Roche (OTCQX:RHHBY) Merger and Acquisition Call January 25, 2012 7:00 AM ET
Severin Schwan - CEO, Roche Group
Alan Hippe - Chief Financial and IT Officer
Dan O'Day - Diagnostics Division, COO and Member of the Roche Corporate Executive Committee
Sachin Jain - Bank of America/Merrill Lynch
Gbola Amusa - UBS
Bill Quirk - Piper Jaffray
Quintin Lai - Robert W. Baird
Vincent Meunier - Exane BNP Paribas
Alexandra Hauber - JP Morgan
Luisa Hector - Crédit Suisse
Michael Leacock - RBS
Keyur Parekh - Goldman Sachs
Welcome to everybody, and thank you for joining our call, which is going to last for about one hour. This is Severin speaking, and with me today, Alan Hippe, our Chief Financial Officer; and Dan O’Day, Chief Operating Officer of Roche Diagnostics.
Illumina is a great successful company, and we are excited to share with you the background of this planned acquisition. At the beginning, just let me shortly put this transaction into context. An important element of today’s success of Roche Diagnostics is our breadth and depth of various key measuring technologies. They allow us to develop and market a broad range of diagnostic tests from molecular diagnostics to serum work area or tissue diagnostic testing. The completeness of our offering is important, both for our customers and Roche.
Over the years, we have developed a number of high-tech platforms, both internally and also as you can see on Page 4, by acquiring a number of key technologies. And we believe that sequencing is and will continue to be an increasingly important technology as we go forward.
Let me focus on three points specifically: first, it will allow us to further strengthen our clear number one position as the leader in the worldwide diagnostics market. The depth and breadth of our offering to our customers will continue to be a key differentiator in the marketplace. Second, Roche’s strong global footprint and expertise in the research and diagnostics market would certainly help to accelerate the transition of sequencing into research and clinical diagnostics around the world. And third, with a wide range of technologies available within the Roche Group, we will also be able to strengthen our in-house collaboration between pharma and diagnostics in our efforts to develop more targeted medicines.
So combining the strengths and capabilities of Roche and Illumina makes a lot of sense, both from a strategic and an operational point of view. We firmly believe that we will create value for both companies, and this is why we approached Illumina back in December last year.
Unfortunately, the Board of Illumina has not been interested to negotiate a business combination, and for this reason, we are now directly approaching Illumina’s shareholders and offer a price per share of US$44.5. This represents an overall consideration of US$5.7 billion. We believe this is a compelling offer, and we feel that Illumina’s shareholders will find it extremely attractive. It certainly represents full and fair value of Illumina.
As I said at the beginning, Illumina is a great and successful company. Together with the management and employees of Illumina, we want to bring our combined business to the next level.
With this, I hand over to Dan.
So thank you, everybody. Good afternoon, good morning, this is Dan O’Day speaking. And it’s a great pleasure today for me to walk you through the transaction rationale. Now let me just start by expressing also my enthusiasm for this acquisition and the value that I’m convinced it will create for both shareholders of both organizations and also for the employees involved.
Now what I’d like to do is really walk you through why. Why is that the case? What is the acquisition rationale? And importantly, why now? And I hope that I get through all of those points during my talk. In order to set up what the combined entities can bring together from a synergy perspective, let me first just remind you what we’re talking about in terms of the two separate entities and what they bring to the table.
So referring to Slide 6 just to set the scene, Roche Diagnostics is by far the number one company in-vitro diagnostics. It is growing consistently ahead of the market, has been for the past five years. And part of what allows us to continue to grow ahead of the market like that is this broad array of technologies, the ability to bring solutions to labs and to patients around the world regardless of where the science leads is an extremely important aspect to our business. And in that regard, the other aspect is the very large commercial presence that we have around the world. We are present in more than 130 countries. We have literally hundreds of thousands of instruments. We have sales people and service people in every corner of the world that allow us to leverage these technologies to the benefit of our customers.
