Analyst: The Better Desktop DNA Sequencer May Be Losing The Marketing War

Worthwhile read comparing DNA sequencer hardware sales: 

http://www.forbes.com/sites/matthewherper/2012/08/15/analyst-the-better-desktop-dna-sequencer-may-be-losing-the-marketing-war/

Sent from Pocket - Get it free!

Gen-Probe sale validates molecular future

Hologic, the "Woman's Health Company," announced today that they're betting the company on genomics.

Well, that's not exactly what HOLX announced, but practically speaking, when a $5B company with a mild amount of DX exposure decides to pay $3.75B to buy a nucleic acid testing firm (Gen-Probe), they're really betting the company on genomics.

I like the deal for both HOLX and GPRO - HOLX gets exposure to growing markets and technologies which nicely complement their core business. (Tthe combination of HOLX's focus on women's health and GPRO's HPV tests is a perfect fit.) GPRO - who's growth was slowing - gets a nice bump in valuation, and probably a good amount of independence.

It'll be interesting to see what becomes of the non-women's health applications of Gen-Probe. Will HOLX punt the cancer testing business to QGEN or Clarient (GE)? Since the deal is all-cash, HOLX might want to later de-lever by punting the cancer tests or other assets.

Two unfortunate side effects of the acquisition: Gen-Probe is/was the largest, most prominent molecular DX pure-play. With Gen-Probe losing its' independence, we're losing both a bellwether for MDX, and losing a buy-side specialist. Gen-Probe is/was in excellent position to commercialize interesting DX coming from smaller players, as is the case of their PCA3 product sourced from Diagnocure.

One other impression from the HOLX-GPRO deal: re-reading Roche's rationale for their pursuit of Illumina, it sure seems to me that Gen-Probe would have been a better fit for Roche instead of Illumina. I wonder if they'll try to top HOLX's offer. (Or maybe GE or Danaher will.)

Sequencing hardware: who's best?

An academic group ran similar experiments on Ion Torrent PGM, Illumina MiSeq, and 454 GS Jr DNA sequencers. And the winner was……….well, there was no clear winner - performance was differentiated by machine - the PGM was the highest throughput, MiSeq most accurate, and the 454 had the longest reads.

I think this is a problem because currently the incremental customers that represent sequencing moving from a niche to a mainstream activity are unlikely to have a full understanding of their needs. For example, while the team at the Broad Institute knows why they'd prefer machine 'A' over machine 'B', a typical pathology lab does not know enough to decide if they would get the most benefits from hardware producing the greatest accuracy or the longest reads? What's acceptable accuracy? I'd argue that the path lab at the University of Whatever can't answer these questions.

Until the answers here are more obvious, customer demand will be for a slice of a shared sequencing resource (a sequencing core) rather than for their own sequencing hardware, thus limiting the growth of the hardware market. (Though this is good news for Oxford Nanopore and other NGS hardware suppliers - the longer it takes for the market to mature, the more prospects who remain uncommitted to any certain hardware platform.)

Biotech needs more GE

My Dad sold industrial electrical supplies for GE, and from that exposure, I always thought that the drug discovery tools supply & services industry was similarly attractive to GE's for its' scale, business fit, customer base, and exposure to a growth market. (Many of GE's businesses can be described as supplying essential component technology to Fortune 500 business, be they jet engines, electrical transformers, or wind turbines.)

I had been saying that drug discovery was ripe for GE since 1998, when on the executive team at Upstate Biotechnology, at my suggestion, a GE acquisition was listed in our business plan as an exit scenario. In 2003, GE entered the drug discovery market by buying Amersham, and I felt vindicated, and hopeful that GE would continue investing in the drug discovery industry.

That generally hasn't happened, though things may be changing - GE today announced the acquisition of SeqWright, a Texas-based sequencing CRO.

(btw: a good overview of GE Healthcare businesses is available here.)

The press release for the SeqWright acquisition trumpets SeqWright's connection with GE's existing Clarient molecular diagnostics business. (Clarient having been acquired just a year and a half ago), but even together GE still only has its' toe in the molecular diagnostics water. (Especially since the always awesome World Map of High-Throughput Sequencers lists SeqWright as having only 3 machines - one each of 454, SOLiD, and HiSeq.)

