Has Roche Said "Nein" To Illumina's Asking Price Once More?

By Stephen D. Simpson, CFA | January 06, 2013 AAA

The "will they or won't they" between Roche (OTC:RHHBY) and Illumina (Nasdaq:ILMN) has continued to spur rumors and debate ever since Roche walked away from its bid for the leading gene sequencing company earlier this year. Rumors in the fall said that Roche was working on yet another bid, while subsequent rumors claimed that agreements had been reached at $60 per share or even $66 per share. Given reports of Roche chairman Franz Humer's statement to a Swiss newspaper on Sunday, however, it looks like this deal is off once again.

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A Familiar Story
In an interview with SonntagsZeitung, Chairman Humer basically turfed the rumors that the two companies had reached an agreement, stating that Illumina wouldn't move off of "the totally unrealistic price they were looking for." Moreover, he said that Illumina was "definitely off the table" and that Roche was going to look elsewhere for the sequencing technology it wanted.

This is not an altogether surprising development. As I have maintained in prior articles, I thought Roche's prior bid of $51 was plenty generous at the time. While Illumina has logged a few good quarters since then and launched some interesting (and novel) PCR reagents, the reality is that Illumina wants Roche to pay for the diagnostics leverage that Roche itself will be adding to the business - on its own, I still believe Illumina will struggle to become a major player in next-gen clinical diagnostics.

In any case, time will tell whether this is really the last word, or whether Roche is simply negotiating through the media. A $60 per share, $7.9 billion bid could have been in the cards, but I would hope that Roche would not go up to $66.

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Where Does Roche Turn Now?
Next-gen diagnostics is a key for Roche's long-term growth, and not just as a means of tapping into the growth that companies such as Cepheid (Nasdaq:CPHD) have been able to reap from the market. Rather, more and more drugs (especially in oncology) are launching with companion diagnostic tests, and there is a widespread expectation that this will become true in other areas such as cardiology and auto-immune (rheumatoid arthritis in particular) in the coming years. Right now, in fact, more than half of the company's pipeline has a companion diagnostics component.

Fortunately for Roche, it are not exactly hard up for other gene sequencing tech acquisition candidates.

As the second place competitor to Illumina, Life Technologies (Nasdaq:LIFE) could be a candidate, particularly as the gene sequencing business would be relatively easy to separate from the rest of the business. That said, I don't see this happening - I cannot believe that Roche would want the rest of Life Technologies, and I can't see LIFE management selling its growth crown jewel at anything less than an irresponsibly high price. That said, a partnership (and large investment by Roche) built around diagnostics could be plausible.

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Privately-held Oxford Nanopore could also be an option. While Illumina has long held a stake in this company, it seems like the relationship there could be fraying a bit as the companies have gone into arbitration. The downside to Oxford is that it has taken a very long time for the company to develop its technology and it's still not clear just how "ready for prime time" the technology is. While Oxford Nanopore should be lauded for wanting to get its technology and products working right before commercial launch, and Roche may be more interested in long-run technology than near-term launches, there could be some execution risk here.

Roche may also have a few other wild cards to play. Publicly-traded Pacific Biosciences (Nasdaq:PACB) has gone from darling to dreck, as the unacceptably high error rate of the company's products has soured researchers and clinicians on a platform that was once pretty hot. Here again, it may be a question of timing and long-term tech value - if Roche believes they can fix what has ailed PacBio and that the technology can still be competitive with Illumina, Life Tech, and Oxford, maybe this is where the company goes. At the same time, if there were easy fixes available, one would think PacBio would have already gone in that direction.

A few other names to watch include Genia, GnuBIO and Nabsys. These are all much smaller companies, but all have potentially interesting technology in sequencing. The big questions are how close these companies are to commercialization and how secure their IP is - any of these would be far cheaper than Illumina, but Roche would be taking on substantially more risk and would have to shepherd these technologies/platforms toward commercial viability; "plug and play" they are not.

There could also be a slight chance that Roche bids for the IP assets of bankrupt Helicos. These assets would not come close to giving Roche all of what it needs, however, and it's uncertain that the IP here could be integrated with another potential acquisition. Either way, shareholders of Helicos will likely see no benefit even if Roche makes a bid.

The Bottom Line
As a Roche shareholder, I'm somewhat conflicted. While I do want to see the company bulk up its genomics capabilities, I don't believe it should pay just any price to do so. Roche has a strong business at present, with a good pipeline, and it would be a shame to see the company launch a value-destroying move such as overpaying for Illumina. That said, I continue to believe that the company will do something here, so investors should stay tuned for the next twist or turn in the tale.

At the time of writing, Stephen D. Simpson owned shares of Roche since 2011.

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