Turning to Slide 7 gives you an overview of what other businesses we’re in today. And importantly, what I want to point out here today is that many of our businesses are in the in-vitro diagnostics settings. And just to clarify that, that really means that is the clinical setting. That’s where labs are providing data output and solution output to clinicians that make decisions on patients. This is the regulated portion of our business. It implies that you have to have a very high quality level, high validation level and reproducibility throughout the world. Then you can see we have a variety of businesses in that segment. We also have an active business, an important business to our strategy in the Life Sciences, which calls on a different customer base today. It calls upon the research audience.
And turning to Slide 8, the reason that, that is extremely important to our overall strategy and in my opinion, our number one position in the marketplace, is that it allows us to get into some of the most innovative technologies in diagnostics today. That’s usually where technology starts. They start in the research lab, and they’re very attractive in and of itself in the research lab. But many of those then follow into diagnostics, and our ability to be in that marketplace allows us to effectively take those technologies into the clinic, to the physician and eventually to the patient. So it's an extremely important part of our strategy and one that we intend to strengthen with this acquisition.
Now turning to Slide 10. I think this slide really says quite a bit about the Illumina and what their business is. I mean, the slide really emphasizes this is a solid business, it's been performing for many years, it's the leading business in sequencing and microarrays. It's a proven company over time, and it has strong sales, profit and cash flow generation as you can see here on this slide.
It's two product lines, sequencing and microarrays, and as I'll explain, I think they really have a very nice complementary effect into our Roche business. So a strong business, a leading business, one that I personally respect a great deal and one that I think we can leverage in the total diagnostic equation.
Now with that said of the two businesses, I'd like to get into the rationale, and if you turn to Slide 12, I’m going to cover 4 key points to the rationale today: one is increasing our market participation in the sequencing market; strengthening our portfolio overall at Roche; unlocking the commercial potential of the two organizations; and very importantly, the eventual entry into in-vitro diagnostics so the clinical setting of these important technologies.
So to start with, on Slide 13, I’d like to focus on the market participation. As you saw from the Illumina slide, this has been a fast-growing market over the past five years, and we expect that to continue into the future. Today, it is over US$1 billion marketplace, and we expect that to be over US$2 billion marketplace in 2015. And the question, of course, is what's driving that growth, and there are two major factors to that: one is the fact that there will be increased penetration into the research market, which I’ll talk a bit more about. With the advent of the increase in the advantages of some of the new aspects of Illumina’s next-generation sequencing, we have the ability to penetrate much, much deeper into the research market.
The second one is, of course, going into the professional market into the clinical in-vitro diagnostics marketplace. And you may ask yourself, what’s driving that need? And I just want to try to characterize that need using an example of one particular therapeutic area which is cancer. And the reality is that the information generated by sequencing is increasingly being used to make treatment decisions. And when you look at cancer, which is very much a heterogeneous disease, and by that, I mean, one breast cancer is not the same as another breast cancer. If you have two patients in the waiting room, they will differ significantly in terms of their prognosis, in terms of the treatment therapies and in terms of how we need to progress with that.
And of course, a lot of information comes into play with that, genetic information and other information allows the clinician to make the best decision. But what’s clear is more and more, we understand the genetic basis of disease, we understand the mutations that are involved in cancer, and we also have therapies more and more that we can direct to those particular mutations. And as the number of mutations increases that are actionable, the need for determining the complexity of those genetic variations increases, and that's where sequencing comes into play. So it allows us to really cater therapy in combination, by the way, with other technologies that we have within the Roche Group, whether that's tissue diagnostics, PCR and others to the needs of the patient.
Now two things on this. I mean, clearly, the technology has advanced significantly. If we look at the first human genome, it took 13 years to produce the first human genome, which was finished in 2003 at a cost of US$3 billion. Today, that can be done with the current technology in one day at the cost of several thousand dollars. Obviously, that leads to the ability to dig deeper into the research setting, and it's now much more appropriate to go into the clinical study, which means in the future, from a medical standpoint, whereas today, sequencing is used at major cancer research hospitals around the world for a select patients or some subset of patients. In the future, this need, this demand and this technology improvement will mean that all hospitals around the world will basically dimensionalize every cancer patient as they come upon initial diagnosis. And this is some of what we think the two companies combined can best exploit into the future. So that’s why we’re bullish about the market, and we also recognize there are challenges in terms of the funding environment, in terms of new technologies, in terms of transition to IVD and we think those challenges are best met with the combination and skill set of the 2 organizations.
