Roche Mulls Bid For Genetic Sequencing Company Life Technologies

| About: Roche Holding (RHHBY)

According to news reports, Roche Holdings (OTCQX:RHHBY) is mulling to bid for a diagnostics company called Life Technologies (Life Tech) (NASDAQ:LIFE). While Life Tech has a decent presence in several business verticals including laboratory equipment and scientific instruments, it is the rapidly growing genome sequencing business that must have caught the attention of the Swiss healthcare major.

The move signifies Roche's continued interest in gene sequencing after multiple attempts including a hostile bid to acquire Illumina, which failed about a year ago, Below we take a close look at the event and its impact on Roche Holdings.

We have a $58 price estimate for Roche Holdings, which is in line with the current market price. Roche shares have risen almost 30% in the past year.

Genetic Sequencing: Holds Key For Growth

Genetic sequencing helps in decoding DNA at granular levels, which in turn allows doctors to develop specific treatments targeting a patient's needs. While significantly higher costs and a longer analysis time have historically hindered the use of genetic sequencing, the scenario is changing with the introduction of new improved devices. The average prices of genetic sequencing devices have been declining with growing competition. Further, as processes are getting improved, the analysis time has also come down from days to a few hours. Going forward, these factors will boost the use of genetic sequencing to develop differentiated drugs and companion diagnostics in areas of high unmet need, especially oncology.

Realizing the growth potential, Roche has intensified its focus on combining more of its pharmaceutical pipeline drugs with the development of companion diagnostics. The importance of genetic sequencing for Roche became evident when the drug maker aggressively tried to acquire one of the genetic sequencing market leaders, Illumina, last year. However, the latter fended off the hostile takeover attempt as it believed Roche's final offer of close to $6.5 billion, which was after many upwards revision, was still too low.

What Does Life Technologies Offer?

Life Tech's business unit Ion Torrent recently launched a same-day gene sequencing device, which is what Roche has been looking for with the Illumina acquisition. While Illumina would have given Roche ready access to its already well-established same-day gene sequencing machine, what could motivate Roche is that Life Tech's machine can do the job at $1,000 per sequence, at least one-third the price compared with Illumina. With its R&D capabilities and global reach coupled with Life Tech's genome sequencing products, Roche can bolster its efforts of transitioning gene sequencing into clinical and routine diagnostics.

The acquisition will give Roche an opportunity to boost its revenues from the pharma franchise as well as increase its market share in the diagnostics market, which could trigger an upside to our $58 price estimate. The growth potential can be seen from its targeted skin cancer drug Zelboraf. The drug is based on a similar mechanism as it comes with a companion diagnostic test that identifies patients with a specific genetic mutation and will benefit from the treatment. Zelboraf witnessed a huge uptake in demand as revenues clocked over $250 million in just one year of its launch in late 2011.

The Serious Contenders

In addition to Roche Holdings, there are a couple of potential suitors for Life Tech. Some of them include core diagnostics companies like Thermo Fisher Scientific (NYSE:TMO) and Danaher Corp (NYSE:DHR). However, the steady cash flows have attracted various private equity players as well. A buyout consortium of Blackstone Group, Carlyle Group, TPG Capital and Temasek Holdings are said to take part in the bidding. Roche has also joined a buyout group comprising KKR and Hellman & Friedman to bid for the diagnostics company.

But, Roche Holdings and Thermo Fisher Scientific are expected to emerge as the most serious and suitable contenders for the acquisition even as it is yet to be seen if they are interested in buying the whole company. The former would be more interested in acquiring the generic sequencing business as it may not want to spend nearly $11 billion (current market capitalization of Life Tech) on an acquisition that comes with other low growth diagnostics businesses. Further, Life Tech's other businesses are a good fit for Thermo Fisher's existing portfolio. Separate bids for separate businesses seem a little difficult as this will potentially increase Life Tech shareholders' tax burden. However, the potential bidders could acquire Life Tech entirely and then divest the businesses they are not interested in.