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In order to expand its footprint in the prenatal testing market, Illumina Inc. (ILMN - Analyst Report), a major developer of life science tools for large-scale genetic analysis, recently entered into a definitive agreement to acquire Verinata Health, Inc., a privately held company dedicated to non-invasive tests for the early identification of fetal chromosomal abnormalities. Under the terms of the agreement, Illumina will purchase the latter for $350 million along with an additional $100 million in milestone payments through 2015. Illumina expects to finance the transaction primarily with its cash in hand.

Illumina is optimistic about the deal, which when completed will grant the company the access to Verinata’s verifi prenatal test, the largest among the non-invasive prenatal tests (“NIPT”) available at present for high-risk pregnancies. Compared with other testing options, this verifi prenatal test works more efficiently with advanced technology to provide accurate aneuploidy detection, with the ability to look across the entire genome.

This is expected to help Illumina cater to the huge addressable NIPT market, which is estimated to be over $600 million in 2013, with projected domestic market growth of 1.5 million to 2 million tests per annum in the next five years. The company, with the occurrence of 500,000 high-risk pregnancies annually in the U.S. and an estimated 4 million pregnancies in total, is very much hopeful about its future growth in this niche. Also, based on the recent combined view of American College of Obstetrics and Gynecology (ACOG) and Society of Maternal and Fetal Medicine (SMFM) that recommended cell–free DNA prenatal testing as a first or second trimester option for women at increased risk of aneuploidy, Illumina expects higher adoption of NIPT going forward.

Although, Illumina expects this transaction to dilute its fiscal 2013 adjusted earnings by 20 cents per share, it will turn accretive from the beginning of 2014. Illumina expects to provide its fiscal 2013 guidance, including the impact of this transaction during the fourth quarter and fiscal year 2012 earnings call.

Notably, in September 2011, Illumina had entered into a multi-year supply agreement with Verinata, which the latter used to purchase Illumina's sequencing instruments and consumables for use in the commercialization of non-invasive prenatal testing for the detection of multiple aneuploidies.

The ongoing difficulties in obtaining research funding in the backdrop of continuing economic uncertainty have not been enough to deter Illumina from working on several growth avenues to improve its performance going forward. The company continues to demonstrate its strength in the genotyping market with its high margin next generation sequencing (NGS) platform. Over the past few quarters, it has made several acquisitions and entered into partnerships to tap this growing market.

Earlier in September 2012, the company acquired UK based BlueGnome Ltd., a provider of Cytogenetics and In Vitro Fertilization (IVF) screening solutions for genetic abnormalities associated with developmental delay, cancer and infertility. In the same month, the company entered into a strategic alliance with Partners HealthCare, a healthcare system developed by the Brigham and Women’s Hospital, and Massachusetts General Hospital in order to develop improved infrastructure and networking tools for the interpretation and reporting of genetic sequencing data.

The company also entered into a partnership with Siemens Healthcare Diagnostics to use the MiSeq platform for Siemens’ molecular HIV tests. Furthermore, the company expanded its Genome Network with the inclusion of the British Columbia Cancer Agency to its existing list. Illumina experiences tough competition from players like Life Technologies and Thermo Fisher Scientific (TMO - Analyst Report), among others.

Currently, Illumina retains a Zacks #3 Rank (short-term Hold). Over the long term, we have a ‘Neutral’ recommendation on the stock.

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