So moving to the second aspect of our rationale, the strengthening of the portfolio, the complementarity of our portfolio. If you look at Slide 14, just to use one example, to use sequencing although this exists in other aspects of the two companies’ portfolios, you can see that we have two different types of sequencing products between the two companies. One is a short-read technology, one is a long-read technology. And they really have different benefits depending on the types of sequencing that you’re doing. And that's depicted here on Slide 14. So in fact, they're quite complementary. They can be used in conjunction with each other. And I think this is extremely important as we look at the totality of the portfolio and how to put this best to work for the needs of the customer base out there in the environment.
If you turn to Slide 15, it gives you a slightly broader perspective using the other Roche technologies that we have. And here again, there’s complementarity between the sequencing and the microarray business and what we do in PCR, tissue diagnostics and even eventually in terms of cancer diagnosis, into what’s done in our immunoassay portfolio for instance. So that’s number one, the strength of the total portfolio both in the research setting and also in the routine IVD setting.
The other point I'd like to made in this slide is there's clearly a gap today, and that is the ability for sequencing to be used in routine in-vitro diagnostics, which we'll come back to as an important point about one of the benefits of the transaction that I’m speaking about today. But it's clearly a need and it clearly represents an important business opportunity in the mid to longer term.
Moving to unlocking the commercial potential on Slide 16. I think this has some very interesting aspects that, by the way, we put to work in other acquisitions, for instance with Ventana. But if you look at the current makeup of Illumina today, it's about US$1 billion. Those sales predominantly come to in United States and they’re focused on the top-tier customers, the large genome centers, the large academic facilities.
Roche’s strength is across multiple technologies, it's a more than CHF 10 billion company. As I said before, a large installed base across many customer bases, including a deeper penetration into smaller and midsized research facilities, in addition to an extremely large, in fact, the largest in the world commercial infrastructure for in-vitro diagnostics.
In addition, although we have a very strong business in the United States, we have a very strong balance of our expertise also outside the United States in terms of our ability to amortize the ex-U.S. business. And back to my example, since the acquisition of Ventana in 2007, this has been a very important part of our strategy to take the Ventana products very much into our global framework in a global way, drive their penetration, drive their growth and also attain the synergies and efficiencies in working with other technologies we have within the group. So this would be exactly the same concept here that we would put to work again with Illumina.
Switching to a different topic, which is entry into IVD, which is the last of our synergy topics in acquisition rationale. Turning to Slide 17, Roche has now more than 30 years of experience in taking products from the research setting into the IVD setting, into clinical diagnostics. There are many hurdles that exist in terms of being able to do this successfully, and we routinely do it successfully. Everything from the IVD system development to importantly some of the unique aspects of Roche Diagnostics capabilities in terms of clinical validation and some of the benefits we also get from our pharma colleagues, and then moving right through to being able to work actively and with the regulatory authorities around the world, including some of the highest hurdle regulatory authorities like the FDA to get products approved and then quickly get them into our established global infrastructure to bring these to the customers in the fastest possible way in combination with our other technologies.
So this is something that we have a tremendous expertise in, and combined with the expertise of Illumina in sequencing, we feel we can really drive, accelerate this introduction of sequencing into the in-vitro diagnostics marketplace.
And finally in terms of the entry into IVD, it's one of the unique natures of Roche on Slide 18. In the mid to longer term, we see this also playing into our model of PHC, which, as you know, within the Roche Group today, we have more than 160 collaborations alone between our pharma and our diagnostic colleagues, leading to a very robust late-stage pipeline of companion diagnostics. Sequencing can be yet another tool for complex genetic variations that we can put into the system and allow us to amortize both the benefit to diagnostics as well as the benefit to pharma and to the Roche Group.
So in summary on Slide 19, this is, in my opinion, absolutely the right acquisition. It's also the right time because the technology is now ready to go into the smaller research labs and take advantage of the combined entities, and it's also the right time in terms of the entry into more routine diagnostics. So this really becomes both a strong rationale and also the right timing to take advantage of this opportunity.
