Roche Holding AG
Gene sequencing is central to personalised medicine, which allows scientists to predict a patient's response to a particular drug, both during clinical practice and in drug trials.
Roche is already the world's largest maker of cancer drugs, where gene analysis is progressing fastest, as well as a major maker of diagnostic tests.
This ... will help Roche sustain its leadership position in targeted therapies, which we consider as highly promising, said Bryan Garnier analysts in a research note.
But they added a deal would probably be neutral to earnings in the first year of ownership at the current offer price, which is 18 percent above Illumina's closing price on Tuesday and over 60 percent above the level before rumours of a bid started in mid-December, and that Roche might have to raise its offer to secure a deal.
Roche Chief Executive Severin Schwan said the company had no intention of raising its offer for the San Diego-based group that was founded in 1998 and employs just over 2,000 people.
A top executive at another large pharmaceutical group told Reuters that while the Illumina business fits Roche in a way it would not with another drug major, the Swiss group will probably end up paying more than $44.5 per share.
At 1456 GMT, Roche stock was down 3.5 percent at 159 Swiss francs, lagging a 1.5 percent drop in the European healthcare index <.SXDP> as some investors fretted over the cost of a deal. Illumina shares were up just over 43 percent at around 54 dollars.
UNWILLING TO TALK
Basel-based Roche said it would offer to buy Illumina for $44.50 a share in cash. Roche currently owns a very small number of Illumina shares, finance chief Alan Hippe said.
It plans to start a tender offer because Illumina was not willing to negotiate a transaction.
Roche has made multiple efforts to engage with Illumina in order to reach a negotiated transaction, but Illumina has been unwilling to participate in substantive discussions, it said.
Oddo Securities analysts described the offer as very generous, saying it equated to 22 times Illumina's forecast operating profit for 2011 at a time when diagnostics sector peers are trading at around 10 times forecast earnings.
However, Deutsche Bank analysts said Illumina's earnings were forecast to grow strongly in the coming years.
A deal, which would be Roche's largest since it bought the remaining stake in U.S. biotech group Genentech for nearly $47 billion, would be financed from available cash and borrowing under its credit facilities and would not require a financing condition, Roche said.
The company also said it would nominate a slate of independent candidates for election to Illumina's board.
It is our strong preference to enter into a negotiated transaction with Illumina, Roche's Schwan said.
Illumina urged shareholders take no action pending a recommendation from the board.
In 2008, Roche, with Schwan as its diagnostics head, overcame resistance from test maker Ventana Medical Systems to snap it up for $3.4 billion, a deal that was deemed as expensive at the time, but a good strategic fit.
Testing the waters with an unsolicited, low-end bid is a tactic Roche used in the Ventana deal, before increasing its original offer by 19 percent.
They came with an opportunistic offer to test the waters. If no one showed up, they would probably top up the bid to $55 to get a board recommendation. If their approach triggered a bidding war, Roche would have the financial fire power to trump any rival bid, said Lionel Melka, fund manager at Bernheim, Dreyfus & Co which owns Illumina's shares.
Pharma industry bankers say Abbott Laboratories
All these people are realistic bidders, they will surely have a look. But Roche is a tough competitor to go against, one pharma banker said.
Genome sequencing involves a large amount of data processing, so IT companies such as Google
Capital Research Global Investors, Baillie Gifford & Co, Sands Capital Management, Morgan Stanley Investment Management and Jennison Associates are the five biggest shareholders of Illumina, which, according to Reuters data based on filings, own about 44 percent of its outstanding shares.
Companies such as Illumina, Affymetrix
Shares of Illumina, which receives a significant portion of its revenue from research institutes that depend on government funding, have halved over the past six months after the company warned it expects the uncertainty in research funding to continue through at least the fourth quarter.
In the longer term, however, many analysts believe gene sequencing technology has the potential to revolutionise some areas of medicine, especially as the cost of the technology tumbles.
Earlier this month Ion Torrent, a division of Life Technologies, said it would sell a tabletop machine that is able
to sequence a person's whole genome for just $1,000.
Mapping the complete genome sequence of people with cancer or autism, for instance, may elucidate a disease's underlying genetic causes as well as possible ways to treat it.
Fourth-quarter figures are due from Illumina on January 31 and from Roche on February 1.
Roche said it has hired Greenhill & Co and Citigroup as financial advisers. Goldman, Sachs & Co and Bank of America Merrill Lynch are acting for Illumina.
(Additional reporting by Ben Hirschler, Deena Beasley and Katie Reid; Editing by Chris Wickham and Mark Potter)