Roche Caves on $6.7 Billion Illumina Offer (Update 1)

Updated to include additional analyst comments, share prices and added data throughout.

NEW YORK ( TheStreet) -- After extending a $5.7 billion January hostile bid for Illumina ( ILMN) multiple times in March, Roche has upped its bid for the genomics machinery company by 15% to $6.7 billion -- or $51 a share -- as many investors and analysts expected.

The proposal by Roche is its third hostile bid in the U.S. pharmaceuticals sector after taking a previous $46.8 billion offer for Genentech and a $3 billion bid for Ventana Medical Systems directly to shareholders. With Thursday's offer price increase, Roche has come back to the table with a higher bid in all three instances.

Still, Roche may need to add to its amended offer for Illumina.

"While we were expecting a raised offer, we were not expecting a raised bid so soon after the initial bid. We still anticipate a higher bid, potentially mid-year, to take advantage of anticipated weakness in the space surrounding 2013 National Institute of Health funding," wrote Mizuho Securities analyst Peter Lawson in a note reacting to the bid. Lawson gives Illumina shares a price target of $62.

"We view today's move as the next step, rather than the final step, in the process that we still ultimately believe will lead to a deal... The important question is whether or not the increased bid is enough to bring Illumina to the negotiating table and allow Roche to learn more about Illumina's closely guarded pipeline," noted JPMorgan analyst Tycho W. Peterson, who rated shares "overweight" with a $70 a share price target. Analysts give Illumina an average price target of $55.38, according to consensus estimates polled by Bloomberg.

For investors betting on a bid increase, Roche's new $51 a share offer price represents a relief, as the bid came up against multiple deadlines and Illumina enacted a "poison pill," which could have led to Roche's withdrawal. Investors will have until April 20 to tender their shares, Roche said in a Thursday statement. Separately, Illumina said that shareholders should take no action until the company's board reviews the bid and makes a recommendation.

In previous reviews, Illumina used a fairness opinion analysis by Goldman Sachs to prove to shareholders that the bid was underpriced.

When Roche first announced the offer on Jan. 25, Illumina shares rocketed past the $44.50 initial price to levels over $55 a share. However, as the takeover attempt dragged on, Illumina shares fell below $50 as some lost their confidence that a higher offer would emerge.

In afternoon trading, Illumina shares were up over 4% to $52.05. Year-to-date, Illumina shares are up over 60%, fueled by Roche's takeover interest, more optimism on the market for its genetic sequencing machinery and speculation that other drug giants could bid on the San Diego-based company.

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In a Thursday statement, Roche Chief Executive Severin Schwan said that the company increased its bid as a way to expedite the merger and help with negotiations, which appeared stalled earlier in March. "Based on our discussions with Illumina shareholders we have seen interest to accelerate the takeover process," said Schwan.

Analysts had called the January bid "opportunistic" and "undervalued," with many pointing to a higher eventual bid by Roche or a competing offer by healthcare giants like Siemens Healthcare ( SIE) and Johnson & Johnson ( JNJ), Abbott Laboratories ( ABT) and Becton, Dickinson ( BDX).

Risk arbitrage analysts at Makor said that the move was a first step to an eventual $55 a share takeover. In April, Illumina's annual shareholder meeting and Roche's now upped offer price will likely move the bid forward. Roche recently appointed a hostile slate of directors to Illumina's board. "These elections will clearly favor the bid from Roche," wrote Makor analysts, who expect a deal completion by mid-June.

The shares of Illumina and competitor genetic research machinery makers like Life Technologies ( LIFE) have been bolstered by high expectations for new equipment that can bring cancer research directly to patient treatments. Illumina is currently developing machinery to sequence human genomes in a day, bringing down the time horizon from weeks and even months, which should also lower costs.

In bidding for Illumina, Roche would acquire the leading sequencing specialist, which would also help the company's own drug research and development efforts. Currently Illumina has an over 50% market share in sequencing machinery, as the technology becomes a part of cancer patient treatment, in addition to medical research.

Still, there are risks to an acquisition.

Illumina shares were more than halved at points in 2011, as the continuation of research grants from large scale government funded efforts like the National Institute of Health came into question. The NIH and similar organizations account for a large portion of Illumina's customers, until it can market new machinery directly to hospitals and patients.

Earlier in the week, Columbia University filed a lawsuit against Illumina for alleged patent infringement five DNA sequencing patents that are material to the company's next-generation sequencing products.

The company earned 9 cents a share in its fourth quarter earnings on Jan. 31, missing estimates compiled by Zacks. In its previous two quarters, Illumina also missed Zacks consensus earnings estimates.

At a new bid price of roughly $6.7 billion, Roche's offer for Illumina represents the second largest U.S. targeted deal, according to data compiled by Bloomberg. That data shows that overall merger activity fell 14% this quarter from the fourth quarter of 2011, putting deals at the lowest level in 2.5 years.

For more on how deal and trading volumes may impact Wall Street earnings, see why there is a widening investment bank performance gap.

Goldman Sachs and Bank of America Merrill Lynch are acting as financial advisers to Illumina. Greenhill and Citigroup are Roche's financial advisers to Roche.

-- Written by Antoine Gara in New York