The release also affirms that GE's business model in this space is SERVICE, not proprietary R&D/assay development. In other words, both GE and Roche have roughly similar M&A appetites in this space, but GE chose to buy modest capacity in SeqWright, while Roche wants to own an entire technology platform, if the Illumina deal were to close.

(Ironically(?), WSJ's coverage of the GE's acquisition of SeqWright says that Roche is a customer of SeqWright, which I'd bet wouldn't continue if Roche buys ILMN.)

The SeqWright deal reinforces GE's interest in the biotech industry (and more specifically, molecular medicine) not only as a validation statement, but for the fact that more big-league, results-oriented capital is being committed to biotech, as GE invested to generate tangible cash & EPS, whereas the majority of biotech investment is done to create speculative future value (and often only equity value, not cash-flow value.)

Let's face it: biotech needs more investors like GE, and more of their business mentality. GE's acquisition of SeqWright was, in effect, more capital voting for biotech businesses with customers and cash flow, as opposed to transformative technologies or "cool" tech platforms. VCs: why fund any technology company (i.e. company not developing leads) that you couldn't imagine selling to GE? As an example, consider a genetic engineering company like Amyris - sure, they can do proprietary biofuel R&D that might someday pay off, but isn't the highest NPV likely to come from selling the company's capabilities to generate cash flow?


One reason that GE hasn't been more active in the drug discovery industry is that there are not many acquisition targets available to provide scale. Only LIFE, QGEN, VWR, and ThermoFisher could add >$1B in annual revenue to GE, but in general, these companies have generally been valued at a price that would make difficult a non-dilutive acquisition for GE. Still, I can't ignore that LIFE CEO Greg Lucier is a GE-alum, and that QGEN would make a just about perfect complement to GE Healthcare's Life Sciences business.

I could also see GE getting involved in the pursuit of ILMN (it's the Amersham of 2012), but their lack of public involvement to date suggests to me that they either can't make the price work for them, or that GE invests in more predictable technology. (Why make a multi-billion dollar acquisition in Sanger sequencing if other tech platforms (like nanopore sequencing) might overtake Sanger tech?)

(btw: Roche upped their bid last week. ILMN didn't budge at all. I don't think this deal is getting done right now, but rather in 6-18 months time, after the ILMN board of directors experiences an unfavorable quarter.)

As for SeqWright, congrats to them and to any other CRO that manages to get liquid. Deal terms weren't announced, but if SeqWright was growing fast with the rest of the sequencing industry, and cash-flow positive, they probably got a decent price, though, on the flip side for GE, trading GE stock for an ongoing, competitive DNA sequencing lab is more EPS efficient and less risky than opening a lab using their own cash to buy equipment and hire staff, so there is a limit to what GE would pay. GE may have even made acquisition overtures to many sequencing CROs to see who would bite at the lowest price.

Let's hope that GE has a good experience with SeqWright, and further invests in the molecular medicine industry.

So you need some DNA sequencing? (pt 3 conclusion.)

I've stretched this topic out farther than intended, so I'll conclude directly:

-from looking at the map, there seems to be 4 types of sequencing centers, each with different strategies and hardware needs:

1) medium-large installations (Broad, BGI)
2) fee for service centers
3) genomic (academic) centers with a commitment to genomic research (5-10 sequencers.)
4) academic centers with a small exposure to genomics (1 or 2 sequencers.)

Each of these will have different rates of adoption of NGS technologies. Here's how I'd characterize each of these centers future behaviors:

#1) medium-large centers: all about throughput and cost, with less regard for specialized instruments or needs, these centers also already have a substantial investment in hardware and informatics, so the winning hardware providers will be the ones that plug in best into the existing hardware and informatics. It will be a whole lot easier to integrate the latest generation of Illumina technology than to pivot 90 degrees to integrate a novel technology.

I expect that the number of medium-to-large centers rises, as the cost/sequencer falls and the start-up cost of a new sequencing center falls. I don't know if research demand for such centers is here yet, but I think several institutions will launch ~$10M fundraising efforts for a new genomic research center, as much for their economic development/headline value as their scientific value. (Example: the former Ignite Institute, which landed at Fox Chase.)

