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Originally published Wednesday, January 25, 2012 at 9:44 AM

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Roche plans a tender offer for Illumina

Swiss drugmaker Roche plans to offer $5.7 billion for diagnostics company Illumina in a deal it says would accelerate routine clinical use of DNA testing.

The Associated Press

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Swiss drugmaker Roche plans to offer $5.7 billion for diagnostics company Illumina in a deal it says would accelerate routine clinical use of DNA testing.

Roche Holding AG said Wednesday buying Illumina Inc., which has rebuffed it, will strengthen its position in diagnostics because the companies' technologies are complementary.

Illumina's board Wednesday urged shareholders not to take action until it reviews the proposal and makes a recommendation.

The news sent Illumina's shares up 46 percent, or $17.46, to $55.15, well above the offer of $44.50 per share, implying that shareholders expect Roche to raise its price.

Roche's bid represents an 18 percent premium over Tuesday's closing price of $37.69 for Illumina shares. It's 64 percent higher than the last closing price before rumors surfaced in December that Roche was considering acquiring Illumina. That speculation boosted Illumina's stock price, but the shares have still lost about half of their value over the last 12 months.

Illumina, based in San Diego, makes systems that analyze an individual's DNA. It's expected that future breakthroughs will use that information to tailor treatments in ways that are especially effective for people with certain genes.

Roche, which has more than 80,000 employees and specializes in cancer diagnosis and diabetes management, said it has tried to negotiate a deal, but Illumina has declined to participate. Roche plans to nominate a slate of independent candidates for a majority of the seats on Illumina's board of directors and to propose measures for shareholders to consider at their 2012 annual meeting.

Roche has a history of success with hostile offers. It eventually acquired U.S. cancer drug maker Genentech in 2009 by forcing buyout talks with such an approach.

Illumina is the biggest gene sequencing company, with a market share of about 65 percent, according to Credit Suisse analyst Vamil Divan. Roche is a distant third with a share of about 15 percent, he said, behind Life Technologies Corp.

"Roche is the global leader in clinical diagnostics and would likely be able to accelerate the move of sequencing from the research setting to the clinical arena," Divan wrote in a research note.

Divan said it would make sense for Roche to buy Illumina, but noted that the price was "very low" and that Illumina shareholders who bought the stock last summer when it traded above $70 may be reluctant to sell for $44.50. He said Roche may have to raise its offer to around $60 per share to close the sale.

Illumina and Life Technologies are both getting ready to sell systems that can sequence a person's entire genome in about a day. Earlier this month, Illumina said it plans to start launch the HiSeq 2500 system in the second half of the year, and said the system can sequence a genome in 27 hours.

Life Technologies is planning to ask the Food and Drug Administration to approve its Ion Proton Sequencer this year. The Carlsbad, Calif., company said the Ion Proton will cost about $149,000 and will be able to sequence an individual genome for $1,000. It said older sequencing costs $5,000 to $10,000 and takes weeks or months. Illumina has not announced a price for the HiSeq 2500.

Roche CEO Severin Schwan said the company remains open to talking with Illumina and developing a joint strategy for the combined businesses. The deal will depend on a majority of Illumina shareholders tendering their stock, although Roche has yet to commence its offer.

If the buyout succeeds, Roche plans to move the headquarters for its applied science business to San Diego but maintain operations for the unit in Penzberg, Germany, where it's now based.

Roche Chairman Franz Humer said in a letter to Illumina President and CEO Jay Flatley that Roche hopes to retain Illumina's managers and employees. The company employs about 2,100 workers, according to FactSet.

Illumina's board confirmed last week that it wasn't interested in negotiating a deal, according to Humer's letter. It is scheduled to announce its fourth-quarter results and hold a conference call with investors on Tuesday.

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