Roche Willing to Consider Added ‘Value’ in Illumina Bid

Roche Holding AG (ROG) said it is willing to study “additional value” in its bid for Illumina Inc. (ILMN) after a proxy-advisory firm recommended that the target company’s shareholders reject the hostile offer.

Roche’s concession was tied to “the opportunity to enter discussions and perform due diligence” in preparation for a possible deal, the Basel, Switzerland-based drugmaker said in an e-mailed statement yesterday.

Institutional Shareholder Services had said earlier yesterday that Roche’s $6.7 billion bid undervalues San Diego- based Illumina, the maker of machines that search the human genome for ways to defeat disease. Egan-Jones Ratings Co. also recommended that Roche’s proposals, including a slate of new directors, be rejected, according to a statement by Illumina.

The advice may prompt Roche, the world’s largest maker of cancer drugs, to raise its offer for Illumina a second time, said Lionel Melka, co-manager of Bernheim, Dreyfus & Co.’s Diva Synergy Fund (DIVASYA), which holds Illumina stock.

“This report puts a lot a pressure on Roche to bump again to get a friendly negotiation going prior to the April 18 meeting” of Illumina shareholders, Melka, whose firm is based in Paris, said in an e-mail before Roche’s statement.

Acquiring Illumina would expand Roche’s offering of diagnostic products and potentially allow the Swiss company to better target medicines to patients. Illumina plans to introduce a machine capable of scanning a person’s complete DNA within a day by the end of this year, Illumina has said.

Shareholder Vote

Shareholders of Illumina should vote for management’s nominees to the board of directors at the annual meeting, and reject Roche, according to the report by ISS.

“Roche would seem to be an excellent partner for Illumina as the sequencing industry grows more intertwined with new drug development,” ISS analysts wrote. “The current bid, however, falls short of providing a compelling enough consideration to cause Illumina’s shareholders to support Roche’s nominees.”

The Swiss drugmaker bid $44.50 a share for Illumina in January, and raised the offer to $51 on March 29. Illumina, which closed at $52.33 on April 5, rejected both proposals as inadequate and refused to negotiate.

After the first rebuff, Roche proposed that Illumina shareholders oust four directors at the annual meeting, expand the board and elect six Roche nominees. That would give the Swiss company a majority on the board, clearing the way for negotiations.

Sweetened Offer

The sweetened offer values Illumina at 34 times this year’s expected earnings, Roche said in a statement March 29. That’s a higher valuation than other publicly traded gene-sequencing companies, such as Carlsbad, California-based Life Technologies Corp. (LIFE), Roche said in a presentation to investors.

Still, no one should value Illumina based on this year’s profit, ISS said.

“Traditional financial metrics that focus on near-term or past profitability -- exactly the metrics on which Roche has focused -- are not particularly useful because they do not measure the one thing both current shareholders and Roche are most interested in: the commercial potential of the company’s disruptive technology, across a number of large addressable markets,” ISS wrote.

To contact the reporter on this story: Phil Serafino in Paris at pserafino@bloomberg.net

To contact the editors responsible for this story: Phil Serafino at pserafino@bloomberg.net; Reg Gale at rgale5@bloomberg.net

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