2) fee for service centers: I selected the first 5 US service providers that I could think of (Asuragen, Beckman Coulter, Cofactor, Expression Analysis, Seqwright), and was surprised to see their total capacity was 26 sequencers among them. The absolute number could be outdated or inaccurate for a number of reasons, but the point is that the service centers aren't big consumers of technology. (I'd guess, though, that they run at higher capacity utilization than most academic sequencers.)

The fee-for-service centers also tend to have more than one technology platform in-house.  As demand grows, the fee-for-service centers will add capacity in a nimble, savvy, but serial fashion, spread among whichever technologies are requested by their customers, and which provider has the best performance/value proposition at any given time.

3) academic genomic research centers. much of the research at the genomic centers will be tied to clinical trials, so this group will be very sensitive to FDA approval of a sequencing device, and not very sensitive to throughput/performance though turnaround time may matter if the clinical trials are looking for the sequencing data to guide treatment. I'd expect this group to hang with the Illumina technology for the foreseeable future. They're the most likely platform to receive FDA approval. (Unfortunately, this isn't likely to happen soon, if the FDA approval of microarray platforms is any indication. As a forerunner to sequencing, Affy got their microarray platform approved by the FDA (in 2009?) for clinical diagnostic use, but I've heard that it wasn't easy, and the approval is not too broad.)

#4) small-time centers: the largest market in number but smallest in $$$. This market won't grow significantly until clinical adoption of DNA sequencing becomes widespread, and even then the biggest customer may be the pathology labs, not the bench researchers. In this case, I'd expect this category to largely adopt either the nanopore or Ion Torrent technology, as much for simplicity as for throughput and cost.


After this analysis, I am surprised that the opportunities for new platforms such as Oxford Nanopore are not as obvious. The newcomers may still be a success, but I think we're still a few years away from the inflection point in the growth of sequencing hardware.

The M&A game….

…..featuring Illumina + Roche again and an addendum to my post last week about the Affymetrix-eBioscience non-deal. What do these 2 deals have in common?

Luke Timmerman @ Xconomy has a good piece this week with 5 reasons why the Roche + Illumina deal isn't right for Illumina. I shared reason #6 in the comments:

• "…..because the touted “total solution” provided by a Roche + Illumina combination is a fairy tale. Illumina sells equipment. Roche sells drugs and diagnostics. What tiny bit of equipment that Roche sells (454) hasn’t done well. I don’t see how selling Illumina equipment makes Roche’s drug or diagnostics businesses any better. What “total solution” becomes enabled by the combo that isn’t possible by Roche just buying a roomful of Illumina (or someone else’s) sequencers?" 

What the ILMN-Roche and AFFX-eBiosciences deal have in common is that both deals are now an exercise in game theory. Consider ILMN's options:

1. Accept Roche's bid. (notgonnahappen. Roche's offer is ~$6 below the current price) 
2. Adjust the terms: wrestle for a higher bid from Roche or find another bidder to up the price. 
3. No deal. Win a proxy fight by making the stand-alone scenario more real and financially attractive. 

Likewise, consider eBioscience's options:

1. Accept AFFX's likely revised downward terms, though still rich, in order to allow AFFX to win debt financing of the acquisition. 
2. Adjust the terms by selling to another suitor, likely at a lower price than AFFX's rich offer. 
3. No deal. No liquidity for investors. 

Timmerman argues Illumina shareholders should vote to remain independent for largely qualitative reasons. Unfortunately, I think the decision to be made by shareholders is much more cold and quantitative: what's the better risk-adjusted net present value?

1. Roche's $44.50/share bid, (again, notgonnahappen.) 
2. a sweetened bid, or 
3. the capital gains in future years from selling ILMN shares after the company stock re-appreciates. 

Putting some #'s to #3. Using round figures, ILMN is at $50/share, and had a previous high of $80/share. Holding ILMN stock for 2 years to see $30 in appreciation would require an annual return to equity holders of 26.5% - a not unreasonable scenario, particularly in such a growing industry. The problem is, the $30 gain offered in the future (over two years) can be made a lot less relevant with a sweetened bid 'now' by Roche.

