Illumina Wins One and Loses One

Sometimes you win, and sometimes you lose. Genetic sequencing systems maker Illumina (NASDAQ: ILMN  ) experienced a taste of both over the last couple of days. The company announced today that it will buy Verinata Health. That's the win, but what about the loss? Roche Holding AG appears to be walking away from a possible acquisition of Illumina.

No deal
The bigger news by far relates to Roche's decision. Illumina's stock fell more than 7% after a Swiss newspaper, SonntagsZeitung, reported that Roche was no longer interested in an acquisition.

According to SonntagsZeitung, Roche chairman Franz Humer stated that Illumina was making "totally excessive price demands." Because the two parties couldn't agree to terms, Roche opted to walk away after pursuing Illumina for around a year.

Anticipation of a deal had driven shares of Illumina up over the past few months. Illumina spurned a $51 per share bid from Roche in April, prompting expectations that the ultimate buyout could be at a significantly higher price. Last month, Swiss newspaper L'Agefi reported that the two companies had agreed to a $66 per share acquisition. That deal didn't materialize, however.

Deal
The deal that did materialize is with Verinata Health, a provider of non-invasive tests for identifying fetal chromosomal abnormalities. Illumina is buying the company for $350 million up front and up to $100 million in milestone payments. 

With the Verinata acquisition, Illumina gains access to its Verifi prenatal test for high-risk pregancies. This prenatal test is used to detect several chromosomal abnormalities, including Down syndrome, Edwards syndrome, and Patau syndrome.

Verinata is the second acquisition for Illumina in the past four months. In September, the company announced its purchase of BlueGnome, which makes tests for finding genetic abnormalities related to developmental delay, cancer, and infertility.

Looking ahead
First, the bad news. Illumina's tactic of holding out for a higher price definitely appears to have backfired. Although at least one analyst thinks that Roche might still return to strike a deal, those odds are lowered now. 

The greater likelihood could be that Roche targets another company. Roche's chairman was quoted as saying that "Illumina was a 'nice to have' and not a 'must have' for us. There are several alternatives to get hold of gene-sequencing technology."

Affymetrix (NASDAQ: AFFX  ) , Life Technologies (UNKNOWN: LIFE.DL  ) , Luminex (NASDAQ: LMNX  ) and Pacific Biosciences of California (NASDAQ: PACB  ) are potential prospects that Roche might consider. However, all four are much smaller than Illumina.

The good news is that Illumina appears to have made a smart move with the Verinata buy. Verinata's prenatal tests should be a good fit with Illumina's product line and company direction. Illumina expects the acquisition to hit 2013 earnings by $0.20 per share but be accretive beginning in 2014.

Unfortunately, the market won't place much emphasis on the Verinata deal for now. The sting from Roche walking away from bargaining hurts too much. Everybody wins some and loses some. However, it's always better when the win is bigger than the loss. That's not the case for Illumina this time.

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  • Report this Comment On January 07, 2013, at 7:04 PM, aecooter33 wrote:

    The Verinata buy was way too much money. The non-invasive trisomy market is already a crowded space with Sequenom leading the way. Illumina always states they don't compete with their customers, just sell kits and instruments. Well their purchase of Verinata proves that's not true and now they'll compete with one of their biggest customers which is Sequenom which runs their trisomy test on Illumina instruments. Seems like a conflict of interest to me.

  • Report this Comment On January 08, 2013, at 6:06 AM, jcreamer007 wrote:

    Your article states:

    "The greater likelihood could be that Roche targets another company. Roche's chairman was quoted as saying that "Illumina was a 'nice to have' and not a 'must have' for us. There are several alternatives to get hold of gene-sequencing technology."

    Affymetrix (NASDAQ: AFFX ) , Life Technologies (NASDAQ: LIFE ) , Luminex (NASDAQ: LMNX ) and Pacific Biosciences of California (NASDAQ: PACB ) are potential prospects that Roche might consider. However, all four are much smaller than Illumina."

    However, LIFE has a market cap of $8.8 Billion vs ILMN's $6.2 Billion market cap and LIFE was in the DNA sequencing business before ILMN existed. LIFE is the 800 pound gorilla in the room and the reason that Roche thought twice about paying $60/share and upward for ILMN. In fact, Roche has been pursuing ILMN for more than a year, but it wasn't made public until a year ago.

    The devil is in the details, too bad they get in the way of telling the story the way you want to,

  • Report this Comment On January 08, 2013, at 7:59 PM, scbaker813 wrote:

    This sentence is just full of errors:

    Affymetrix (NASDAQ: AFFX ) , Life Technologies (NASDAQ: LIFE ) , Luminex (NASDAQ: LMNX ) and Pacific Biosciences of California (NASDAQ: PACB ) are potential prospects that Roche might consider. However, all four are much smaller than Illumina.

    AFFX and LMNX have absolutely nothing to do with sequencing. They are competitors of ILMN, but for completely different product lines. They wouldn't serve Roche's sequencing interest.

    LIFE is certainly an option, but they are not smaller than ILMN. With a higher market cap, they would surely end up being more expensive. The problem is they'd be buying a lot more than just the sequencing platform, so it's less of a 'pure play' for Roche.

    Beyond ILMN and LIFE, there really aren't any viable options for Roche, assuming they want a "it's working today in the field" technology. Everything else is just 'promising technologies that may or may not end up seeing the light of day'.

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