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Illumina Shares Fall After Double Whammy

 January 07, 2013 12:40 PM

(By Mani) Shares of Illumina Inc. (NASDAQ: ILMN) are having a tough day as an overpaid acquisition and Roche's comments, which suggested that the Swiss giant may not buy Illumina in the near-term, have made investors anxious and sell the stock.

Roche Holding AG Chairman Franz Humer said, "Illumina is definitively off the table," according to an interview published yesterday in SonntagsZeitung.

San Diego, California-based Illumina has been shutting the door for any negotiation with Swiss-based Roche for a deal. The U.S. health care company has also been advising its shareholders not to accept the Switzerland Company's offer as it grossly undervalues the company.

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Since December 2011, Illumina is being linked with Roche, which would benefit from Illumina's technology in the genetic field helping the Swiss major in providing treatment suited for individual patients. In addition, the acquisition would have boosted Roche's presence in the life science space.

In January, Roche offered only $44.50 against rumors of $50 a share. This was later sweetened to $51 a share or approximately $6.7 billion on March 29. Roche's efforts to reach a negotiated price had failed before making unsolicited bid.

Last month, a Swiss newspaper, L'Agefi reported that the companies had agreed to a $66 a share deal. However, the paper tweeted Monday that Illumina asked for $68 a share on Dec. 28 and $75 a share on Jan. 3.

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"The other side wasn't ready to retreat from their totally excessive price demands. Roche doesn't do acquisitions that don't create added value. We have self- discipline," SonntagsZeitung reported citing Humer.

Meanwhile, Illumina would acquire Verinata Health for $350 million cash and up to $100 million in milestones. Verinata markets Verifi, a non-invasive prenatal test for fetal aneuploidy.

Illumina will have access to Verinata's verifi prenatal test, the broadest non-invasive prenatal test (NIPT) available today for high-risk pregnancies, and to the most comprehensive intellectual property portfolio in the non-invasive prenatal test industry.

As non-invasive prenatal testing is one of the most rapidly growing areas utilizing next-generation sequencing, Illumina is uniquely positioned to be at the forefront of providing superior prenatal testing options.

The company expects the deal to be 20 cents a share dilutive in 2013 and accretive thereafter as the acquisition is appropriately aggressive given the challenging macro in the academic markets.

"However, we see Verinata as the least differentiated of the T21 testing providers. Verinata has only a fraction of the 10% of the T21 market not controlled by Sequenom Inc. (NASDAQ: SQNM)," Oppenheimer analyst David Ferreiro said in a client note.

To facilitate the ultimate transition of sequencing into the clinic, Illumina is building out its diagnostics franchise.

"ILMN appears initially focused in the area of reproductive health. The company plans to continue to operate Verinata's CLIA/CAP lab, but seeks eventual FDA approval for a Verifi IVD test to hasten adoption," Ferreiro said.

However, in the current non-invasive prenatal test landscape. Sequenom is a first-mover with about 90 percent test share, with Ariosa controlling the majority of the remainder. Ariosa and Verinata have been attempting to compete on price, but seem to have had little market impact.

Illumina will need to invest significantly in infrastructure to compete effectively with Sequenom and shares to remain weak given this announcement coupled with comments from Roche Chairman Humor suggesting an Illumina bid was off the table.

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