Illumina Wins One and Loses One


Sometimes you win, and sometimes you lose. Genetic sequencing systems maker Illumina experienced a taste of both over the last couple of days. The company announced today that it will buy Verinata Health. That's the win, but what about the loss? Roche Holding AG appears to be walking away from a possible acquisition of Illumina.

No deal
The bigger news by far relates to Roche's decision. Illumina's stock fell more than 7% after a Swiss newspaper, SonntagsZeitung, reported that Roche was no longer interested in an acquisition.

According to SonntagsZeitung, Roche chairman Franz Humer stated that Illumina was making "totally excessive price demands." Because the two parties couldn't agree to terms, Roche opted to walk away after pursuing Illumina for around a year.

Anticipation of a deal had driven shares of Illumina up over the past few months. Illumina spurned a $51 per share bid from Roche in April, prompting expectations that the ultimate buyout could be at a significantly higher price. Last month, Swiss newspaper L'Agefi reported that the two companies had agreed to a $66 per share acquisition. That deal didn't materialize, however.

The deal that did materialize is with Verinata Health, a provider of non-invasive tests for identifying fetal chromosomal abnormalities. Illumina is buying the company for $350 million up front and up to $100 million in milestone payments.

With the Verinata acquisition, Illumina gains access to its Verifi prenatal test for high-risk pregancies. This prenatal test is used to detect several chromosomal abnormalities, including Down syndrome, Edwards syndrome, and Patau syndrome.

Verinata is the second acquisition for Illumina in the past four months. In September, the company announced its purchase of BlueGnome, which makes tests for finding genetic abnormalities related to developmental delay, cancer, and infertility.

Looking ahead
First, the bad news. Illumina's tactic of holding out for a higher price definitely appears to have backfired. Although at least one analyst thinks that Roche might still return to strike a deal, those odds are lowered now.

The greater likelihood could be that Roche targets another company. Roche's chairman was quoted as saying that "Illumina was a 'nice to have' and not a 'must have' for us. There are several alternatives to get hold of gene-sequencing technology."

Affymetrix , Life Technologies , Luminex and Pacific Biosciences of California are potential prospects that Roche might consider. However, all four are much smaller than Illumina.

The good news is that Illumina appears to have made a smart move with the Verinata buy. Verinata's prenatal tests should be a good fit with Illumina's product line and company direction. Illumina expects the acquisition to hit 2013 earnings by $0.20 per share but be accretive beginning in 2014.

Unfortunately, the market won't place much emphasis on the Verinata deal for now. The sting from Roche walking away from bargaining hurts too much. Everybody wins some and loses some. However, it's always better when the win is bigger than the loss. That's not the case for Illumina this time.

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