In an attempt to buy a leading position in the emerging field of DNA sequencing, Roche, a Basel, Switzerland-based drug giant, initiated a $5.7 billion tender offer to buy the outstanding shares of Illumina, the San Diego-based leader in genetic research equipment, despite rebuffs by Illumina's chief executive and board.
Franz Humer, Roche's chairman, released a public letter to Illumina chief executive and chairman Jay Flatley bemoaning "the lack of any substantive progress in our efforts to negotiate a business combination between Illumina and Roche" and a January 18 letter confirming a lack of interest by Illumina's board. While continuing to leave room for negotiations, Humer said, he was going directly to Illumina's shareholders with a $44.50 per share offer, a 19% premium to Illumina's share price on Tuesday. Humer wrote that Roche "contemplates continued employment" for Illumina's management and workers. But the offer is far below the $79 per share price that Illumina commanded less than a year ago. Reached by Forbes, Flatley declined to comment.
The price of sequencing every letter of DNA in a person's genome – essentially giving the recipe for that person's physical characteristics and health -- has dropped from more than a billion dollars a decade ago when researchers finished the human genome project to just $5,000 now. That is faster than the computer industry's famous Moore's law. Scientists and doctors are now using the technology to try to divine the causes of mysterious illnesses in some children and to try and pick drugs for cancer patients who have no other hope. (Both Steve Jobs and Christopher Hitchens had their tumor sequenced.)
"Interpreting genomes is about to absolutely explode," says David Goldstein, a Duke University researcher who is a paid advisor for Knome, a company that sells genetic analysis of the data that comes out of Illumina's machines.
The boys in Basel have been believers for a long time. Roche purchased 454 Life Sciences, the first company to make headway reducing the cost of sequencing genes, in 2007 for $155 million. That company, created by genetics entrepreneur Jonathan Rothberg, had dropped the cost of sequencing a human genome to about $500,000.
But Roche failed to keep Rothberg at the company he founded, and saw 454's technology eclipsed by Illumina. In 2006, Illumina chief executive Jay Flatley, who had already out-maneuvered rival Affymetrix to become the leading supplier of so-called DNA chips that allowed researchers to look at hundreds of genes at once, paid $600 million to purchase Solexa, a rival to 454 for sequencing every DNA letter in a person, plant, or microbe. Analysts at the time criticized the move as too expensive, but it paid off. Flatley foresaw a world where cancer patients and perhaps even infants would get their DNA sequenced, and in the meantime sold the company's $600,000 machines to researchers who consumed thousands of dollars more in chemicals to get DNA data. Funded by research grants, the market for DNA sequencing gear ballooned to a $1.5 billion market. Flatley recently estimated that 90% of the DNA that gets sequenced by researchers goes through an Illumina machine.
There has been competition, though. One new upstart, Pacific Biosciences, built its own DNA sequencers that had advantages in speed and in dealing with the genomes of never-before-deciphered organisms; it has failed to get much traction from scientists. Another, Complete Genomics, offered a factory-based approach where researchers could send samples away and not have to deal with their own machines.
The biggest competitor, though, has been Rothberg, the man Roche chased away. In 2010 Life Technologies, a maker of scientific equipment, purchased Rothberg's new company, Ion Torrent, for $725 million. The company's new DNA sequencer, the Personal Genome Machine, was based on semiconductor technology and cost only $50,000. Though it is far less powerful than Illumina's machine, Life has sold more than 900 PGMs. Earlier this month, Life announced plans to sell a $150,000 sequencer that would sequence a human genome for $1,000 in a day. Illumina, boasting more reliable data and a better track record, announced plans for a machine that would generate data at a somewhat higher cost; the machines would still cost $740,000.
Roche has now voiced new confidence that Illumina will maintain its lead – and that the market for DNA sequencing technology is about to take off. It's understandable why Flatley and his board wouldn't see Roche's offer as a good deal. Illumina's stock plummeted as a result of fear that the budget of the National Institutes of Health will fall. If the medical market is approaching, even slowly, that may not matter. Flatley, who built Illumina into a biotech powerhouse in the face of many doubters, probably also doesn't relish the possibility that his company could be the next 454, which went from leader to also-ran.
The deal also, in some ways, resembles Roche's $47 billion purchase of Genentech, the South San Francisco firm that for years defined the U.S. biotechnology industry. That deal did result in a flight of executives and scientists, but Roche has maintained its hold on Genentech's drugs and many of its valuable products. And, despite resistance from Genentech, eventually the deal did get done.
