By Meg Tirrell, Tara Lachapelle and Anjelica Tan
Feb. 21 (Bloomberg) -- Roche Holding AG’s pursuit of Illumina Inc. is putting companies from Life Technologies Corp. to Genomic Health Inc. in play as health-care providers turn to DNA to tailor treatments for cancer and inherited diseases.
Life Technologies, which sells for less relative to 2012 earnings than 95 percent of U.S. life-science equipment makers, may be targeted for a takeover as it competes with Illumina to introduce a faster, cheaper gene-sequencing instrument, said Macquarie Group Ltd. Debt-free Genomic Health, the provider of a genetic test for breast cancer, may also lure buyers, JMP Securities said, while genomic-analysis tools maker Affymetrix Inc. would be the cheapest company to acquire relative to free cash flow, according to data compiled by Bloomberg.
Roche’s $5.7 billion hostile bid last month to gain Illumina’s technology aimed at parsing the building blocks of life in one day may spur a series of further deals, according to Deutsche Bank AG. With doctors increasingly looking to DNA to diagnose mysterious childhood diseases and aim treatments precisely at genetic variations that contribute to cell growth in cancer patients, General Electric Co., Siemens AG and Novartis AG may be interested buyers, according to Macquarie.
“Roche’s hostile bid for Illumina sparked a lot of interest in the genetic sequencing space,” Alex Morozov, a Chicago-based analyst at Morningstar Inc., said in a telephone interview. Buyers could “look to supplement their internal R&D with external candidates, especially if they see something that could potentially be promising,” he said.
Jaime Rupert, a spokeswoman for Carlsbad, California-based Life Technologies, Emily Faucette for Redwood City, California-based Genomic Health, and Doug Farrell of Santa Clara, California-based Affymetrix, declined to comment on takeover speculation.
Roche, the world’s biggest maker of cancer drugs, took its takeover offer directly to shareholders after San Diego-based Illumina refused to enter talks. Illumina’s board then rejected the hostile bid as “grossly inadequate.”
Illumina closed 16 percent above the $44.50 a share proposal last week, indicating traders who profit from acquisitions are betting Basel, Switzerland-based Roche will increase its takeover bid. Roche wants to transition Illumina’s gene-mapping technology into routine medical use where it can potentially target medicines toward individual patients.
Getting the technology out of the lab and into hospitals and doctors’ offices will help drive growth in the $1.5 billion market for gene-sequencing machines. The devices search through DNA coding that contains the instructions for making all human cells. Scientists are then able to identify variations or mutations and figure out how they contribute to disease.
“We’ve seen these types of cycles before within the life science and diagnostics group, where you’ve seen one significant M&A event kick off a series of other transactions or acquisitions,” Ross Muken, an analyst with Deutsche Bank in New York, said in a phone interview. “This space is not devoid of targets.”
The offer for Illumina “bodes especially well” for Life Technologies because it makes machines that compete with Illumina’s DNA sequencers, Bill Bonello, an analyst with RBC Capital Markets in Minneapolis, wrote in a Jan. 25 report. The company makes Ion Torrent desktop-sized machines, designed to be less expensive and simpler to use than competing products, Chief Executive Officer Greg Lucier said in an interview last year.
“Ion Torrent is Illumina’s most formidable competitor in next-generation sequencing,” Alastair Mackay, an analyst with GARP Research & Securities Co. in Baltimore, said in a phone interview. “Ion Torrent’s sales are growing very rapidly.”
The $8.3 billion company is competing with Illumina to develop the first machine that can parse DNA in one day, rather than weeks or months. Both companies announced Jan. 10 they’d built machines with such capabilities.
If the bid for Illumina succeeds, the “only option” for Roche’s competitors in diagnostics may be to buy Life Technologies, Jonathan Groberg, an analyst with Macquarie in New York, said in a phone interview.
Still, Life Technologies fell 7.8 percent to $45.92 on Feb. 17 after Oxford Nanopore Technologies Ltd., which is entering the gene-sequencing race with a new portable device that will allow people to analyze DNA on the go, presented data at a conference in Florida. While potential buyers have approached Oxford, England-based Oxford Nanopore, the closely held company hasn’t pursued any offers, CEO Gordon Sanghera in a phone interview last week. Illumina fell 3.9 percent to $51.82 the same day.