And in closing, maybe just a couple of words on the eventual integration scenarios upon the completion of the transaction. I personally have tremendous respect for the management and the employees of Illumina. I think they have done a tremendous job. They've delivered over the years. They've made significant improvements. They have very good interactions with their customer base. And at the same time, I think Roche has a tremendous amount of experience in integrating creative, high-growth companies into its system. We've demonstrated that with Ventana. We've demonstrated that with other activities within the Roche Group on how do we foster, how do we invest in these growth businesses to create even more out of the business than it could have on a stand-alone basis.
And it's with that intention that we also announce that we intend to combine our current Applied Science business and Illumina into one organization and to headquarter that out of San Diego, out of the headquarters of San Diego. We also stated that we would continue to maintain operations in Pennsburg, Germany, our current location for Applied Science because that is and will continue to be an important site for diagnostics. It's also one of the sites around the world where we have diagnostics and pharma located on the same site, which gives us some unique advantages in terms of being able to collaborate across the researchers, across both businesses.
So in summary, I believe this is really value-creating again for the shareholders, value-creating for the employees, and I think both for the Illumina and the Roche employees, there'll be tremendous new opportunities as part of a larger organization.
And with that, I'd turn it over to Alan to cover the transaction financials.
Thanks, Dan. Welcome to everybody. It's a great opportunity and also the opportunity to share the excitement about this acquisition here. It is my pleasure now to cover the financials. However, before I start, I would like to reinforce what you have heard from Severin and Dan already that this acquisition is about creating value and growth.
Through proposed acquisition with Illumina, we are buying the market leader in a business that is fast growing and increasing in importance. This is totally in line with our philosophy that we want to be in the lead in the market where we decide to play, and you see that outlined on the Slide 21. Not only does it enable us to become the market leader but it also enables us to access a solid business with a strong sustainable cash flow and an attractive margin, and you might have seen on Dan's slide, the margin is at 23% operating profit.
Illumina will not have a dilutive effect on the diagnostics business, and as for the Roche Group, the deal will be accretive to core EPS, operating profit and operating cash flow in the first year after close. When you look at Illumina, in addition, it has strong IP and an attractive product setting, which indicates a sustainable cash flow.
With that, I would like to switch gears and to summarize the transaction financials a little bit. First of all, the Illumina acquisition is in line with our stated M&A policy. We have always stated that we do not want to engage in large megamergers as this is disruptive for innovation and the culture of companies. Acquisition must also make sense, and I think this is an evident case here. And the acquisitions should also strategically fit with our focus on high-end medical value businesses.
We believe that the higher the medical differentiation, the higher the premium that the healthcare systems and the customers are willing to pay. As such, we are interested in additions to our current portfolio in the high-end value segment.
And importantly, the financial flexibility of the Roche Group is not significantly affected as the deal can be financed out of the free cash flow capacity of the group. Just to remind us, the 2010 operation free cash flow of the group has been around CHF 14 billion. You might also remember that the free cash flow at that time in 2010 after dividend amounted to CHF 4.7 billion. So as I talked, the acquisition is about 1.5 times of the free cash flow of the group after dividend. So the deal will be financed from available cash on Roche’s balance sheet and borrowings of its credit facilities.
With that, let's go to the next page, and I don’t want to talk too much about that page. When you look at the transaction financials on Slide 23, it's an overview. Let me mention once again the price per share at US$44.5. And also, let's look at the transaction value at approximately US$5.7 billion. I think you've taken a look at the premiums, which are quite attractive, so I think that's also fine. I'm not going to talk a lot about the offer conditions as they will be specified in the offer documents anyway.
When you go to Slide 24 and the next steps, just two comments on this. We will promptly commence a tender offer to purchase all of the outstanding common stock of Illumina, and we will commence the process to nominate slate of directors and make other proposals at Illumina’s 2012 annual meeting.
And with that, I would like to summarize on Slide 25. And really just two comments here. And the whole transaction strengthens Roche’s footprint in the attractive and fast-growing sequencing market. And in addition, it enables Roche to access the solid business with a positive cash flow and strong margin.
And with that, thanks a lot for your attention. We’re happy to reach you for your questions.
(Operator Instructions) The first question is from Mr. Jain Sachin of Merrill Lynch.
