Roche Holding AG (ROG) is abandoning a $6.7 billion bid for Illumina Inc. (ILMN) because investors are concerned the U.S. company’s gene-mapping technology may go the way of the 8-track or the floppy disc.
Roche Chairman Franz Humer, whose initially hostile overtures months later yielded successful takeovers of Genentech Inc. and Ventana Medical Systems Inc., failed to entice the San Diego-based company into negotiations. The Swiss drugmaker said yesterday it won’t extend a sweetened offer after its proposals were rejected at a meeting of Illumina’s shareholders.
Roche’s refusal to pay a higher price may signal that investors aren’t sure Illumina will emerge as the leader in a race to introduce faster, cheaper, gene-sequencing instruments. New products announced in the past three months from Oxford Nanopore Technologies Ltd. and Life Technologies Corp. (LIFE) may overtake Illumina’s as the standard for researchers, Roche has said. Illumina also is more optimistic about its own business than analysts, Roche said.
“A lot of people in the sequencing industry really don’t know which technology is going to win in the end,” said Jack Scannell, a London-based analyst with Sanford C. Bernstein Ltd. “That spooked a lot of Roche shareholders. There is a huge amount of caution that you end up buying Betamax and not VHS.”
Shares of Basel, Switzerland-based Roche rose 0.9 percent to 164.40 Swiss francs in Zurich. Illumina fell 0.9 percent to $44.12 at 11:46 a.m. in New York. Illumina shares sank below the offer price for the first time last week and continued the decline as investors grew concerned Roche would abandon the deal if Illumina didn’t agree to start discussions. Roche’s offer expires at 6 p.m. New York time tomorrow.
“I don’t see many possibilities for reconciliation at this point,” Ben Kelly, an event-driven analyst at Louis Capital Markets LP in London, said in an interview.
Roche pursued Genentech for about eight months and spent $46.8 billion for the 44 percent of the biotechnology company that it didn’t already own. Roche proposed $89 a share in July 2008, and began a hostile tender offer at a reduced price of $86.50. The company then raised the bid twice, to $95 a share, to eventually win support from Genentech’s board.
Roche waited seven months to raise a hostile $75-a-share bid for Ventana. The maker of diagnostic tests for cancer agreed to sell in January 2008 after Roche raised the bid 19 percent to $89.50.
Bid for Illumina
The Swiss drugmaker made a hostile bid for Illumina in January and raised it on March 29, less than a third of the time Humer and Chief Executive Officer Severin Schwan took to raise the bids for their last two large hostile takeovers. While investors expected Roche would use the same tactic this time, Illumina proved a harder sell, said Marc Booty, who helps oversee more than $100 billion, including Roche shares at Pictet Asset Management Ltd.
“Ventana was the leader in its field and there was a scarcity of assets at the time,” Booty said. “With Genentech, they were already the majority owner, so it’s apples and oranges. With Illumina, it’s the first technology that can be commercialized, but it’s not the only game in town.”
Roche probably won’t try to buy another gene-sequencing company, said Martin Voegtli, an analyst at Kepler Capital Markets in Zurich.
No Alternative Purchases
“We won’t see that in the near future,” Voegtli said in an interview, adding that Roche may seek collaborations instead. “They’ve already screened the landscape, they saw that Illumina has come up with the most interesting and advanced technology, so they would lose quite a bit of reputation if they just turned around and bought something else.”
Roche said its offer represented a premium of 88 percent over Illumina’s closing stock price of $27.17 on Dec. 21, the day before market rumors about a potential transaction drove Illumina’s stock price higher. Illumina yesterday said it was pleased that Roche won’t extend the bid, which the U.S. company had called “grossly inadequate.”
Roche’s effort to use a proxy fight to force negotiations ended yesterday when Illumina won the support of shareholders for its slate of directors, based on preliminary estimates at the company’s annual meeting in New York. Shareholders also rejected Roche’s attempt to expand Illumina’s board to 11 from nine members.
‘Could Fit in Here’
“It would have given them an edge as diagnostic paradigms evolved, but that was a 5- to 10-year view,” Booty said. “This was a ‘this could fit in here and maintains our competitive edge in the commercial lab space’ as opposed to a ‘we need this to plug a hole now.’”
Roche may return with its $51-a-share offer if things don’t go well for Illumina over next year, said Bryan Brokmeier from Maxim Group.
“I don’t think Roche has completely given up,” Brokmeier said. “They may come back with an offer if Illumina shares don’t move higher and shareholders see that they shouldn’t have walked away, or if Illumina comes out with better news on its pipeline and greater information.”
Booty, the Roche investor, said it’s unlikely Illumina investors would warm to Roche’s offer after maintaining it undervalued the company.
“I’m happy to see Roche walk away,” Booty said. “In the low 50s, it was a workable deal but it had created an overhang, and now focus can return to the underlying business.”
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