Roche and Illumina to Remain Separate Entities

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Roche’s chairman Franz Humer has been quoted by a Swiss newspaper as saying that a deal with Illumina is “off the table”. Roche’s competitive position in sequencing remains weak, and we still see logic in the deal. However, we don’t think it is critical to Roche’s core strategy in the near term, and we do not expect a deal to happen at recently rumored (and exorbitant) prices.

Roche’s last official offer of $51 per share expired in April 2012 after the firm failed to make any headway with reconfiguring Illumina’s board. However, rumors resurfaced in December 2012 that the two firms were negotiating a much higher $66 per share price tag, which would imply a deal value of $8.1 billion.

In the near term, we don’t think Roche needs to bring leading sequencing technology from a firm such as Illumina into its fold. Roche’s core strategy ties to the development of personalized therapies that combine its leadership positions in oncology drug development and diagnostics; companion diagnostics today are still typically PCR-based (molecular diagnostics) or tissue-based. And while sequencing technology likely will supplant these methods in the long run, it is unclear whether Illumina’s technology will continue to dominate the market. In our opinion, Roche has time to decide whether to pay up for Illumina’s technology or take another gamble on a less established sequencing player, as it did with its $140 million acquisition of 454 Life Sciences in 2007.

Roche’s reorganization of its applied science business may improve its profitability slightly in the near term, but improvement in the firm’s competitive positioning in sequencing via in-house technology is only a long-term goal. The firm’s applied science business saw sales decline by 5% over the first nine months of 2012 at constant currencies, and its genomic analysis business (a subset of applied science that includes sequencing and microarrays) declined 21% over this period as industry headwinds in the academic setting and competitive pressure from players like Illumina weighed on results.

 

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