PropThink: ILMN Up On Roche Take-Out Re-Emergence; LIFE To Weaken

By David Moskowitz

Major Drug and Diagnostics company, Roche Holdings RHBBY appears to be coming back to the table to take another run at acquiring Illumina ILMN, according to a report from the London Times. Recall that Roche initially offered $44.50 per share for ILMN then raised its bid to $51.00 before the parties walked away from the table in April, after Illumina, a leader in high-end gene sequencing, rejected Roche's offer. Since then, analysts have speculated that because Roche is looking for a gene sequencing business, Life Technologies LIFE may be Roche's next target. In addition, hedge fund Paulson & Co. recently disclosed a large position in LIFE, fueling speculation that LIFE could be sold to Roche. As a result, today's news from the London Times could remove the take-out premium in LIFE.

The issue is that ILMN fits particularly well with Roche, and fills a gap that Roche is looking for in the research-based gene sequencing market. ILMN is a leader in that market with the largest installed base of sequencing equipment and a steady flow of revenue from reagents (disposable chemicals used in the sequencing process) sold to users of ILMN machines. LIFE's current platform (called 'SOLiD') is viewed to be inferior to ILMN's and has not gained the same level of traction with research institutions. LIFE hopes to gain that traction with its new sequencing technology (the 'Ion' line), but ILMN's large following and the ability to continue leveraging the installed infrastructure may make LIFE's efforts more difficult. Should Roche actively pursue ILMN, as the news implies, this confirms the thesis that LIFE may have more trouble expanding its share of the market. Roche has a history of "signaling" acquisitions, so the news today is likely more of a planned leak, hence our expectation that ILMN will get the new, higher bid. Expect ILMN to continue to trade toward the $60 level, with LIFE giving up some recent gains as take out speculation for that name should cool.

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