Sachin Jain - Bank of America/Merrill Lynch
Just three, if I may. Just firstly, some broad market perspectives on dynamics that resulted in top line pressure at Illumina in the middle of last year. So government funding, how you see that, and the rate of the consumables uptake. Secondly, on synergies, you've talked about it from a broad perspective. I wonder if you're willing to quantify how you see top line or cost savings from the deal. And then thirdly, a very broad question on financial flexibility. I think you very broadly discussed the possibility of reviewing the dividend payout ratio once your net debt target levels have been reached. Does this deal change anything i.e., on the target or the potential for reviewing of that payout ratio? Thank you.
Perhaps Dan, if you could answer the first two questions on the operational side and then Alan will take over on the financial question.
Absolutely. Sachin, its Dan here. Relative to the general market dynamics, as I said, referring back to the slide on the market growth, Slide 13, we have taken into account these potential funding challenges in the United States and around the world. But I would say that really the growth comes, of course, from continuing to supply the large genome centers and the large research centers, but the growth also comes from the ability to penetrate audiences that have not been exposed to sequencing yet. And these audiences, in our opinion, still have adequate funding to invest in this and to drive this forward, and then, of course, eventually in the mid to longer term into the clinical setting. So we have taken into account things like NAH funding and those scenarios and also recognizing that this is a research market that's much broader than the United States as well. In terms of the synergies, I just reemphasized, this is a growth acquisition. This is not about cost cutting. It's really about investing in a business that has grown very nicely over the past years, and we're confident will continue to grow. So the synergies that we're talking about are the ability to leverage the two commercial organizations, to leverage the expertise we have within Roche about in-vitro diagnostics and bringing those products to the marketplace, to leverage the combination of pharma and diagnostics in biomarker discovery. So that's really what the acquisition is about.
Yes, well, I think the payout ratio is certainly an important question, a very tough one. When it comes to the dividend, let me first say that Illumina is a solid cash-generating business, with $1 billion in sales and a very attractive margin and generates quite some cash. So and given really the long-term sustainability of our operating cash flow and I also mentioned the free cash flow that we are generating, and I'm just reiterating the CHF 14 billion that we have generated in operating free cash flow in 2010. When you take that together, so you see that we have a lot of financial strengths, and that means well, we are committed to our attractive dividend policy.
The next question is from Mr. Gbola Amusa of UBS.
Gbola Amusa - UBS
I have three questions as well. So clearly for this deal and for Ventana previously, distribution logic exists, and we see on Slide 16 even some evidence that, that's going to happen here. On Ventana, can you comment on any evidence of revenue synergies that have played out? And more specifically, what countries or distribution channels were responsible for the pickup in your tissue diagnostic sales? And whether Illumina similarly can be supported by those same regions. Second question is, would the unprecedented speed of Zelboraf through trials, how long do you think before Illumina technologies might benefit the development in your pharma pipeline? Is that within 5 years? And then lastly, on Illumina, what percentage of these shares do you currently own? Obviously, it has to be below 5% but is that closer to 0% or closer to 5%?
Okay. This is Severin speaking. On the number of Illumina shares, we only hold a very small quantity of shares. For the first two questions, perhaps, Dan, if you can comment.
I appreciate you picking up the distribution logic. I mean, I think obviously, we continue to grow Ventana significantly faster even in the U.S. marketplace outside the United States. I think that, that tells you that the distribution logic is working there and continues to work. I still think our penetration rate on the Ventana side ex U.S. has plenty of room to grow and will continue to grow. But I think that's really working and I wouldn't comment on any specific figure other than the figures we released publicly at the annual results in terms of growth rates.
Gbola Amusa - UBS
Sorry to interrupt. If you could name two countries or three countries, what would they be for Ventana?
Well, for Ventana, I don't think it's any particular country, but if you look at Europe and Asia-Pacific in general, in particular, I mean, those were areas where we continue and are the number one company. So if you look at Europe and Asia-Pacific on the numbers, I think it will give you a very clear guidance on how we've been able to amortize that. On the second point in terms of Zelboraf, yes, I thank you for noticing how quickly that went through the clinical development pipeline. Pascal Soriot, my colleague always say, well, don't expect that for every product, which I think is fair. But relative to your specific question about when will sequencing come in to be a companion diagnostic? Clearly, that is a mid- to longer-term issue for a number of reasons. First of all, we have to bring sequencing through to a validated in-vitro diagnostics platform, which again combined with Roche, we're in the best position to be able to do. And then secondly, sequencing comes into place as you get more and more mutations. So the more complex to be with the mutation, the more sequencing becomes, I think, a potential companion diagnostic in the future. And that will come as we continue to identify targets in our pharma pipeline and around the world. And so I think it's a bit of a longer-term story but one that will come in to account and one that we can enjoy the same synergies that we do within the Roche Group with our other technology.
