All eyes in San Diego’s life science industry are on Illumina Inc. The La Jolla-based genetic analysis company is the target of a $5.7 billion hostile takeover bid from Swiss drugmaker Roche Holding AG.
Illumina, which employs more than 2,300 people locally, is set to formally respond to Roche’s unsolicited tender offer this week. In the meantime, Illumina CEO Jay Flatley has urged shareholders to hold tight while the board evaluates the proposal.
Roche on Jan. 27 began a tender offer to buy all of Illumina’s outstanding stock for $44.50 per share in cash — a 64 percent premium over Illumina’s stock price on Dec. 21, the day before market rumors about a potential transaction between Roche and Illumina drove up Illumina’s stock price.
The deal would strengthen Roche’s position in the life science and diagnostics markets, said Daniel O’Day, chief operating officer of Roche’s Diagnostics Division, giving the company an edge in developing drugs that are tailored to a patient’s unique genetic makeup.
With Illumina’s DNA-analysis prowess, the combined company could “help enable the discovery of complex new biomarkers improving drug discovery and the selection of patients most likely to respond to a targeted treatment,” O’Day said.
Maintain the Brand
Because Illumina is one of San Diego’s largest biotech brands — and its No. 1 biotech employer by employee head count — many observers wonder what would happen to the company’s name and its workers if Roche takes ownership.
Roche Chairman Franz B. Humer offered some insights in a letter to Flatley on Jan. 25, which he made public on the Roche website.
Roche would combine its existing Applied Science business with Illumina and move the division’s headquarters to San Diego, he said; those operations are currently based in Penzberg, Germany.
“Roche contemplates continued employment of Illumina’s management and employees following the consummation of a transaction and we are prepared to work with you to develop mutually satisfactory employment arrangements,” Humer said in the letter. “We intend to continue the Illumina legacy within the Roche Diagnostics Division, and to maintain the Illumina brand.”
Duane J. Roth, CEO at San Diego technology and life sciences organization Connect, said it makes sense for Roche to keep Illumina in San Diego. “At Illumina, the expertise is really in the people who work there,” Roth said.
“This is much different than a company coming in and buying a product, and it’s different from previous local examples when there have been mergers of like companies,” he said. “When the asset is very deep and broad, like it is with Illumina, the acquiring company is much less likely to want to move it someplace else.”
He compared the potential deal to Mountain View-based Intuit Inc.’s 1993 acquisition of TurboTax. Intuit kept the tax software operations based in San Diego.
Sweetening the Deal
Nearly a week after announcing its bid, and with Illumina still resisting, Roche came forward with a plan to take control of Illumina’s board of directors by increasing the board size and nominating a slate of independent directors that could be elected at Illumina’s upcoming annual meeting.
“Despite our repeated attempts, Illumina has been unwilling to participate in substantive discussions regarding a negotiated transaction,” Roche Group CEO Severin Schwan said in a Jan. 31 statement.
Schwan has remained publicly confident that the acquisition will happen, even as analysts predict the company may have to up the ante or possibly compete with other takeover bids. So far, no other company has stepped forward to make an offer on Illumina.
Peter McDonald of New York-based equity research firm Auriga USA LLC is among the analysts who say Roche’s $44.50-per-share offer is likely just a starting point. “We expect Roche’s offer will need to be increased,” he said, noting that Roche needs Illumina to gain a technical edge in the diagnostics space.
Roche has gone hostile before in diagnostics with its 2008 acquisition of Tucson, Ariz.-based Ventana Medical Systems Inc., a medical test maker, McDonald said. In that case, Roche initially offered $75 per share and ultimately boosted it to $89.50, for a total of $3.1 billion.
With Illumina, he said per-share offer could be valued at about $57, citing a recent diagnostic acquisition by publicly held Thermo Fisher Scientific, based in Waltham, Mass.
“We believe Roche’s offer is inadequate as it does not accurately value (Illumina’s) near term growth opportunities,” or the potential upside from emerging opportunities for diagnostics in the clinical setting, McDonald said.
Illumuna shares, which trade on Nasdaq under the symbol ILMN, opened on Feb. 2 at $51.58 — a 37 percent increase over the closing price of $37.68 on Jan. 25, the day that Roche announced its takeover plan.
Even if Illumina becomes part of a global pharmaceutical company, Roth said that the company would continue to play a big part in making San Diego a center for genomic medicine. “Illumina and Life Technologies are the two world leaders in (DNA analysis) equipment, and we have the J. Craig Venter Institute,” he said. “San Diego has the most expertise in this area.”
