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Roche's Illumina Bid May Start War

Meanwhile, Roche's bid provided a windfall to Illumina competitors who are developing genetic sequencing machinery for research labs to study cancer tumors that may assist treatments for individuals as costs and sequencing times come down.

The stocks of Illumina's competitors Life Technologies (LIFE), Pacific Biosciences of California (PACB) and Complete Genomics (GNOM) surged roughly 3%, 15% and 23% respectively. Illumina and its competitors may bring sequencing time horizons down from weeks and even months to just a day, potentially lowering costs enough to make them increasingly affordable for patient care.

"[We] expect other stocks with direct exposure to sequencing (Life Technologies, Pacific Biosciences of California and Complete Genomics) will enjoy a sympathetic boost," wrote Leerink Swann analyst Dan Leonard in a note reacting to Roche's bid. However, Leonard tempers expectations of an M&A wave. "I don't think any of the companies I mentioned in the note are going to get an offer in a near term," said Leonard in a follow up conversation. Instead, he believes that Roche's interest is in Illumina cause for investors to reevaluate the growth prospects of the sequencing market.

Putting aside a potential new bidder for Illumina, Roche's bid could rise on simple valuation concerns. Jefferies analyst Jeffery Holford said in a Jan. 25 note that while Illumina's bid makes strategic sense, the $44.50 price is "opportunistic" and will likely need to be increased. JPMorgan analysts increased their price target for Illumina's shares by 60% to $70 a share, calling the bid too low for a technology leader in an open-ended market like genetic sequencing machinery.

"We believe the offer price underappreciates the [free cash flow] generation by the company," adds Wedbush Securities analyst Zarak Khurshid in a note upgrading Illumina's price target to $50 a share from $35.

Analysts currently give Illumina a price target of $41.91 a share, according to consensus estimates polled by Bloomberg. The company is expected to earn 28 cents in earnings per share when it reports its fourth quarter earnings on Jan. 31, according to estimates compiled by "Zacks. In its previous two quarters, Illumina missed Zacks consensus earnings estimates.

Presently, Roche is willing to pay a significant premium for Illumina's sequencing machinery, in spite of slowing earnings. The offer values Illumina at 32 times its 2012 profit estimates of $1.39 a share, according to Bloomberg. Nevertheless, that bid is below Illumina's historical three year average of 38 times earnings, making the firm's intrinsic value closer to $70 a share, according to William Blair analysts.

Illumina's board will now need to review Roche's offer and recommend action for shareholders, the company said in a statement. Goldman Sachs and Bank of America Merrill Lynch are acting as financial advisers to Illumina. Greenhill & Co. and Citigroup are Roche's financial advisers

-- Written by Antoine Gara in New York

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