Roche Holding AG (ROG) offered $5.7 billion in a hostile bid for Illumina Inc. (ILMN) to bolster sales of gene-mapping equipment. The target’s shares climbed above the bid price as investors speculated Roche will have to raise it.
Roche today proposed paying $44.50 a share for Illumina, 18 percent more than yesterday’s closing price. It will put the offer directly to shareholders after the San Diego-based company was “unwilling to participate in substantive discussions,” Basel, Switzerland-based Roche, the world’s biggest maker of cancer drugs, said in a statement.
Roche would gain technology for reading the genetic makeup of tumors, potentially allowing the company to offer treatment specific to individual patients. The drugmaker will have to raise its bid as it did in prevailing in two previous unsolicited offers since 2007, said Birgit Kulhoff, a Zurich- based manager at Rahn & Bodmer Co. who owns Illumina shares.
“Offering $44.50 probably won’t satisfy Illumina management and shareholders,” said Kulhoff. “If I look at the offer through the glasses of Roche shareholders, they are already offering a very high multiple.”
Roche made its interest in acquiring Illumina known to the company on Dec. 13, according to filing with the Securities and Exchange Commission, formally offering $40 a share on Jan. 3. Illumina’s board rejected that offer on Jan. 19, Roche said in the filing.
Illumina surged 46 percent to $55.15 at the close in New York, the biggest single-day gain in almost 12 years. Before today, the stock had fallen 52 percent from a record $77.88 on July 6. Roche fell 2.8 percent to 158.40 Swiss francs in Zurich. It was the biggest single-day decline in two months.
The Swiss drugmaker has “no intention” of raising its bid, Chief Executive Officer Severin Schwan, 44, said today on a conference call with reporters. The bid is “really attractive and compelling” and offers “full and fair value,” Schwan said.
Schwan, an Austrian citizen, was head of diagnostics in 2007 when he and then-Chairman and CEO Franz Humer made a hostile offer for U.S. diagnostics company Ventana Medical Systems Inc. Humer, 65, yielded the chief executive role to Schwan in 2008, and the two men worked together on the $46.8 billion acquisition of Genentech Inc., completed in March 2009.
A takeover of Illumina would be Roche’s largest purchase since Genentech, according to data compiled by Bloomberg. Roche paid $3.4 billion for Ventana in 2008 after initially offering $3 billion.
Roche already owns a “very small amount” of Illumina shares, Chief Financial Officer Alan Hippe said on the call.
Roche plans to finance the bid out of its free cash flow and via borrowing from its credit facility, Hippe said. Roche obtained a 3.9 billion euro ($5.07 billion) five-year credit line in November, according to data compiled by Bloomberg. Its 2010 operating free cash flow was 14.1 billion francs.
Illumina’s directors will review the offer and make a recommendation to shareholders in due course, the company said in a statement. Goldman, Sachs & Co. and Bank of America Merrill Lynch are acting as financial advisers to Illumina, and Dewey & LeBoeuf LLP is legal counsel.
“Our preference continues to be a constructive dialogue and to have a negotiated agreement,” Schwan said.
Roche has begun the process of nominating candidates to Illumina’s board to be considered at the annual meeting, Schwan said. Greenhill & Co. and Citigroup Inc. are the Swiss company’s financial advisers, while Davis Polk & Wardwell LLP are providing legal advice.
Four members of Illumina’s nine-member board of directors are due to stand for re-election at this year’s annual meeting. Roche, however, plans to nominate six directors at the meeting, and to propose a separate vote to expand the size of the board by two, said a person with knowledge of the matter.
If shareholders supported Roche’s proposals, the Swiss company’s nominees would hold a majority of seats on the board, this person said. Illumina hasn’t yet scheduled a date for this year’s annual meeting, which in the past has been held in March or April.
Illumina has been in a race to develop the first machine to be able to parse the building blocks of life in a day, rather than weeks or months. It announced Jan. 10 that it would market such a machine in the second half of this year. Illumina competes with Carlsbad, California-based Life Technologies Corp. (LIFE), which on Jan. 10 also said it had reached the same goal. The current Illumina machines can sequence five human genomes in 10 days, according to the company.
Roche will use its global reach to move genome sequencing beyond academic labs and into patient treatment, Daniel O’Day, the company’s head of diagnostics, said today.
“Together, Roche and Illumina’s capabilities and global reach will accelerate the transition of sequencing into clinical and routine diagnostics,” Roche told Illumina employees today in a letter filed with U.S. regulators. “DNA sequencing is expected to help to discover complex biomarkers that could become companion diagnostics and be paired with specific treatments in the long-term.”
The offer values Illumina at about 32 times analysts’ average 2012 profit forecast of $1.39 a share, according to data compiled by Bloomberg. Over the past two years, Illumina has traded at an average of 29 times forward earnings, the data show. Illumina traded at Roche’s offer price as recently as last September, before it scrapped its annual profit forecast on concern that research funding would be reduced.
Offer to Earnings
The offer equates to about 50 times Illumina’s earnings in the 12 months ended Sept. 30. That compares with the 83 times trailing profit that Roche eventually paid for Ventana, according to data compiled by Bloomberg. Beckman Coulter Inc., an Illumina competitor, was sold to Danaher Corp. (DHR) last year for $6.8 billion, or about 26 times profit, the data show.
Roche decided to go directly to shareholders after Illumina confirmed its lack of interest in a Jan. 18 letter, Humer said in a response today to Illumina Chief Executive Officer Jay Flatley.
“This is a compelling offer, and we are confident that your stockholders will find it extremely attractive,” Humer wrote. “We hope that your board will now take the opportunity to negotiate a transaction that will allow your shareholders to realize this substantial value.”
Roche said the offer is 64 percent above Illumina’s closing price on Dec. 21, a day before speculation about a potential transaction boosted Illumina shares. On Dec. 22, Illumina advanced 7 percent in New York trading after Schwan told Bloomberg News in an interview that Roche would be ready to “seize” the right opportunity. Roche would consider a deal about the same size as its purchase of Ventana, he said.
In October, Illumina announced a $15 million to $17 million restructuring plan because of concerns that government and academic institutions may reduce research funding, as well as uncertainty about the global economic environment.
With the Illumina offer, Roche is making the largest unsolicited bid for a life-sciences company since Valeant Pharmaceuticals Inc. offered $5.7 billion for Cephalon Inc. in March, according to data compiled by Bloomberg. Teva Pharmaceuticals Industries Ltd. eventually acquired Cephalon.
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