The next question is from Mr. Bill Quirk of Piper Jaffray.
Bill Quirk - Piper Jaffray
Daniel, the move to announce that you're going to consolidate your Life Sciences business into San Diego, obviously, as well as your German facility, Swiss facility is a pretty significant move, and particularly considering that we don't actually have an agreement from the Illumina board at this point. How should we interpret this in terms of the strength of the signal here that you're trying to send about the commitment that Roche has to this deal? And then secondarily, what does this say come from a big-picture standpoint on the 454 business?
Perhaps I can just take the question now about our commitment to this transaction, we're of course very committed to this transaction, and this is the very reason why we have now directly approached the shareholders of Illumina. And as I said earlier, we believe it is a very attractive and compelling offer. It represents full and fair value. Therefore, I think it will not only. There will not only be a big commitment from our side but there will also be a compelling proposition for the Illumina shareholders. On the second question, perhaps Dan.
Sure, absolutely. Well listen, I mean, I think it's just logical to us, first of all. And secondly, I think it is important that we send a signal. But the logic first, I mean, I think when we look at the combination of the 2 businesses, some of the fastest-growing areas and largest areas will be sequencing and microarrays. And with the strength and the number one position of Illumina in this segment, it made sense to us to look at the headquarters being out of where some of the fastest-growing businesses are based and yet still leveraging the expertise in other parts of the Roche world, which we do with other business areas by the way as well. For instance, molecular diagnostics is based out on Pleasanton, where it's on Severin's first slide. Initially, the innovation came out of (inaudible) and then was developed by Roche but we have sites in Branchburg, New Jersey, we have sites in Rotkreuz, Switzerland where we have centers of excellence for diagnostics, and we generally try to place the headquarters at a prominent location. So logic-wise, it made sense. Secondly, certainly, I mean, I think but it's not the only signal. We're trying to send a signal as well to both Illumina and Roche employees that this is a strong business for us. The Applied Science business, Life Sciences is important for our diagnostics business and I think that, that's critical. To your comment on 454, I've tried to address it on Slide 14. Very complementary technologies. There is room and space for both short read and long read. We've seen that in the marketplace to answer different questions. They're complementary but very different, and we perceive that being the case moving forward as well.
The next question is from Mr. Quintin Lai of Robert Baird.
Quintin Lai - Robert W. Baird
You have the field of next-generation sequencing has been advancing quite rapidly, and the technology changes have every 2 years or so seems like a new platform. What is your view on bringing Illumina in and keeping up with that pace of change of technology advances? And do you think that this will be enough? Or do you think that once you get in, if you get in, that you'll have to still do M&A for new technologies that might still show up in the future for sequencing?
Yes, it's a great point but. First of all, I mean, I think it's good to take a look at the history of Illumina. They've had a track record of continuously evolving their technologies to stay in the leadership position. So I'm a big believer that past behavior also predicts future behavior. So I think that's important, number one. But you're right, the technology advancement is certainly far from over. Even the announcements we saw at JP Morgan suggests that the technology continues to advance. So our strategy at Roche not just in this business, but all of our businesses, is to invest heavily in the next generation of technology, and we would do the same here. We would continue to invest in the business to drive the next adoptions of the technology, to look forward at things like single-molecule technology and investing in those as well to make sure we stay ahead of the technology curve. The other, of course, advantage of this technology curve is, as I said before, the ability now to penetrate into customer audiences that have not been penetrated before. And I think that that's really important, that we're now at a stage of technology advancement that we can really access different customer audiences than we could have 1 or 2 years ago. So it's a combination of pursuing the technology and now that the technology is ripe and ready to penetrate.
