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Illumina Gains on Roche's Bid Rumor

RHHBY ILMN

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Once again the buyout rumor of Illumina Inc. (ILMN - Analyst Report) by Swiss drug maker Roche Holding AG (RHHBY - Analyst Report) cheered the investors to begin with an early Christmas celebration. Almost after a year of the historical hostile bid, the possibility of the deal was announced by a Swiss newspaper L’Agefi, according to a Bloomberg report on Thursday. Investors’ optimism helped this gene-sequencing company’s stock witness a single-day gain of 7.8% on yesterday’s close. 

According to the newspaper, Roche Holding may have agreed to buy Illumina at a price 48% higher than its original unsuccessful bid. Stating the information as reliable but not verified, the said newspaper quoted that both the companies may have agreed on the latest bid at a transaction price of $66.00 per share or an offer value of $8.1−$8.2 billion. According to the report, the official announcement could be made in the first half of January 2013.

Past Records

We note that Roche had made multiple efforts in the past to strike a deal with Illumina, with the intention to combine Illumina with its Applied Science business, thereby strengthening its current offerings in the Life Science market. However, the latter was always unwilling to participate in the substantive discussions.

This led Roche to commence a tender offer to purchase Illumina’s outstanding shares in January 2012, at an offer price of $44.50 per share (aggregate value $5.7 billion) in cash. In March, Roche further increased its offer price for Illumina’s shares to $51.00 (aggregate value $6.7 billion). However, Illumina declined the offer considering it grossly inadequate.

In this regard, in a request letter to Roche, Illumina clearly explained its current prominent position in the genomics and DNA sequencing technology industry with superior operational performance and financial success, which the company believes is worth more than Roche’s offer.

The company also emphasized on its leading position in the global next-generation sequencing market, where it has a 60% share. Moreover, the company estimated that over 90% of all sequencing output across the world is produced on Illumina instruments.

In this regard, the company also noted its steady performance over the past decade during which it had consistently outperformed analyst estimates of revenues and earnings per share (EPS). While revenues increased at a 10-year CAGR of 83%, non-GAAP EPS increased at a 5-year CAGR of 26%. Moreover, during the 10-year period, Illumina generated an 1129% return to its stockholders compared with a mere 16% gain in the S&P 500.

Our Take

Based on the past record and observing once again the steady fundamentals of Illumina along with its huge opportunities in the growing gene-sequencing market, we remain skeptical about the credibility of the acquisition news. However, the 48% rise in offer price may act as a huge impetus in this regard. We prefer to remain on the sidelines until more visibility is obtained.

Currently, Illumina and Roche both retain a short-term Zacks #3 Rank (Hold). Over the long term we are Neutral on both the stocks.

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