January 26, 2012 / 7:05 PM / 7 years ago

Illumina adopts poison pill to stave off Roche

PHILADELPHIA/ZURICH (Reuters) - U.S. gene sequencing company Illumina Inc (ILMN.O) adopted a “poison pill” defense strategy against a hostile $5.7 billion bid from Swiss drugmaker Roche Holding AG ROG.VX, saying it would trigger a rights agreement if any party bought 15 percent of its stock.

Illumina’s first public move since Roche announced the offer on Wednesday showed its leadership would not be easily convinced of the proposal’s value, especially at the current price, deal-watchers said.

Roche said it was “disappointed” in the action by Illumina’s Board and still believes its offer delivers “full and fair value” to shareholders.

“Illumina has strong defenses. Only more money is going to buy Roche access,” said one healthcare investment banker, who was not involved in the deal. The banker declined to be named because he was not authorized to speak to the media.

In addition to the poison pill, Illumina has a so-called staggered election for its board of directors, which makes it difficult for an outside party to gain control of the board in one year.

A deal would give Roche’s diagnostics unit a leading position in the fast-growing area of gene sequencing, which is central to medicine’s future as it allows researchers and physicians to better predict how patients are likely to respond to a drug.

A deal would be the latest in a series of healthcare transactions as drugmakers look for new areas of growth to offset the loss of patented drugs and biotechs search for new areas of expertise.

On Thursday, Amgen Inc (AMGN.O), the world’s largest biotechnology company, agreed to buy Micromet Inc MITI.O in a $1.16 billion deal to acquire another novel technology that aims to harness the body’s immune system to fight cancer. Meanwhile, Celgene Corp said it would buy smaller biotech firm Avila Therapeutics for $350 million.

PROTRACTED BATTLE MAY BE AHEAD

Roche may be facing a drawn-out battle after Illumina announced the rights plan, which typically allows a shareholder other than the bidder to buy more shares at a discount, often with the aim of forcing a higher offer or deterring a bid because of the higher cost of acquiring the extra shares.

“The Illumina Board has taken this action to ensure that our stockholders receive fair treatment and protection in connection with any proposal or offer to acquire the company, including the proposal announced by Roche,” Illumina Chief Executive Jay Flatley said in a statement.

The Swiss drugmaker plans to formally launch a tender offer for Illumina by early next week at $44.50 per share, according to a source familiar with the matter. U.S.-based Illumina would have 10 days to respond.

Illumina investors are convinced the company is worth more, and traded the shares above $54 on Thursday. Analysts and traders suggested Roche may have to pay close to $60 a share to win Illumina, though Roche has said it has no plans of raising the offer.

“The poison pill would make the tender offer useless, so it’s unclear what Roche would gain other than a chance to posture that it’s serious,” said an arbitrage trader who declined to be named.

Roche plans to nominate directors for Illumina’s board and make a shareholder proposal to increase the size of the nine-member board by two people, a source familiar with the situation said. The source was not authorized to speak to the media.

“The point, counter-point of a bid and then poison pill and the back-and-forth just makes this seem like a longer, drawn-out battle,” said another arbitrageur who declined to be named.

Roche, however, has been forced to raise its offer in other bidding situations — for biotech company Genentech and test maker Ventana — even when it declared its initial salvo a full-and-fair value.

With Schwan as its diagnostics chief, Roche in 2008 overcame months-long resistance from test maker Ventana to snap it up for $3.4 billion. It had made an unsolicited, low-end bid, before increasing its original offer by 19 percent.

Roche stock closed nearly flat on Thursday. Shares of Illumina were down 4.6 percent at $52.60 in late trading on Thursday, after gaining more than 45 percent on Wednesday.

Additional reporting by Shailesh Kuber in Bangalore and Deena Beasley in Los Angeles; Editing by David Cowell, Dave Zimmerman, Gunna Dickson, Matthew Lewis and Andre Grenon

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