What if Roche offered an additional $2B, which would raise the ILMN offer to $60/share, or about a third of the 2-year gain upfront? This might be hard for ILMN shareholders to turn down, especially if the offer is cash-heavy.

To me, and likely to both ILMN shareholders and Roche management, the outcome is determined largely by your appraisal of ILMN's NGS technology. If you think ILMN is in danger of being passed by Ion Torrent or Oxford Nanopore, you take a sweetened offer from Roche. If you think ILMN has the tech to stay on top, you probably hold your shares (or, if Roche, increase your bid.)

All of this says to me that we should be on the watch for a public unveiling of ILMN's future NGS tech, or their roadmap as such. (Via a press conference or an analyst day, or the like.) ILMN is currently touting NGS prices of ~$5,000 per genome. If they can demonstrate a technology (or path) that drives this number down into ONP's ballpark (~$1,000), expect ILMN to stay independent. If not, ILMN will take Roche's best offer.

Roche has already played their role in this game, as they played the "you know you're not the only fish in the sea" card - even though the whole world knows that there isn't an equivalent alternative NGS investment available. (Unless you think PACB or GNOM make for good back-up plans.) I interpret this as Roche saying that they're open to paying a bit more for ILMN - otherwise, they'd play either the "take it or leave it" card.

Nearly six weeks have passed since Roche's hostile bid and yet Illumina hasn't shown off any reason for shareholders to expect ILMN stock to pop as an independent company. Be on the lookout for either a sweetened Roche bid or a big ILMN tech exposé.


While ILMN is looking for paths to increased valuation, eBioscience must be looking for how to avoid too much decrease in valuation. It looks like AFFX can't do the current $330M deal, as lenders are pulling their financing. They could seek another bidder, but presumably they held an auction before accepting AFFX's bid, and know the possible range of offers. At 4.7X trailing revenue, the AFFX offer is very rich.

As a mostly-commodity provider, eBioscience probably still wants to get a deal done, even if AFFX can't honor the proposed terms. (btw: there are differing reports on whether AFFX's offer is all-cash or 50/50 cash/equity.) Would eBioscience rather take a tweaked deal from AFFX at say 90% of the value, or - as they are a growing company - sell a year or two later to someone else at a reduced multiple? (say $80m in 2012 revenue x a 3.75X multiple (=$300M.)) Chances are, this offer from AFFX represents the best and most lucrative chance for liquidity for eBioscience shareholders that they are going to see for a while.

The best outcome here for eBiosciences is to negotiate a sale at a point between their best alternative purchasers' price and the $330M, or to alter some deal terms to slightly reduce the value of consideration from AFFX. eBioscience could keep the same headline number, but accept a mix heavier on equity than cash, for example. Or, eBioscience shareholders could provide the debt financing themselves, in the form of an earn out or milestone payment from AFFX.

Unlike ILMN, I don't think that eBiosciences has to worry that their suitor will have a change of heart. If the financing gap can be bridged, the deal will happen. At this point, it seems to be a matter of how much less lucrative terms eBioscience is willing to accept and whether this figure works for AFFX's bankers.

NGS & DX?

There's an interesting conversation going on about error rates in DNA sequencing in the Genomics (NGS) group on LinkedIn. Some are wondering if development of DNA sequencing diagnostic applications will be delayed by the experienced error rates (up to 4% on some platforms, including Oxford Nanopore.)

My take: I think the barriers to adoption of sequencing technologies as diagnostics are:

-any error-intolerant application is still likely to rely on RT-PCR for a while to come. (Example: detecting specific BCR-ABL mutations in CML patients.)

If you have a specific gene of interest, or even genes (up to about 10 or 20, depending on who you listen to) 

-PCR still wins the day, because of accuracy, speed, cost, privacy concerns, and the fact that PCR apps have familiar payor and FDA tracks. (Many PCR assays code for reimbursement <$300, so NGS still has a way to go to win on price.)

NGS, on the other hand will be used for broad discovery and in cases where patients are willing to pay out of their own pocket at least until the economics change, and the FDA approves a platform/assay combo such as Foundation Medicine. I'd say that we're at least 2 years away from that, regardless of error rate.    

