Roche Offers $5.7 Billion To Acquire Illumina Inc.

Roche wants to accelerate the transition of gene sequencing into clinical, routine diagnostics

CEO SUMMARY: Once again, Roche is hunting for gene sequencing and gene analysis technology that can support its goal of being a world leader in gene-based therapeutics and clinical lab testing that utilizes gene tests and molecular diagnostics. Last week, Roche launched a hostile stock tender offer for shares of Illumina, Inc., of San Diego, California. It is offering to pay $5.7 billion for all outstanding shares of Illumina, which rejected the proposal. Experts expect Roche will continue to pursue the acquisition of Illumina, which had revenue in 2010 of $902.7 million.

ONE BIG PHARMA and in vitro diagnostics (IVD) company is placing a multi-billion dollar bet that the future of lab medicine is genetic testing! That’s one interpretation of the hostile take-over offer that Roche Holding, Ltd., made to Illumina, Inc., of San Diego, California.

On January 25, Roche offered to pay $5.7 billion for all outstanding shares of Illumina. The company makes life science tools and systems to analyze genetic variation and function. This price represented a premium of 64% over Illumina’s closing stock price on December 21, the day before rumors surfaced about a potential Roche-Illumina deal. Illumina rejected the proposal. In 2010, Illumina’s revenue totaled $902.7 million.

Holding Out for More?

As this issue of THE DARK REPORT went to press, Illumina’s board was rejecting the Roche offer. Illumina says its board will issue a formal recommendation to shareholders within 10 days of the January 25 offer. Meanwhile, Roche launched its tender offer for Illumina shares.

Observers say that Roche wants to pursue ownership of Illumina because it expects the adoption of gene sequencing in clinical diagnostics to occur swiftly. Illumina holds a major market share of gene sequencing systems that are sold in research settings.

Illumina’s gene sequencing technology is considered to be one of the market leaders. Adding Illumina’s products to Roche’s product portfolio in DNA analysis and molecular diagnostics would give the Swiss-based company a strong platform to support expanded use of gene sequencing and gene analysis by clinical labs and pathology groups.

Of course, Roche’s aggressive appetite for things genetic and molecular is familiar to most pathologists and lab administrators. One example is 2007’s uninvited acquisition offer made by Roche to Ventana Medical Systems, Inc., in Tucson, Arizona. In early 2008, Roche agreed to pay $3.4 billion for Ventana, a company that had about $270 million in sales during 2007.

At the time, Roche said the Ventana acquisition would complement its position in both in vitro diagnostics (IVD) systems and oncology therapies.

But why would Roche pay $3.4 billion for Ventana, a company that had $270 million in revenue during 2007? The reason, according to Bloomberg BusinessWeek, is that Roche and Ventana shared an intimate understanding of the next revolution in medicine. “In the coming decade, pharmaceutical products—especially cancer drugs—will be created in tandem with diagnostic tests that tell doctors which patients are likely to benefit,” reported the news magazine.

Roche Acquired BioImagene

Consider how Roche has executed this strategy. In 2010, Roche’s Ventana division bought BioImagene, Inc., a digital pathology company in Sunnyvale, California, that made systems for pathologists doing digital image analysis and image sharing. Ventana paid approximately $100 million for the company, which, at the time, had an estimated 100 customers worldwide.

Going back even further, it was in the 1980s when Roche launched its DNA and gene sequencing business strategy. Roche was one of the early investors in polymerase chain reaction (PCR) technology, which was developed by Kary Mullis, Ph.D., in 1983 when he worked at Cetus Corporation. In 1989, Hoffmann-La Roche Inc., and Cetus began joint development of diagnostic applications for PCR.

PCR Patents Held by Roche

Two years later, Hoffmann-La Roche paid $300 million to formally acquire the world-wide rights and patents to PCR. From that investment, Roche has earned $2 billion in royalty patent payments from clinical laboratories and medical researchers.

THE DARK REPORT offers this history of Roche’s acquisitions over the past two decades to make a point. This is a company that spent huge amounts of money back in 1901 to buy the rights to the PCR patents. Its willingness to open the checkbook and buy companies with the DNA and genetic technologies it wants is well established.

From that perspective, it may be that Illumina will end up selling to Roche— but at a much higher price than the current offer. After this happens, lab administrators should expect to see Roche to aggressively use gene sequencing technologies to create new tests for use in clinical laboratories.

Roche Wants to Boost Its Sequencing Products

WHEN IT ANNOUNCED its intent to acquire Illumina, Inc., Roche said the proposed acquisition would strengthen its position in life sciences and diagnostics. For pathologists and lab administrators, this is Roche declaring that it is prepared to be a leader in clinical applications for gene sequencing and gene testing.

Specifically, Roche said the acquisition of Illumina and its DNA sequencing technology—when combined with Roche’s existing product line—will accelerate the transition of genetic sequencing into clinical and routine diagnostics. Roche wants to strengthen its position in sequencing and microarrays to serve the growing demand for genetic and genomic solutions.

Further, as one of the world’s larger pharmaceutical companies, Roche is carefully building its ability to combine diagnostic tests with pharmaceuticals. It recognizes the growing role that companion diagnostics will play in decisions about which patients qualify for specific therapeutic drugs.

To that end, Roche is telling the investment community that DNA sequencing will play a major role in helping researchers discover complex biomarkers that could become companion diagnostics and be paired with specific treatments. Illumina’s technology and gene sequencing products will give Roche more capabilities in this area.

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