Illumina Win in Board Contest May Signal Long Roche Fight

Illumina Victory  May Signal Long Roche Battle
The headquarters of Illumina Inc. stands in San Diego. Source: Illumina Inc. via Bloomberg

An Illumina Inc. victory over hostile suitor Roche Holding AG for control of its board tomorrow may signal investors are in for a long takeover battle.

Roche, the world’s biggest maker of cancer medicines, has nominated six directors and proposed expanding the size of Illumina’s board to 11 from nine as it seeks to acquire the San Diego-based company for about $6.7 billion. Earlier this month, three advisory firms sided with Illumina, recommending votes for its four nominees including Chief Executive Officer Jay Flatley.

Illumina, which makes tools for mapping DNA, has twice rejected bids from the Swiss drugmaker, the latest valued at $51 a share. Roche said last week it won’t sweeten its offer again without starting talks, and the three-month fight may drag on if Illumina prevails tomorrow at its annual shareholder meeting in New York.

“Roche has tended to be very patient in the past,” Doug Schenkel, a Cowen & Co. analyst, said in an April 13 telephone interview, citing previous successful acquisitions. “Both Genentech and Ventana took the better part of a year from the initial bid to coming to an agreement. There’s some precedent to suggest this could last a long time.”

Illumina’s shares closed below Roche’s offer price last week for the first time since the bid was made as investors grew concerned the drugmaker would abandon the deal if Illumina didn’t agree to start discussions. The shares fell 2.1 percent to $44 at the close of New York trading.

Roche rose less than 1 percent to 160.70 Swiss francs in Zurich.

Losing Confidence

The decline shows investors don’t have a lot of confidence that Roche will win at Illumina’s annual meeting, said Alastair Mackay, an analyst with GARP Research & Securities Co. in Baltimore.

“Roche can posture and Roche can threaten, but at the end of the day they only have three choices,” Mackay said in a telephone interview last week. “Walk away, stick with the bid of $51 -- which, unless they have something up their sleeve at the shareholder meeting, will likely fail -- or raise their bid.”

Proxy-advisory firms including Institutional Shareholder Services said earlier this month that Illumina stockholders should vote for management’s nominees and reject Roche. If shareholders follow their advice, Roche may have to wait until the 2013 annual meeting to try again unless it increases its offer, said Les Funtleyder, a portfolio manager who helps oversee $100 million, including Illumina shares, at Miller Tabak & Co. in New York.

Wait Until Next Year

“If Illumina doesn’t allow Roche in to do due diligence, they may have to wait until next year’s board meeting to put their people on the board,” Funtleyder said in a telephone interview last week. “In theory, Roche could offer $100 a share and see what happens, but I don’t think that’s going to happen.”

Roche has said its size, experience and sales force will enable it to expand Illumina’s business into increased laboratory use, where the machines could help match the right cancer therapies with patients.

About 80 percent of sequencing revenue now comes from academic and government researchers, with the total market worth more than $2 billion, Cowen’s Schenkel wrote in a March research report. The cost of mapping DNA is falling as technology improves, with the expectation that by next year, second-generation machines will be able to sequence full human genomes in a day for less than $2,000, Schenkel wrote. Illumina dominates the next-generation sequencing market, he said.

Roche’s Message

“The combined capabilities of our two companies will accelerate the transition of sequencing into clinical and routine diagnostics,” Roche wrote April 11 in a letter to Illumina shareholders. “But this will take considerable time and the risks and uncertainties are real -- which make our $51 all-cash offer a very attractive one and a more than reasonable starting point for negotiations.”

The Basel, Switzerland-based drugmaker bought biotechnology company Genentech Inc. in March 2009, paying $46.8 billion for the 44 percent stake it didn’t already own to end an eight-month battle in which it raised its bid twice. Roche nabbed cancer-test maker Ventana Medical Systems Inc. in January 2008 for $3.4 billion after a seven-month struggle in which it sweetened its offer once.

The expectation that the Illumina conquest may follow suit has pushed some shareholders to drop the stock rather than hang on for a long wait. Dan Mahony, who manages $300 million at Polar Capital in London, bought Illumina immediately after Roche’s initial bid of $44.50 a share in January, expecting a sweetened offer. He said he sold his stake at the end of February after signs an agreement wouldn’t be reached quickly.

“Now I just wonder if people have tempered their expectations,” he said. “The market tends to be fairly accurate with these things. Even if you want to wait for a $55 to $60 offer, it’s going to take some time to come through.”

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