Roche Holding AG (ROG)’s $6.7 billion public bid to buy Illumina Inc. (ILMN:US) stopped the gene-sequencing company’s board from discussing what price would be acceptable and may have scuttled a possible deal, according to Chief Executive Officer Jay Flatley.
Flatley, 59, who called the $51-a-share offer “woefully inadequate,” said yesterday that the directors didn’t want to openly talk about a sale amount after Roche’s hostile bid was made public in January because they would have needed to disclose those discussions.
“We never took an entrenched position that we wanted to be independent, it really came down to the pricing of the transaction,” said Flatley, speaking in an interview at the company’s San Diego headquarters. “Had that bid risen into a range where we thought it was the right deal for our shareholders, then we would have supported the deal. But we never got into that range.”
Illumina itself is a “very active” acquirer, buying three to five smaller companies annually with a larger purchase about every five years, such as its $600 million Solexa Inc. deal in 2007, Flatley said. While potential cuts in government spending next year may hurt the company, a wave of new genetic tests for Down Syndrome will help drive revenue, he said.
The company makes machines that can provide a full transcript of a person’s DNA, information used to diagnose rare disease, identify the risk for a genetic condition, or match cancer treatments to patients’ tumors.
Illumina rose less than 1 percent to $47.90 at the close of trading in New York, or 6.1 percent below Roche’s $51 offer. The shares have gained 57 percent this year.
Speculation about a deal with Basel, Switzerland-based Roche leaked in December, and Roche formally made its interest known a month later by publicly offering $44.50 a share, after it said Illumina was “unwilling to participate in substantive discussions.” After the Swiss drugmaker increased the offer in March, investors voted down its attempt to gain control of Illumina’s board at an April 18 shareholder meeting.
“At no time during the process were we able as board directors to debate what price we would take,” Flatley said. “Because the offer became public, we were very limited what we could discuss internally, because we had to disclose almost everything that we talked about.”
Alexander Klauser, a spokesman for Roche, the world’s largest maker of cancer medicines, declined to comment today.
Illumina had $1.3 billion in cash and equivalents (ILMN:US) at the end of the second quarter, according to data compiled by Bloomberg, giving it room to make acquisitions.
“It’s a very attractive industry, it’s growing fast, there’s huge potential in so many areas for sequencing that I think it’s drawn a lot of attention, so there’s been some attempts at consolidation,” Flatley said.
Yesterday, Mountain View, California-based Complete Genomics Inc. (GNOM:US), which is being sued by Illumina for patent infringement, agreed to be acquired by BGI-Shenzhen, a Chinese operator of genome-sequencing centers, for about $117.6 million.
“Complete Genomics is a company that’s had some interesting technology, but they’ve been under financial pressure, and clearly haven’t established a workable business model yet,” Flatley said. “I’m kind of surprised it wound up being the Chinese in this case, particularly with the intellectual property lawsuit we have going.”
An expanding opportunity for Illumina is the $1 billion market for Down syndrome tests. Three companies, including Sequenom Inc. (SQNM:US) in San Diego, sell the blood tests that are accurate in detecting Trisomy 21, the genetic chromosomal abnormality that most commonly causes the condition, 99.1 percent of the time as early as 10 weeks into a pregnancy.
“It’s a competitive market and everybody’s using our technology there,” Flatley said. “We think in a few years it will overtake amniocentesis, as the way to test for Down syndrome.”
Illumina’s revenue next year may be hurt by the U.S. government’s $1.2 trillion in looming spending cuts, known as sequestration, which are set to start in January. The National Institutes of Health, which provides medical research grants that have been spent on sequencing products and services, would lose $2.5 billion if Congress doesn’t block the reduction.
Flatley said one-third of the company’s customers will be affected if the cuts go through as planned.
“Our view is, even if it goes into place, it’s going probably pretty short-lived,” he said. “NIH is widely supported in both parties.”
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