While Life Technologies’ laboratory supplies and tools for forensic and food-safety work make it more diversified than Illumina, the company was valued Feb. 17 at 7.4 times projected earnings before interest, taxes, depreciation and amortization for fiscal 2012, based on analysts’ estimates compiled by Bloomberg. That’s cheaper than 20 of 21 life-science equipment makers in America greater than $100 million for which estimated earnings are available, data compiled by Bloomberg show.
Life Technologies rose 1.2 percent to $46.49 today after earlier climbing as much as 3.2 percent, the biggest intraday gain since Jan. 25.
As drugmakers increasingly turn to diagnostic tools that help determine if a patient is genetically susceptible to a particular disease or would be more responsive to certain treatments, GE, Siemens and Novartis may be interested in acquiring companies with gene-sequencing technology, said Macquarie’s Groberg.
“There’s no shortage of people that may be interested in something like that,” Groberg said. “GE is very interested in trying to figure out how to have that total value proposition for delivering health care more efficiently to people. Siemens has gotten into diagnostics and thinks sequencing is going to be an important piece of the whole diagnostic market.”
Jeffrey DeMarrais, a spokesman for Fairfield, Connecticut-based GE, Annie Seiple of Munich-based Siemens and Novartis’ Eric Althoff said the companies don’t comment on takeover speculation.
GE, the world’s biggest maker of medical-imaging equipment, said in November it’s seeking to double its $2.4 billion in annual sales from divisions tied to molecular-based medicine within three to five years.
The company plans opportunistic acquisitions this year, limited in size to $1 billion to $3 billion, CEO Jeffrey Immelt said at a shareholder meeting in New York on Dec. 13.
Siemens, Europe’s largest engineering company, is also investing in personalized medicine. Under increased pressure to keep up with competitors like Roche, the company said this month it will work with HIV drugmaker ViiV Healthcare Ltd. and Tocagen Inc., a developer of an experimental brain tumor treatment, to create tests that will determine which patients will benefit from the therapies.
Joe Jimenez, CEO of Basel-based Novartis, said last month that it intends to make “bolt-on” acquisitions to build scale in smaller divisions such as diagnostics.
Genomic Health, which develops diagnostic tests based on gene expression to personalize cancer therapies, may be “an interesting acquisition candidate,” said Charles Duncan, an analyst at JMP Securities in New York. Genomic Health makes a gene test that helps identify which breast cancer patients will benefit from chemotherapy.
The $830 million company, which also develops tests for colon and other types of cancer, is projected to boost revenue 61 percent in the next three years from $206 million in 2011, based on analysts’ estimates compiled by Bloomberg. It also has no debt and more than $100 million in cash and short-term investments, the data show.
‘Ability to Innovate’
“What they have demonstrated is an ability to innovate,” Duncan said in a phone interview. The business is profitable and “offering very attractive margins and revenue streams for some of the companies that could be acquiring,” he said.
The risk in buying Genomic Health is that the deal wouldn’t “rapidly become accretive” as the company invests in research and development, said Mackay of GARP Research.
Genomic Health fell 1 percent to $28.11 today.
Affymetrix, which makes products that help diagnose cancers earlier and personalize therapies based on a patient’s genetic profile, may also become the subject of a takeover, said Bryan Brokmeier, a New York-based analyst at Maxim Group LLC.
‘Year of Consolidation’
The $321 million company, whose first so-called genotyping microarray was invented more than 20 years ago, traded at 6.4 times its cash from operations after deducting capital expenses as of last week, data compiled by Bloomberg show. That’s the cheapest free cash flow multiple among U.S. life science equipment companies with market values greater than $100 million and less than a third of the median 23 times for the group, the data show.
Still, the market for Affymetrix’s products is shrinking as gene-sequencing technology becomes cheaper and easier to use, said Macquarie’s Groberg. Eventually sequencing will replace DNA microarrays, he said.
Affymetrix fell 1.1 percent to $4.56 today.
“Affymetrix is very cheap and they have a lot of cash,” Maxim’s Brokmeier said in a phone interview. “Affymetrix has invested a lot in microarrays and it’s a huge growth opportunity in the near term. A lot of people do expect Affymetrix to be acquired at some point in the next couple of years.”
Larger pharmaceutical or medical-device companies will consider buying a diagnostics maker to generate growth and reach new distribution channels, Spencer Nam, a Boston-based analyst at ThinkEquity LLC, said in a phone interview.
“There’s an underlying theme right now that this year could be a year of consolidation and M&A activity involving diagnostics companies,” Nam said. “Now with Roche making a bid for Illumina, everything is up in the air.”