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Illumina, Roche and Fairness

Prohost Biotech - Thursday, February 09, 2012

Illumina (ILMN) is occupying the center stage these days. Roche’s persistent attempts to acquire ILMN, has opened investors’ eyes on the importance of this firm’s technology in moving away from the road of stagnation to that of innovation. Innovation is the insurance that guarantees the survival and growth of the drug companies in the future that has already begun. Illumina’s technologies and marketed state-of-the-art sequencers and gene analyzers have been a major contributor to the flourishing of information about the origins of diseases at the molecular level.  This capability, which lured Roche, was overlooked by Wall Street investors who have recently caused a selloff in the stock for theorized reasons. The real value of Illumina resides in its indispensability as the cornerstone of future advancement in medical diagnosis and treatment. With all the new-targeted drugs on the market and in the firms’ pipelines, the current diagnostic and treatment statuses are still far from perfect.

The next step to perfection is for the drug firms to use the genetic information in developing drugs that enable physicians to practice personalized medicine, i.e., treating patients based on their genetic construct and addressing the subgroups of patients in one disease, for example, cystic fibrosis, with different approaches for each group (see Vertex (VRTX). By pinpointing the genetic aberration and the pathways of diseases, Illumina’s tools has and will continue to help the drug developers discover and design suitable targeted drugs that prevent the formation of the pathological proteins at the origin of the disease pathway. Now, the firm’s tools are getting into the clinic at a reasonable price to the diagnostic laboratories.

Of course Illumina had no choice except rejecting Roche’s offer based, on a generous premium, but unfortunately on a stock that had just lost 50% of its price as a result of exaggerated stock selloff based on negative speculation. The offer looked like a deceptive move by a shrewd player. Ignoring the real value of Illumina in Wall Street at a time or another does not mean that Illumina does not know its own value. The more Roche insists on acquiring Illumina, the more investors would recognize how valuable is this genomic firm. For Illumina to consider negotiations with Roche, the Swiss firm must build its offer on ILMN’s average value for the year that preceded the exaggerated selloff that slashed 50% of its price in days.

When they intend to acquire a firm, large drug developers make accurate evaluation of the small firms’ technologies, patents, products and every valuable asset in the targeted firm. When the large firms decide upon the acquisition, they would surely love to pay the lowest possible price. They make their offer based on the targeted firm’s market cap in case the firm is undervalued. This is what Illumina has argued about the offer and flatly rejected it. Illumina stood for its shareholders; others didn’t, which led to very valuable biotechnology firms to be sold for much less than their fair values. The phenomenon that led to a great number of unfairly valued biotechnology companies is caused by Wall Street’s overlooking the values of the firms’ technologies and pipeline products. They still cause selloffs in development-stage firms at each and every negative financial statement when all the valuable products of these firms are still in development, costing money, rather than generating revenues. Some of these companies have the innovative technologies that giant Pharmaceuticals realize would guarantee their sustained growth.

Roche knows that Illumina’s tools were used for research only and that Illumina is taking its tools to the clinic after being able to make them easier to use and affordable for the labs and the patients. Sequencing a whole person’s genome will be feasible around $1000, around the same price of a full routine blood test, an MRI, or a PET scan. Roche knows that a precise diagnosis will be possible to make for various mutations that cause the same disease. It knows that having Illumina and its equipment in house would enable the practice of personalized medicine. In an interview Roche CEO acknowledged that pharmaceutical companies who will not innovate would be facing difficulty surviving.

The ball is now in Roche’s hands. Will we see a new offer? We believe that yes, we will. Everything is possible with negotiations in good faith.

Every time the subjects of going to the root-cause of diseases and practicing personalized medicine is risen Compugen (CGEN) crosses our mind. Other companies also cross our mind, include Sequenom (SQNM) on the discovery tool side and Alnylam (ALNM) and Isis (ISIS) on the drug developing side.

Today’s news from Alnylam announced the firm’s scientists developed a novel approach for monitoring RNAi activity in blood samples (the cERD method). The new breakthrough method enables routine and frequent measurement of tissue-specific target gene silencing, without the need for invasive tissue biopsies. Rachel Meyers, Ph.D., Vice President, Research at Alnylam said, “We believe that this approach could be transformative for the development of RNAi therapeutics, in addition to having potential applications with other therapeutic modalities. In this regard, we are pleased to launch our efforts enabling industrial applications with a technology license to Isis.”

We agree. It will be big.

We long the firms cited in this text.

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