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Illumina bid: A checkup on Roche's resolve

The logo of Swiss pharmaceutical company Roche is pictured on the company's headquarters in Basel.

Christian Hartmann/Reuters

Equipment that maps human genomes is rapidly becoming faster and cheaper; before too long the technology may be commonplace in hospitals. That's why Roche, the Swiss drug maker, is preparing a hostile $5.7-billion (U.S.) cash bid for Illumina, the Nasdaq-listed market leader in gene-sequencing.

Illumina's stock quickly traded as much as 22-per-cent above Roche's mooted $44.50-a-share bid on Jan. 25, suggesting the market considers it merely a sighting shot. That's reasonable. A predator rarely starts with its best bid. Roche has cash in abundance, and far-sighted family shareholders. And an auction could break out, if medical technology heavyweights, such as General Electric, are tempted to counterbid.

Chief executive officer Severin Schwan insists this is a "full and fair" offer. But the same phrase was used to describe two big previous bids, for Genentech and Ventana. Both were subsequently sweetened, by nearly 20 per cent in Ventana's case. Like Illumina, Ventana was a U.S.-focused diagnostics firm that Roche wanted to take global.

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The offer equates to 30 times Illumina's 2012 earnings, and a 64-per-cent premium to the closing price on Dec. 21 – the day before Dr. Schwan's own talkativeness helped boost the stock. But investors and directors are likely to focus on the skinnier 18-per-cent uplift versus Jan. 24's close, and on the $76 peak the shares reached as recently as June.

Moreover, while Roche would lessen Illumina's reliance on universities and government labs, the firm's current dependence on this customer base means cutbacks in state funding have walloped its stock. And so Roche's salvo is well below Illumina's recent average price-to-earnings ratio. Over the past two years, Starmine data show its stock traded at a median 38 times. Applying that ratio implies a takeout at about $56.20 – 26 per cent above the current offer and more than double Dec. 21's close. Roche's determination to dominate gene-sequencing will be thoroughly tested.

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