DNA in Play as Life Technologies Joins Illumina Watch

DNA in Play as Life Technologies Joins Illumina Watch

Roche Holding AG’s pursuit of
Illumina Inc. is putting companies from Life Technologies Corp.
to Genomic Health Inc. in play as health-care providers turn to
DNA to tailor treatments for cancer and inherited diseases.
Life Technologies, which sells for less relative to 2012
earnings than 95 percent of U.S. life-science equipment makers,
may be targeted for a takeover as it competes with Illumina to
introduce a faster, cheaper gene-sequencing instrument, said
Macquarie Group Ltd. Debt-free Genomic Health, the provider of a
genetic test for breast cancer, may also lure buyers, JMP
Securities said, while genomic-analysis tools maker Affymetrix
Inc. would be the cheapest company to acquire relative to free
cash flow.
Roche’s $5.7 billion hostile bid last month to gain
Illumina’s technology aimed at parsing the building blocks of
life in one day may spur a series of further deals, according to
Deutsche Bank AG. With doctors increasingly looking to DNA to
diagnose mysterious childhood diseases and aim treatments
precisely at genetic variations that contribute to cell growth
in cancer patients, General Electric Co., Siemens AG and
Novartis AG may be interested buyers, according to Macquarie.
“Roche’s hostile bid for Illumina sparked a lot of
interest in the genetic sequencing space,” Alex Morozov, a
Chicago-based analyst at Morningstar Inc., said in a telephone
interview. Buyers could “look to supplement their internal R&D
with external candidates, especially if they see something that
could potentially be promising,” he said.

DNA Coding

Jaime Rupert, a spokeswoman for Carlsbad, California-based
Life Technologies, Emily Faucette for Redwood City, California-
based Genomic Health, and Doug Farrell of Santa Clara,
California-based Affymetrix, declined to comment on takeover
speculation.
Roche, the world’s biggest maker of cancer drugs, took its
takeover offer directly to shareholders after San Diego-based
Illumina refused to enter talks. Illumina’s board then rejected
the hostile bid as “grossly inadequate.”
Illumina closed 16 percent above the $44.50 a share
proposal last week, indicating traders who profit from
acquisitions are betting Basel, Switzerland-based Roche will
increase its takeover bid. Roche wants to transition Illumina’s
gene-mapping technology into routine medical use where it can
potentially target medicines toward individual patients.
Getting the technology out of the lab and into hospitals
and doctors’ offices will help drive growth in the $1.5 billion
market for gene-sequencing machines. The devices search through
DNA coding that contains the instructions for making all human
cells. Scientists are then able to identify variations or
mutations and figure out how they contribute to disease.

Life Technologies

“We’ve seen these types of cycles before within the life
science and diagnostics group, where you’ve seen one significant
M&A event kick off a series of other transactions or
acquisitions,” Ross Muken, an analyst with Deutsche Bank in New
York, said in a phone interview. “This space is not devoid of
targets.”
The offer for Illumina “bodes especially well” for Life
Technologies because it makes machines that compete with
Illumina’s DNA sequencers, Bill Bonello, an analyst with RBC
Capital Markets in Minneapolis, wrote in a Jan. 25 report. The
company makes Ion Torrent desktop-sized machines, designed to be
less expensive and simpler to use than competing products, Chief
Executive Officer Greg Lucier said in an interview last year.
“Ion Torrent is Illumina’s most formidable competitor in
next-generation sequencing,” Alastair Mackay, an analyst with
GARP Research & Securities Co. in Baltimore, said in a phone
interview. “Ion Torrent’s sales are growing very rapidly.”

‘Only Option’

The $8.2 billion company is competing with Illumina to
develop the first machine that can parse DNA in one day, rather
than weeks or months. Both companies announced Jan. 10 they’d
built machines with such capabilities.
If the bid for Illumina succeeds, the “only option” for
Roche’s competitors in diagnostics may be to buy Life
Technologies, Jonathan Groberg, an analyst with Macquarie in New
York, said in a phone interview.
Still, Life Technologies fell 7.8 percent to $45.92 on Feb.
17 after Oxford Nanopore Technologies Ltd., which is entering
the gene-sequencing race with a new portable device that will
allow people to analyze DNA on the go, presented data at a
conference in Florida. While potential buyers have approached
Oxford, England-based Oxford Nanopore, the closely held company
hasn’t pursued any offers, CEO Gordon Sanghera in a phone
interview last week. Illumina fell 3.9 percent to $51.82 the
same day.