Two other NGS points, neither worth a dedicated post for now: now that Oxford Nanopore and LifeTech are both promising ~$1,000 genome from new tech platforms:

-what does the future hold for BGI (Beijing Genomics Institute) that has made a name for itself by buying roomfuls of largely Illumina sequencers? I'd like to be a fly on the wall when someone suggests that they put 10's of millions of dollars of Illumina equipment out to pasture and invest further millions in new GridIon or Ion Torrent equipment.

-will Roche drop their Illumina takeover bid? A ~$6B hostile takeover of the former leader makes less sense now. It will also be interesting to see if ILMN's board changes their mind, and sells now. 

Great leap for DNA sequencing. Small step for early stage financing?

Wow. Just wow.

Oxford Nanopore went public last week with details of their DNA sequencing platform. It is a stunning advancement for sequencing in terms of access, cost, and performance, and represents some pretty amazing chemistry and engineering advancements.

(Great coverage of the science involved here and here and general coverage here.)

A decade ago, sequencing a single human genome cost a billion dollars and required a warehouse full of expensive machinery. Oxford Nanopore's new platform uses a handheld unit and about 5 machine-hours, at a total cost of ~$1,000 to generate a genome. Other technologies are may be capable of reaching the performance levels of Oxford Nanopore in one dimension (cost, read length, turnaround time, etc.), but no technology is as complete as what Oxford announced.

We will be sorting through the impact of the technology for a long time, but one business implication needs to be promoted in light of Oxford Nanopore's success: how a tiny financial brokerage company with a tiny amount of scientific expertise launched Oxford Nanopore.


University tech transfer offices have a thankless job - maximizing the return on young, immature IP, with little capital available for research to de-risk emerging technologies. This is especially true in the UK, where good science is abundant, but early capital is not.

In the early part of the last decade, Oxford University's tech transfer group struck an interesting deal: it sold a half-interest in all spin-outs from the chemistry department for a decade or so for £20M cash up front (~$37M).

The investor in this deal was a new entity (IP2IPO) founded by a small financial brokerage in London. IP2IPO (since renamed IP Group, and listed here) was a new fund dedicated to investing in university IP, and went public on the AIM on the basis of the Oxford agreement, and not much else. (Though after the Oxford deal, IP2IPO struck roughly similar deals with other UK universities.) IP Group is effectively a publicly traded VC firm.

In 2005, IP2IPO seeded what became Oxford Nanopore. (It is interesting to read the press release - there's zero mention of DNA sequencing, which means that either they were being coy, or weren't aware of the potential application for the chemistry technology.)

At the founding of Oxford Nanopore,  IP2IPO received a ~5% chunk of equity per their agreement with Oxford. They also injected start-up capital boosting their ownership interest. Seven years and a few more financing rounds, including a strategic investment by Illumina IP's share of Oxford Nanopore is still 21.5%.

Today IP Group's market cap is £413M or $654M (US), having jumped 12% (+$70M market cap) following the Oxford Nanopore (ONP) news. (IP Group has ~$30M in cash on hand, so EV= $624M).

Unpacking this for a second: Ion Torrent - a DNA sequencing firm with a very cool platform - was sold last year to Life Technologies for $725M. Given this comparable, plus inflation and ONP's advantages, ONP is probably worth $1B today, making IP Group's interest worth $215M, and suggesting that the OTHER 59 companies in IP Group's portfolio are worth $409M in aggregate.)


I am happy to see that such long-term investing has paid off for IP Group, but I would be curious to know today if IP2IPO, its' investors, or the universities would redo the arrangements if given the opportunity. I think if you could reliably find investors with 10+ year time horizons that the IP2IPO model would work on a greater scale, but a look at IP Group's stock chart (with a stock price about even since its' 2003 debut) suggests that the market is not a fan of the IP Group model, even with the Oxford Nanopore development.

(You also need access to stellar tech centers. It is a low risk bet that Oxford's chemistry department will invent something world-changing over the 10-12 years covered by the IP & Oxford agreement. But how many schools and departments can you say that about?)

