IBM or some unknown company in the next 2-3 years. The technology is moving VERY fast. There’s significant risk that Illumina can’t stay on top forever and shareholders need to balance the risk vs. potential reward. Your analysis is focused more on the reward side of the equation.

  • 梅睿鹏 isaac mehl

    thanks for the ball-sy and insightful article luke.

  • http://www.xconomy.com/author/ltimmerman/ Luke Timmerman

    Thanks for the comments here.

    Shawn–I hear what you’re saying about the consolidated Applied Science division, but I’ve seen companies promise to keep large local R&D centers going for a while, only to pull out later. Not sure I buy the argument that Roche Applied Science would be bigger and better for the SD community than Illumina alone.

    Roger–it’s a fair question to raise about whether Illumina can retain its edge in sequencing in such a fast-moving market. What we know for sure is that Illumina has held on to market leadership for a number of years now, despite so much competition. I think there’s a fair chance it can continue to hold on for a good while longer. I don’t see a need just yet for shareholders to ‘take the money and run.’

  • http://biotechmarketer.blogspot.com/ Shawn Baker

    Luke, that worry about Roche was nagging me at the back of my brain. Consolidating and then pulling out of San Diego (a few years down the road) would be devastating for San Diego. And Roche leaving SD is much more likely than Illumina leaving SD. Hmm… I still think Roche moving their HQ here would be positive, but perhaps more risky.

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  • Saumitra Rahatekar

    Exemplary piece of journalism Luke ! All of your arguments came true in the end. More ever sequencing is not only meant for Biotech and Pharma. There are various areas in Agriculture which can use Illumina’s expertise, Forensic science, Animal health (?) and who knows what !

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