Illumina May Want to Reconsider Roche Offer

November 02, 2012, 09:14 am ET, BY Barry C.- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Perhaps it’s in the best interests of shareholders if Illumina (NASDAQ:ILMN) reverses course and lets Roche Holding AG (OTC:RHHBY) know that it’s amenable to a buyout. Because maybe the only factor propping up the shares of Illumina, the San Diego-based maker of gene sequencing equipment, is the prospect of a better offer from the Swiss health care giant. Investors who want to learn exactly how to trade a stock like Illumina can get the information they need in our real time trading reports.

Roche has proposed purchasing Illumina in the past year, but up to now, to paraphrase the TV game show, “The Price Hasn’t Been Right.”  Despite the brush off, Roche isn’t giving up. The company said it still wants to add gene sequencing to its product portfolio and is looking at possible deals, according to an Oct. 16 article in Bloomberg.

Roche’s motivation is clear: access to a potentially huge and lucrative market. By 2017, the bioinformatics market size is expected to reach $9.1 billion. Considering genomic interpretation makes up the largest segment of bioinformatics, that means about $7.7 billion, will be spent in this specific area in 2017, said an article in Genetic Engineering and Biotechnology News earlier this year.

The hope is that by that time gene sequencing will become a mainstay in clinical testing – paid for by insurers – rather than what it is now, essentially a research tool.

Despite some shareholder disappointments in the past, Illumina remains the leading gene sequencing company. The company’s shares are up nearly 50 percent this year, but the stock price has declined about nine percent in the past three weeks, maybe due to its opposition to a marriage with Roche. Investor confidence also may have been hurt by an expected drop in government and academic funding, one reason the company “tightened” its 2012 guidance ranges for both revenue and EPS.

Will Roche look elsewhere after being rebuffed by Illumina, or is it just bluffing? One of its alternate targets could be Life Technologies (NASDAQ:LIFE), which is expected to earn $3.95 in 2012 on sales of nearly $3.8 billion. Shares of the Illumina neighbor are up more than 20 percent in 2012 and now trade just off the company’s 52-week high of $50.99.

Another industry competitor, Luminex (NASDAQ:LMNX) would certainly be cheaper than either Illumina or Life Technologies, given its substantially lower market cap. But Roche couldn’t like the fact that Luminex recently reported lower third-quarter earnings, missing estimates on both revenue and EPS.

Last, and undoubtedly least, is Affymetrix (NASDAQ:AFFX), which has been around since 1992. Once a high flier among gene sequencing companies, Affymetrix today trades at just above $3, a far cry from the $144 share price it commanded in 2000.

Considering all the options, it’s fairly certain that Roche isn’t giving up on buying Illumina. It seems to be a simple matter of when, not if, and at what price.

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