Patricia F. Fitzpatrick Dimond Ph.D. Technical Editor of Clinical OMICs President of BioInsight Communications

Roche’s hostile $44.50 per share bid could also spark additional sequencing acquisition wars.

This week saw a continuation for Roche’s $5.7 billion ploy to take over Illumina and thus gain one of the most successful sequencing companies. On February 27, Roche extended its $44.5 per share offer until 6:00 pm ET, March 23 after failing to win over adequate shareholders. The move is just the latest in a deal that is expected to take its time and go through several twists and turns.

The number of tendered shares amounted to 102,165 shares, and Illumina had roughly 121.4 million shares outstanding according to filings. Illumina has advised its shareholders against Roche’s offer, but some shareholders have countered with a lawsuit alleging that the firm’s board is not acting in their best interests.

Illumina noted that its sequencing platform, based on its sequencing by synthesis (SBS) technology, is the most successful and widely adopted next-generation platform in the world. The company has, according to some estimates, a 60% share of the $950 million genetic sequencing market, which is growing at a rate in the high teens. Both Illumina and Life Technologies now offer smaller sequencing machines, facilitating the move into the clinic. Roche of course would like to play a dominant role in clinical sequencing.

Illumina, however, clearly sees a deal with Roche as severely limiting to its own future, saying “we are singularly positioned to expand its market leadership and to deliver value to our stockholders that is far superior to Roche’s offer. Our industry is nascent, with 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, reproductive health, and cancer management,”commented Illumina CEO Jay Flatley.

The Takeover Tug-of-War

A day after Roche went public with its offer, on January 26, Illumina placed a poison pill shareholder rights plan in place that would be triggered should any party own more than 15% of the company and allows directors to deflect offers for a company. Currently, Capital Research Global Investors, Baillie Gifford & Co, Sands Capital Management, Morgan Stanley Investment Management, and Jennison Associates are Illumina’s five biggest shareholders. They collectively own about 45% of outstanding shares, according to Thomson Reuters data.

Roche responded to the poison pill move by nominating a slate of directors for election to Ilumina’s board, saying it intended to win control of the board as four directors’ terms expired at the company’s 2012 annual meeting.

On February 7, Illumina issued a formal rejection to Roche. Characterizing the offer as “grossly inadequate” and its timing “blatantly opportunistic,” Illumina’s chairman William Rastetter and CEO Flatley said that the offer did not “reflect Illumina’s strong platform of new products and pipleline.” They said that its board unanimously determined that the $44.50 per share cash offer “dramatically undervalues Illumina and is contrary to the best interests of Illumina’s stockholders. Accordingly, the board recommends that stockholders not tender any of their shares to Roche.”

On February 14, a group of Illumina shareholders filed a putative class action against Illumina alleging that its directors adopted the poison pill plan on the advice of Goldman Sachs. Because of a complex derivative transaction between Illumina and Goldman Sachs, Goldman Sachs reportedly stands to lose hundreds of millions if the Roche offer was accepted, the suit alleges. Goldman Sachs thus had incentive to advise Illumina to reject the offer, even though the value of the company’s shares would have increased from the sale to Roche, the case states.

“The plaintiffs allege that the defendants breached their fiduciary duties by, among other things, refusing to engage in negotiations and/or substantive dialogue with Roche, which resulted in the defendants failing to get the best price for Illumina shareholders,” commented the law firm retained by Illumina shareholders, Gilman Law.

Not above using scare tactics, Roche has also told Illumina that due to price pressure on sequencing machines and the prospect of government funding cuts for academic labs—Illumina’s traditional customer base—sales may not expand as quickly as Illumina thinks.

Additionally, Roche can certainly hang in for the long run when it goes after a company, upping the ante considerably. In 2007, Roche offered $75 a share for Ventana Medical Systems, and five months later, in January 2008, Ventana agreed to sell after Roche raised its bid to $89.50. Also, in March 2009, Roche completed its buyout of the roughly 44% of Genentech it didn’t already own for $46.8 billion. Roche had originally offered $89 a share in July 2008, reduced the price to $86.50, and then raised its bid twice, finally closing at $95 a share.

Roche’s Sequencing Experience

Ventana added tissue-based tests to Roche’s diagnostics segment. Roche’s takeover bid for Illumina reflects grim determination to pursue its personalized medicines agenda in gene sequencing and companion diagnostics.

Roche planted its stake in the sequencing world with its acquisition of Curagen’s 454 Life Sciences for $140 million in March 2007. Some analysts say a big reason that Roche will stick with its takeover bid for Illumina is that it bet on the wrong horse with its purchase of 454 Life Sciences. Berstein Research analyst Jack Scanell commented that Roche would like to get its hands on Illumina because 454’s technology “wasn’t the winning technology, and Illumina has essentially beaten them in the market.”

RBC Capital Markets analyst Bill Bonello added, “Roche has a broad-based offering in molecular diagnostics and research tools but a limited presence in sequencing. At this point, Illumina is probably Roche’s only viable established target.”

Some Wall Street talking heads are tongue-wagging about reports that Life Technologies might be the next “hot takeover” target following Roche’s bid for Illumina. Analysts suggest that Roche’s dogged pursuit of sequencing technologies may put other sequencing companies into play.

This game of musical sequencers will no doubt impact the sequencing segment as a whole. “We’ve seen these types of cycles before within the life science and diagnostics group, where one significant M&A event kicks off a series of other transactions or acquisitions,” Ross Muken, an analyst with Deutsche Bank in New York, told Bloomberg. “This space is not devoid of targets.”

Patricia F. Dimond, Ph.D. ([email protected]), is a principal at BioInsight Consulting.

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