M&A Theme Provides Underlying Bid to Market

Roche Holding, the most diversified diagnostics and pharmaceutical Company with an aggressive leveraged strategy for the molecular basis of disease and personalized medicine has offered $5.7B for the leading Company in genetic sequencing and life science tools with revenues in the $1B range. The offer was $44.50 but the stock is already trading at $54, but 33% off its 12 month high of $79.40. As large cap pharma companies shuffle their strategies with acquisitions and spin-offs, Roche is unique with its focus on Rx/Dx synergy now with $24.4B in drug revenue and $7.1B in diagnostics revenue. Recently Roche bid up $3.4B for Ventana, a leader in histology tools and tissue based diagnostics.

At the recent JPMorgan conference we wrote about the renewed enthusiasm for tools’ stocks after presentations by Illumina(ILMN)  and Life Technologies (LIFE) up 3.55% today, allayed fears about cuts in NIH and government support for life science research. The CEO’s of both companies re-directed investor attention to new applications in genomics such as translational medicine and consumer markets. The $23B market for life science tools is expected to grow to $33B over 5 years.

Our coverage of the life science sector including tools  companies was also highlighted in an article in Investor Uprising and since DEC 28 the biotech market is up over 11%.

The tools sector is up over  3% today and smaller sequencing players are up with the ILMN news: Complete Genomics (GNOM $2.95 ) up 18% and Pacific Biosciences (PACB $4.51) up 14%.

Diagnostic players also rallied with some of our focus list companies GenProbe (GPRO $66.94) up 5.63%, Qiagen (QGEN $16.74) up 6.66% and Sequenom (SQNM $4.34) up 3.96%

Dan Leonard of Leerink Swann Research notes in his update last evening:

“Bottom Line : Roche’s hostile offer for ILMN resets the valuation bar for sequencing assets, in our view. We don’t believe ILMN would agree to a deal for anything near the 18% premium offered (which is 44% below the 52-wk high), and we expect the process to drag on for some time. In the meantime, we expect other stocks with direct exposure to sequencing (LIFE [MP], PACB, GNOM) will enjoy a sympathetic boost. “

Dan doubts whether the $44.50 offer would be accepted by Illumina.

The bellwether biotech ETF IBB hit a new 52 week high today of $115.84.

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