Through an 8-K filed on the 25th, TrovaGene (TROV) discretely announced its entry into a research agreement with Illumina (ILMN), a leading sequencing and diagnostics company. The general, almost secretive, nature of the filing appears to hint at a large undertaking. Moreover, given Illumina's recent spree of acquisitions, I believe the recent research agreement just might be the overture to a buyout.
Illumina, Inc.'s Value Paradigm
Currently valued at $9.37 billion, Illumina, Inc.'s core business focuses on the development and marketing of its highly efficient genetic sequencing platforms. Genetic sequencing is proving to be the next frontier of biotechnology research by providing research centers, academic institutions, government labs, and healthcare companies with a greater understanding of anything with genetic material. Recently, Illumina has begun leveraging its established technology in genetic analysis sequencing to establish a position in the molecular diagnostics space.
What's interesting about Illumina is that it utilizes acquisitions to grow out its business. The impact of a meaningful acquisition can be seen in the company's share price appreciation after it completed the acquisition of genome sequencing company Solexa in January 26, 2007. After which, Illumina's shares ran from $19 to $47 a share.
Illumina, Inc. On An M&A Spending Spree
Crawling through Illumina's latest quarterly filing, it appears that Illumina is kicking its acquisition strategy into high gear. In just the first quarter of 2013, Illumina acquired two companies:
- Verinata Health, a California based diagnostics company with a prenatal test designed to detect chromosomal anomalies (Such as Down Syndrome) using trace amounts of the mother's blood. Verinata's non-invasive (to the fetus) Verifi test, like Sequenom's (SQNM) competing MaterniT21 plus test, offers significant safety benefits over previous standards using amniocentesis and CVS (Risk of miscarriage). Illumina acquired Verinata Health for $350 million, with an additional $100 million in milestone-based payments.
- Illumina acquired a development-stage company for an undisclosed sum of money. I assume it was a diagnostics company, given Illumina's recent string of acquisitions in the space.
(Lack of information seems to characterize Illumina's acquisitions, Source: 10-Q)
These acquisitions follow suit from last year, where Illumina acquired British company BlueGnome, another diagnostics company for $95.5 million. It seems that Illumina will continue this trend of meaningful acquisitions given the following:
- Illumina has consistently increased its cash on hand from quarter to quarter, the company currently holds $443 million in cash with an additional $624 million in short-term investments.
- With more and more companies entering the MDx (molecular diagnostics) space, acquisition of development stage companies appears to be a cost effective way of both entering new markets and growing out its IP.
- With its established genetic sequencing technology (in addition to its real-time PCR tech), the whole (Illumina + acquired IP) could easily be greater than the sum of its parts (MDx company on its own).
As such, the question becomes- which company is next? I believe the answer is TrovaGene.
I believe TrovaGene appears as an attractive acquisition for Illumina for a number of reasons. Before venturing ahead, I am assuming that the reader has a general understanding of the company. If this isn't the case, please read my article here.
I'll begin with the research agreement. If one looks at the relationship Illumina had with Verinata prior to the latter's acquisition by the former, there are a number of similarities to the one unfolding with TrovaGene.
As mentioned above, Verinata Health was in the business of developing non-invasive tests using maternal blood to test for chromosomal anomalies. Verinata's Verifi test relied upon Illumina's HiSeq 2000 genetic analysis machine in order to detect said anomalies within the fetal DNA present in the mother's blood. As a result, this naturally led to collaboration between the two in the form of a multi-year supply agreement. By the time Verinata was acquired, its newest tests were looking to utilize "cell-free DNA" present in maternal blood for analysis. Here are the parallels:
- The partnership between TrovaGene and Illumina has been established in the form of a research agreement. This will allow Illumina to assess both TrovaGene's technology and patent estate to determine if it represents a value-add purchase.
- TrovaGene's urine-based assays are reliant on an effective system for real-time PCR and genetic analysis, which are both Illumina's specialty.
- Illumina's acquisition of Verinata at a point where the latter was looking into assays built upon "cell-free DNA" appears to indicate Illumina's current interest within the science. TrovaGene's transrenal nucleic acid (TrNA) foundation is all "cell-free."
TrovaGene's underlying technology appears to synergize positively with Illumina's strengths, especially when one considers the latter's acquisition of Epicentre Technologies Corporation in 2011. Epicentre specialized in the preparations of nucleic acid samples (TrovaGene's TrNA) and specialty enzymes used in sequencing and microarray applications. With Epicentre's IP in preparing and sequencing nucleic acid samples, the research agreement should allow TrovaGene to fully explore the potential of TrNA in terms of the number of conditions that can be detected from urine.
Even if Illumina does not buy out TrovaGene, the recent research agreement appears to again validate the latter's urine-based assay IP. With multiple assays/catalysts expected to roll out this year, success with any one of those urine-based assays and a subsequent run in TrovaGene's share price could prompt a reaction from Illumina. Keep in mind that Illumina has been aggressively purchasing companies in order to establish its presence in the booming MDx space. With the amount of cash Illumina currently sports ($443mm), TrovaGene's current valuation of $112 million represents a small acquisition. Some food for thought.