For the IP2IPO model to work, the investors' value of the university technology should roughly match the university's determination of the value of cash in the present. But there is an inherent disconnect between the high-beta present value of a long term technology and the certain value of short term cash. Blanket agreements like IP2IPO's reduces risk slightly by spreading the risk across multiple spin-outs across multiple sectors.

Still, there seems to be an oversupply of high-risk capital, at least in the US, when including IT/internet investments. Perhaps the IP Group "product" will take off now that there is an obvious big win in ONP to sell to investors.



One other thought on Oxford Nanopore's news: if the disposable USB MinIon unit really does sell for $900, I can see myself buying one this year just to try it out AT HOME. I can't say that about a MiSeq.

Well done, Genomic Health!

When writing about the proposed acquisition of Illumina by Roche I mentioned that I didn't think a $6B acquisition of a hardware maker was the best strategy for Roche to bring their molecular diagnostics business into the DNA sequencing era. (Instead I recommended large-scale, aggressive partnering to grow the molecular diagnostics business.)

In contrast, one company with what I think is EXACTLY the right strategy to advance their molecular diagnostics business into the sequencing era is Genomic Health.

Genomic Health's existing product (Oncotype DX) is a 21-gene PCR test to predict breast cancer recurrence, and a similar product for colon cancer is late stage development. Both of these tests may someday "graduate" to a sequencing basis, if either NGS becomes more economical, or additional value is seen in collecting genomic data beyond the 21 genes of interest. 

But Genomic Health understands the need to augment or match product innovation with platform innovation.

For $20M (or about .03% of the Illumina acquisition price) Genomic Health will be launching a wholly-owned subsidiary devoted to developing sequencing-based tests. This is brilliant on so many levels:

-GHDX kept the founding/leadership team in place, while allowing them to pursue new, more exciting fields. The continuity of the team will be important here, while the new venture won't have to invest in some of the infrastructure already covered by GHDX (such as CLIA certification)

-$20M - while a good-sized investment in R&D - is a more smart-sized play when compared to other NGS-diagnostic players, like Foundation Medicine, which launched with an "A" round of $34M, without even a product strategy. (~15 months after founding, Foundation has just won CLIA certification. This is not an insignificant accomplishment, but still represents the company just now 'reaching the starting line.' )

-For GHDX, the $20M represents about 18 months of operating cash flow. It's a serious investment into (potentially) cannibalizing their own business. If you're a fan of Clayton Christensen and his "Innovator's Dilemma" line of thinking, you'd praise GHDX for being willing to take this initiative, where other former market leaders have treated their existing markets as sacred and protected.

-GHDX is banking on the idea that though their R&D investment will crimp earnings in the short term, equity value akin to that seen in Foundation medicine is likely to result. To illustrate this, imagine if Foundation's $34M seed round valued the company at $50M (post-money, without anything more than a business plan.) For $20M, GHDX has essentially generated $14M in net equity value ($50M enterprise value less $34M cash), and I'd argue that GHDX's venture is worth more than Foundation without spending a dime yet.)

(in fairness, some finance types would argue that with GHDX having a P/E ratio of 126x, reducing operating profit by $10M/yr costs something like $1.26B in foregone equity value, but 1) GHDX's market cap is only $850M, and 2) GHDX is down only 5% since their press release announcing the sequencing initiative.)

-many other companies in GHDX's position might realize the opportunity that NGS diagnostics represent, but instead decide to survey the field of start-ups and trade equity to acquire such products rather than invest in R&D to dilute earnings. GHDX's approach insures that NGS will be a core competency for product development, while still maintaining the option to spin out the subsidiary at any  time. (Continuing to riff on the GHDX echoing some brilliant business strategists like Christensen, I'd say that this represents GHDX's commitment to a Jim Collins 'built to last' culture."

Kudos to GHDX!

-finally, one curiosity: in the press release announcing the initiative, GHDX only once used the word "genomics." (Besides in their corporate name.) Many millions of dollars have been flushed over the last decade by start-ups pursuing genomic solutions. For this reason, I think GHDX has spun their news away from genomics.