Cheap Earnings

While Life Technologies’ laboratory supplies and tools for
forensic and food-safety work make it more diversified than
Illumina, the company is valued at 7.4 times projected earnings
before interest, taxes, depreciation and amortization for fiscal
2012, based on analysts’ estimates compiled by bg. That’s
cheaper than 20 of 21 life-science equipment makers in America
greater than $100 million for which estimated earnings are
available.
As drugmakers increasingly turn to diagnostic tools that
help determine if a patient is genetically susceptible to a
particular disease or would be more responsive to certain
treatments, GE, Siemens and Novartis may be interested in
acquiring companies with gene-sequencing technology, said
Macquarie’s Groberg.
“There’s no shortage of people that may be interested in
something like that,” Groberg said. “GE is very interested in
trying to figure out how to have that total value proposition
for delivering health care more efficiently to people. Siemens
has gotten into diagnostics and thinks sequencing is going to be
an important piece of the whole diagnostic market.”

GE, Siemens

Jeffrey DeMarrais, a spokesman for Fairfield, Connecticut-
based GE, Annie Seiple of Munich-based Siemens and Novartis’
Eric Althoff said the companies don’t comment on takeover
speculation.
GE, the world’s biggest maker of medical-imaging equipment,
said in November it’s seeking to double its $2.4 billion in
annual sales from divisions tied to molecular-based medicine
within three to five years.
The company plans opportunistic acquisitions this year,
limited in size to $1 billion to $3 billion, CEO Jeffrey Immelt
said at a shareholder meeting in New York on Dec. 13.
Siemens, Europe’s largest engineering company, is also
investing in personalized medicine. Under increased pressure to
keep up with competitors like Roche, the company said this month
it will work with HIV drugmaker ViiV Healthcare Ltd. and Tocagen
Inc., a developer of an experimental brain tumor treatment, to
create tests that will determine which patients will benefit
from the therapies.

Genomic Health

Joe Jimenez, CEO of Basel-based Novartis, said last month
that it intends to make “bolt-on” acquisitions to build scale
in smaller divisions such as diagnostics.
Genomic Health, which develops diagnostic tests based on
gene expression to personalize cancer therapies, may be “an
interesting acquisition candidate,” said Charles Duncan, an
analyst at JMP Securities in New York. Genomic Health makes a
gene test that helps identify which breast cancer patients will
benefit from chemotherapy.
The $839 million company, which also develops tests for
colon and other types of cancer, is projected to boost revenue
61 percent in the next three years from $206 million in 2011. It also has
no debt and more than $100 million in cash and short-term
investments, the data show.

‘Ability to Innovate’

“What they have demonstrated is an ability to innovate,”
Duncan said in a phone interview. The business is profitable and
“offering very attractive margins and revenue streams for some
of the companies that could be acquiring,” he said.
The risk in buying Genomic Health is that the deal wouldn’t
“rapidly become accretive” as the company invests in research
and development, said Mackay of GARP Research.
Affymetrix, which makes products that help diagnose cancers
earlier and personalize therapies based on a patient’s genetic
profile, may also become the subject of a takeover, said Bryan
Brokmeier, a New York-based analyst at Maxim Group LLC.
The $325 million company, whose first so-called genotyping
microarray was invented more than 20 years ago, trades at 6.4
times its cash from operations after deducting capital expenses. That’s the cheapest free cash
flow multiple among U.S. life science equipment companies with
market values greater than $100 million and less than a third of
the median 23 times for the group, the data show.

‘Year of Consolidation’

Still, the market for Affymetrix’s products is shrinking as
gene-sequencing technology becomes cheaper and easier to use,
said Macquarie’s Groberg. Eventually sequencing will replace DNA
microarrays, he said.
“Affymetrix is very cheap and they have a lot of cash,”
Maxim’s Brokmeier said in a phone interview. “Affymetrix has
invested a lot in microarrays and it’s a huge growth opportunity
in the near term. A lot of people do expect Affymetrix to be
acquired at some point in the next couple of years.”
Larger pharmaceutical or medical-device companies will
consider buying a diagnostics maker to generate growth and reach
new distribution channels, Spencer Nam, a Boston-based analyst
at ThinkEquity LLC, said in a phone interview.
“There’s an underlying theme right now that this year
could be a year of consolidation and M&A activity involving
diagnostics companies,” Nam said. “Now with Roche making a bid
for Illumina, everything is up in the air.”