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Nov 19, 2012

Illumina's Complete Genomics Offer "Makes Sense", Says Analyst

  • Illumina’s $123.5 million effort to snap up rival Complete Genomics—confirmed Friday by the sequencing equipment giant—makes enough sense to maintain its stock price estimates and the projection that Illumina will outperform the market in 2013, one analyst concluded today.

    “[Illumina] ILMN's efforts to acquire [Complete Genomics] GNOM could pay off for ILMN shareholders in multiple ways,” Leerink Swann’s Dan Leonard, an analyst who covers the life science tools and diagnostics sector, and Justin Bowers, CFA, concluded in a note to investors this morning. “If ILMN is successful in its efforts to acquire the company, it keeps a competitor out of the hands of its largest customer, BGI, and broadens its technology toolbox. If it is unsuccessful, its interest could lengthen the deal process and GNOM could eventually run out of money, which puts a competitor out of business.”

    BGI is BGI-Shenzhen, the Chinese sequencing giant that in September agreed to acquire Complete Genomics for $3.15 a share or $117.6 million—a tender offer that BGI last month extended from the original Oct. 23 to Nov. 21.

    Complete Genomics has already stated that, absent continued funding from BGI, it won’t have enough cash to sustain itself beyond Jan. 31.

    “While the ~$125M offer (plus bridge financing) is not an insignificant amount for ILMN, GNOM’s >$200M in net operating loss carryforwards would soften this amount somewhat,” the Leerink Swann analysts wrote.

    They added that while a deal for Complete Genomics would appear to dilute the value of Illumina shares by 14 cents next year given $20 million in R&D expenses and $8 million in operational costs, that may not be the case. While Complete Genomics lost $55 million through the first nine months of this year, the value of Illumina stock will ultimately hinge on what the company does with Complete Genomics after an acquisition.

    “For all we know, it could replace GNOM’s instruments with HiSeq’s and slash R&D spend to a level necessary to nurture specific applications or technologies (e.g., GNOM’s long fragment read technology). Thus, we’ll allow the process to play out before reconsidering our $1.77 EPS estimate in 2013,” Leonard and Bowers wrote.

    On Nov. 13, Complete Genomics disclosed the bid without identifying the bidder except to call it “Party H.” CG contended there was a substantial likelihood that a deal with Party H would fail to receive antitrust clearance, acknowledging that the companies were each other's closest rivals for U.S. customers seeking whole human genome sequencing as an outsourced service. As a result, Complete Genomics concluded, the offer didn't constitute a superior proposal to BGI’s offer, and thus and wasn't in the best interests of the stockholders.

    Late on Friday in a form 8-K filed with the U.S. Securities and Exchange Commission, Illumina disclosed that it was the “Party H” that, according to Complete Genomics, made an unsolicited bid for Complete Genomics. Illumina said its proposal, submitted Nov. 5, included an offer of $3.30 per share or $123.5 million—5% above the BGI offer approved by Complete Genomics’ board—that was financed with cash-on-hand, without any condition for further due diligence.

    Illumina ended the third quarter with $1.2 billion in cash, cash equivalents, and short-term investments, which it said was essentially unchanged from Jan. 1, 2012, according to results released last month. The company’s Q3 cash flow from operations was $51 million, down from $90 million a year earlier, primarily due to changes in working capital associated with the timing of shipments.


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