Illumina - Roche

I am having a hard time rationalizing the Roche bid for Illumina. Not that Illumina isn't a great company (it is) or that Roche isn't a great company (it is too), but the Roche press release announcing the hostile merger rationalized the potential Illumina acquisition as to "enable the discovery of complex new biomarkers improving drug discovery and the selection of patients most likely to respond to a targeted treatment with high clinical relevance. In addition, by building on Illumina’s capabilities Roche will be able to use its scale, global distribution and diagnostic test development expertise to develop new diagnostic tests that serve patients and customers even more effectively.”


I read that as "we (Roche) want to transform our diagnostic presence in "old" technologies (like IHC assays) into way-cool sequencing-based molecular diagnostics, and the best way to do that is to buy a hardware company that is just now being usurped by LIFE's Ion Torrent sequencing solution."


This doesn't make sense to me, as Roche could probably get such biomarker & diagnostic discovery expertise for 1% of the price of acquiring Illumina by striking 100 x $600k partnerships with biomarker/diagnostic focused companies.

One other problem: Illumina doesn't do any biomarker/molecular diagnostic  discovery/development. 


As of Ilumina's July SEC filings, 94% of Illumina's revenue is derived from hardware or consumable sales. The other 6% is service revenue, largely revenue from companies like 23andMe that contract with Illumina to perform very standard genotyping on their behalf.


(Incidentally, molecular diagnostics and DNA sequencing represents ~4% of Roche's business, by revenue.)


Illumina may be the best in the world at building, selling, and servicing genome sequencers (though LIFE's Ion Torrent technology may have just leapt ahead. For now.) However, because Illumina doesn't compete with their customers, they don't do biomarker discovery, development of diagnostic tests, or performance of FDA-approved clinical diagnostics. 


(I believe that Illumina has gotten their hardware platform certified by the FDA, facilitating the development of clinical diagnostics by their customers, but no specific tests approved by Illumina or their customers.)


I could understand Roche's pursuit of Illumina if they were looking to augment or replace their 454 sequencer business. 454's pyrosequencing platform is widely perceived to be past peak and far behind Illumina and LIFE's sequencing platforms (and also behind Complete Genomics and PacBio's platforms in terms of value). However, hardware is a low-margin business compared to Roche's drug & diagnostic business, and Illumina's sales growth has run full speed into a wall, as of the most recent quarter, falling about 20% short of analyst revenue expectations.


Roche has offered $44.50/share for Illumina, but the market has already upped ILMN's stock to $51, valuing Illumina at a crazy level:


66x P/E
6X price/revenue
2.5X PEG ratio
19X enterprise value/EBITDA
18X EV/OCF


So Roche is willing to pay a high price to grab ILMN. If it is not for biomarker/diagnostic discovery expertise, why in the world is Roche interested? Here's my guesses:


-Roche's 454 technology is cooked, and it is better to spend $6B to buy $1B in new revenue to "pave over" the future financial hole that the 454 business represents. But Illumina's sequencing technology  while an improvement over 454, is still behind the leader, Ion Torrent (LIFE).


-Roche is "skating to where the puck is going to be" w/r/t NEXT next-generation sequencing (Nngs), as they (Roche) like ILMN's positioning for Nngs (Likely nanopore sequencing.) Possible, but not likely, since as a hostile offeror, Roche hasn't had a look at ILMN's R&D. Plus, Roche cut their own nano pore technology deal last fall


-Roche already has biomarker/diagnostics discovery talent & expertise (especially from the old Genentech), and they really just need hardware and sequencing talent. Makes sense, except there's no reason to spend $6B to get access to hardware, especially when the technology is changing so fast. Roche could buy 100 sequencers for 2% of the acquisition price, or just partner with a sequencing provider like BGI.

Or, most likely: following the earnings & revenue stumble by ILMN in the 3Q, in spite of the resulting valuations, Roche is trying to buy low on the apparently mis-priced ILMN asset.

This would make sense to me, and I think it would be acceptable rationale for a press release, but Roche has not taken that tone. Perhaps this is to dissuade other potential suitors, like GE. (GE might say when considering an Illumina bid "nice asset, but we don't have any therapeutic or diagnostic expertise.")

If not Roche looking to get a deal on Illumina, I can't buy into other rationale, unless I am missing something. If I am, please let me know in the comments section.