Roche’s Illumina Bid May Spur Buying in DNA Test Land Grab

Roches Illumina Bid May Spur Buying in DNA Test Land Grab
The headquarters of Roche AG stand in Basel, Switzerland. Photographer: Adrian Moser/Bloomberg

Less than 10 years after the first human genome was decoded, Roche Holding AG’s hostile $5.7 billion bid for Illumina Inc. may spark additional deals as companies race to bring DNA scanning into routine medical use.

Illumina competes with Life Technologies Corp., Affymetrix Inc. and other companies to sell gene-decoding machines that are just starting to be used to tailor therapies for patients with cancer and inherited diseases. While scientific excitement around genome sequencing is high, the companies’ shares have plummeted over the last year because their target customers are mostly scientists dependent on grants in a tough economy.

Getting the technology out of the lab and into doctors’ offices and hospitals could vastly expand the existing $1.5 billion market for gene sequencing machines, industry officials and analysts said.

“This is going to be an enormous opportunity, and now you see it unfolding,” said Greg Lucier, chief executive officer of Life Technologies, based in Carlsbad, California, in a telephone interview. The bid Roche is an acknowledgment that DNA mapping is key to the future of diagnostics, particularly involving its use in cancer treatment, he said.

Illumina today adopted a so-called poison-pill takeover defense in which shareholders will receive one preferred stock purchase right as a dividend for each common share held as of the close of business on Feb. 6.

The San Diego-based company fell 4.5 percent to $52.65 in New York trading. Roche, based in Basel, Switzerland, rose less than 1 percent to 160.20 Swiss francs in Zurich.

‘Unwilling to Participate’

Roche made its hostile offer directly to Illumina shareholders after saying the testing company was “unwilling to participate in substantive discussions,” according to a statement yesterday.

The rights agreement adopted today by Illumina can block a hostile bid by making it prohibitively expensive. Should Roche or another bidder own 15 percent or more of Illumina’s stock, other shareholders will be able to exercise the rights to buy new common stock, diluting the stake of the prospective bidder.

Before initial talk of a takeover attempt surfaced in December, the shares of Illumina -- which draws a third of its revenue from researchers funded by the National Institutes of Health -- had dropped 58 percent over 12 months. Life Technologies and Affymetrix also tumbled, leaving them as vulnerable as Illumina to buyout bids, said Bill Bonello, an analyst with RBC Capital Markets in Minneapolis.

‘Intensity M&A Angle’

“This will intensify the M&A angle people will look at with these stocks,” Ross Muken, an analyst with Deutsche Bank Securities Inc. in New York, said in a telephone interview.

The human genome was first sequenced in 2003. The market for machines that map DNA has been “fast-growing” over the last five years, said Daniel O’Day, chief operating officer of Roche’s diagnostics division, in a conference call yesterday.

“We expect that to continue into the future,” O’Day said. “Today, it is over a $1 billion marketplace, and we expect that to be over a $2 billion marketplace in 2015.”

The devices sold by Illumina, Life Technologies and Affymetrix search through DNA coding that contains the instructions for making all human cells. Scientists use the technology to build an understanding of how variations or mutations found by the machines contribute to disease.

Cancer Variations

This is particularly true in cancer, where variations can contribute to uncontrolled cell growth. Doctors want to use genetic data to aim cancer treatments precisely at these variations, and stop only diseased cells from growing. Genome sequencing is also helping doctors understand, diagnose and, in some cases, treat mysterious childhood diseases that had previously taken years to identify.

The National Human Genome Research Institute has allocated funds to determine how to integrate individuals’ genetic information into day-to-day clinical care issues, such as the appropriate dosing of drugs.

Already, U.S. regulators are working with drugmakers in approving cancer drugs tied to companion genetic tests. Pfizer Inc.’s crizotinib, a treatment for a form of lung cancer caused by a genetic defect, was approved in August along with a companion diagnostic made by a unit of Abbott Laboratories that determines whether a patient has the abnormal gene.

Roche, the world’s biggest developer of cancer medicines, has particular experience with gene-targeted therapies.

Herceptin, Zelboraf

The company sells the breast-cancer drug Herceptin, one of the first cancer medicines aimed only at a subset of patients whose tumors have a particular genetic abnormality. In August, it garnered U.S. regulatory approval for Zelboraf, a melanoma drug that works on patients whose tumors have a certain gene mutation. Roche also sells a companion test with Zelboraf.

While Roche may be a pioneer in its bid for Illumina, it isn’t clear that other drugmakers will seek to acquire similar companies unless they already have a toe in the business, said Les Funtleyder, a portfolio manager with Miller Tabak & Co. in New York, whose fund owns Illumina shares.

“It seems like a bit of a leap for a pharmaceutical company to get into a whole new line of business,” Funtleyder said in a telephone interview. “You don’t need a sequencer to develop a companion diagnostic; you just need the sequence. And you can outsource that.”

Funtleyder cited General Electric Co. and Abbott as companies with existing businesses that may consider a similar acquisition.

‘Best in Class’

With Illumina, Roche is “buying best in class,” said Peter Lawson, an analyst with Mizuho Securities in New York, by telephone. “Illumina’s one of the most interesting companies in this space. They’ve been serial innovators, they’ve been great acquirers of technology and great executors.”

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. Life Technologies said on the same day it had reached the same goal. The current Illumina machines can sequence five human genomes in 10 days, according to the company.

Erik Gordon, a professor at the Ross School of Business at the University of Michigan in Ann Arbor, sees Roche and Illumina as a perfect fit.

“On its own, Illumina will have trouble reaching the broader clinical markets for its devices and will remain dependent on the shaky government-funded markets,” Gordon said in an e-mail. ‘As part of Roche, it quickly gets through the door at clinics worldwide.”

At the same time, he said, “Roche gets another product to run through its sales channel.”

Harvard Geneticist

George Church, a Harvard Medical School geneticist who has founded and advised numerous companies in the industry, said Roche “probably had their eye on Illumina for a long time and were waiting for the price to come down. They knew it was a valuable company; why not buy it at its lowest point?”

The sequencing technology is moving so fast the Illumina technology may become quickly outmoded, said Craig Venter, who led a private team that sequenced one of the first two human genomes a decade ago and runs the J. Craig Venter Institute in Rockville, Maryland.

“I don’t understand why Roche would do this deal when the technology is changing so rapidly,” he said. “I am puzzled.”

When Venter was racing a government team to scan the first human genome, he needed 300 expensive sequencing machines in 100,000 square feet of lab space, he said. Now researchers can build a world-class facility with just 10 smaller desktop machines, he said.

Four Years Difference

“One of these new machines replaces 100 of our old machines four years ago,” he said.

Michael Pellini, chief executive officer of Foundation Medicine in Cambridge, Massachusetts, a company that sells a test looking at 200 cancer genes, said the research market for the machines is saturated while the far bigger market of potential routine medical use is just emerging.

“This technology has not crossed over into the clinical world in earnest,” Pellini said in a telephone interview. “That is the big disconnect.” Roche can help bridge the divide with its expertise in diagnostic tests, he said.

Roche’s pursuit of Illumina reflects the growing focus of health-care companies on personalized medicine, said Susan Clark, professor of medicine at the University of New South Wales, whose lab at the Garvan Institute in Sydney uses Illumina equipment to study cancer gene expression.

The challenge is to better match their cancer therapies with the specific patient populations who will be benefit most, she said. Faster DNA scanning technologies could help, she said.

“A lot of money has been spent by pharmaceutical companies to try to find designer drugs,” Clark said in an interview. “But with designer drugs, you need to know the population that they will target because they are so expensive.”

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