Bloomberg News

Illumina CEO Has Year to Top Roche’s $6.7 Billion Offer

April 19, 2012

The headquarters of Illumina, in San Diego. Source: Illumina Inc. via Bloomberg

The headquarters of Illumina, in San Diego. Source: Illumina Inc. via Bloomberg

Jay Flatley, the Illumina Inc. chief executive who lifted revenue from $1 million to $1 billion over 12 years, persuaded investors to support his rejection of Roche Holding AG’s (ROG) takeover bid.

Now he has a year to prove he can increase his company’s value beyond Roche’s $6.7 billion offer, said Bryan Brokmeier, an analyst with Maxim Group LLC in New York.

Flatley, 59, must introduce new products (ILMN:US), either in-house or through acquisitions, and expand sales to get the shares rising, Brokmeier said. Without that, Roche will have an easier time gaining control of the San Diego-based company’s board at the 2013 shareholder meeting, he said.

Bed-rock investors are “betting on the horse that has consistently won,” Peter Lawson, an analyst with Mizuho Securities USA in New York, said by telephone. Will Illumina “continue to win, and do they have something up their sleeve? That’s the major question here, and it’s a hard one to answer.”

Illumina (ILMN:US), the world’s second-biggest maker of DNA sequencers, called Roche’s $51-a-share offer a “low-ball price,” in a March 19 letter to shareholders. Investors agreed, voting down Basel, Switzerland-based Roche’s attempt to gain control of Illumina’s board at yesterday’s shareholder meeting. Roche said it won’t extend its offer after it expires at 6 p.m. New York time tomorrow.

Illumina fell 1 percent to $44.06 at the close in New York.

$25 Billion Market

The market for gene tests, like the ones sold by Illumina, may grow to $25 billion from $5 billion within a decade as more doctors use a patient’s genetic makeup to tailor treatments, according to a March 12 report from UnitedHealth Group Inc. (UNH:US)

Illumina makes machines that can provide a full transcript of a person’s DNA. That information may be used by doctors to diagnose rare disease, identify patients at increased risk for a genetic condition, like Parkinson’s disease, or match cancer treatments to patients’ tumors.

The company stands to be the leader in the field (ILMN:US), according to Institutional Shareholder Services. The Rockville, Maryland- based proxy-advisory firm urged in an April 6 report that Illumina’s stock holders reject Roche’s “inadequate offer,” because it ignored the commercial potential of its technology.

“Illumina is a business that sells picks and shovels to the California gold rush miners,” said Alastair Mackay, an analyst with GARP Research & Securities Co. in a telephone interview.

Racing Rivals

The company also is racing with Carlsbad, California-based Life Technologies Corp. (LIFE:US) to build faster, less-expensive sequencers. In January, both companies announced they had developed machines that could sequence a genome in a day, rather than weeks or months, for less than $2,000.

Roche, the world’s biggest maker of cancer drugs, could use the machines to develop medicines that target genes that drive malignancies, and has said they would be able to expand the market for the devices.

Analysts haven’t ruled out a better offer from Roche if Illumina releases new products and produces better than expected earnings, said Bill Quirk, an analyst with Piper Jaffray in Minneapolis. Illumina said it expects (ILMN:US) sales to increase 11 percent this year to $1.18 billion. For the first quarter, the company said on April 2 sales would be about $270 million, about $12 million more than analysts expected.

Roche may also come back with their offer of $51 a share if Illumina doesn’t meet investor expectations and the stock falls, said Maxim’s Brokmeier.

Hostile History

Roche has a history of hostile deals. It took about eight months to acquire Genentech, paying $46.8 billion for the 44 percent of the biotechnology company it didn’t already own. The drugmaker proposed $89 a share in July 2008, and then began a hostile tender offer at $86.50. The company then raised the bid twice, to $95 a share, to win support from Genentech’s board.

Roche waited seven months to raise a hostile $75-a-share bid for Ventana, which agreed to sell in January 2008 after Roche boosted its offer 19 percent to $89.50.

“I don’t think Roche has completely given up,” Brokmeier said in a telephone interview. “They may come back with an offer if Illumina shares don’t move higher and shareholders see they shouldn’t have walked. Or if Illumina comes out with better news on its pipeline and greater information.”

Any deal probably would have to be above $55 a share in the near-term and privately negotiated by the companies’ boards rather than taken to shareholders, Quirk said in a telephone interview. Analysts expect Illumina’s shares to reach $54.85 over the next 12 months, according estimates (ILMN:US) of 13 analysts compiled by Bloomberg.

Another Try Unlikely

Roche investors think the possibility of a deal at a higher price is unlikely. The drugmaker made a hostile offer for Illumina Jan. 27, raised it March 29, and yesterday said it will consider other options to expand its business.

“If they can get it in the low 50s the deal makes long- term sense,” said Marc Booty, who helps oversee more than $100 billion, including Roche shares at Pictet Asset Management Ltd in London. “If not, I’m happy to see them walk away. The Illumina bid has detracted from improvement of the base business at Roche in my view.”

To contact the reporter responsible for this story: Shannon Pettypiece at spettypiece@bloomberg.net.

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net.


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Companies Mentioned

  • ILMN
    (Illumina Inc)
    • $159.91 USD
    • -5.13
    • -3.21%
  • UNH
    (UnitedHealth Group Inc)
    • $81.05 USD
    • -1.90
    • -2.34%
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