Quintin Lai - Robert W. Baird
And then with respect to that, I mean, some of the personnel at Illumina are really responsible for keeping up, for their progress. What have you done in the past like maybe with acquisitions with Ventana to incentivize those employees to stay with Roche and to continue that progress?
That's absolutely a good question. It's core to how we handle acquisitions. I mean the first thing as we go in and we understand the motivations of the individuals within that company, what are the policies? What are the procedures? How do we best maintain that, drive that and also leverage and integrate the Roche, the broader Roche network? With Ventana, I'll just give you a couple of very specific examples and Tom Grogan, the founder, who's still with us and if he were here today, he would say that the advancements that Ventana made post-acquisition would never have been possible as a stand-alone company. We've been able to invest, we've been able to penetrate 2 acquisitions recently in terms of bioimaging, into the digital pathology place, and NPM which is an HPV acquisition. Tom was firmly behind and is just enthusiastic about because it's taken his idea that he's started literally in a garage in Arizona and made it even bigger and brighter than he ever could've hoped. That combined with also the connection in with the PCR business, let's say, our EGFR assays and others has really led to being able to bring the business into another level. And of course, that in and of itself is very motivating to employees, I can tell you of Ventana. They want to work in an environment where people are investing in these technologies, and their research and innovations come to medical practice.
The next question is for Mr. Vincent Meunier of Exane BNP Paribas.
Vincent Meunier - Exane BNP Paribas
The first question is with regards to the timing of the deal, if you could give us more detail. The second question is a follow-up question on the complementarity of the businesses. We understand clearly, that's between the short-read applications and long-read applications there is complementarity, but the clients remain the same and so don't you think there could be any interest issues regarding to that? And the last question is on the margins. You say that the top line for the future in these markets is likely to remain dynamic. But is there any risk on a deterioration of the margins because of deflation in this market?
Vincent, let me take the first question, this is Severin again, for the timing of the deal. We will now promptly launch the tender offer to the shareholders. This is the next step. And as part of the process, we will also nominate the slate of directors for their upcoming annual meeting of Illumina with the goal to have the majority of Roche-nominated directors on the Illumina board. That's as much as I can say at this point. You will soon receive it will be publicly made available, the tender offer document, and all the details will be outlined in this document.
Maybe just to pick up again on the short read, long read and the complementary nature of them, clearly, there are some customers that may use both, but there are also a difference in customers. Customers that are using in the clinical setting are using more whole genomery sequencing. And for instance, de novo sequencing is clearly reserved for the research setting. So the bottom line is we continue to really believe strongly these are complementary technologies. Of course, as we go into the transaction like with any transaction, we will pursue a regulatory approval process that will be conducted by independently by the relevant U.S. and foreign regulatory authorities. And the bottom line is we believe the competitive landscape is very robust in this particular space.
And the business prospects of this business.
Sorry, I missed that one. Yes. Well, I mean referring back again to Slide 10, I mean, I would say the business prospects are clearly very positive. Bottom line is if you look at the margins, this would be accretive to the Roche Diagnostics business from day one. And obviously, the growth rate and the value generation, I also believe firmly and strongly.
The next question is from Ms. Alexandra Hauber of JP Morgan. Please go ahead ma’am.
Alexandra Hauber - JP Morgan
Three questions please. Firstly, getting back to the question how soon you can take sequencing into the mainstream IVD world. You partly addressed that already in the UBS question, but I was just not sure whether your comments were more related to how soon this becomes relevant for pharma pipeline projects or how soon this goes mainstream just to really get an idea about your deal rationale number 1 2 or 3 are clearly operational things which I can see how that play out, but how that number 4 entry into IVD, what the timeframe of this? Is this something 2017 or beyond 2020? Second question, Alan, when you said this is accretive, given that you use cash generated from operations, what sort of financing costs does this cash coming from operations have, should we use your company financing cost of 4% or is that actually very close to below 1%? And thirdly, just going back again to what's happening next. You obviously will be able to nominate 4 directors for the Illumina annual meeting but there are 9. So what other proposals will you make that enables you to gain a majority of the board as you have indicated in the press release?
Dan, if you take the first question.
Yes, Alexandra, sure. My comments before on the transition from research into IVD were a bit based more on companion diagnostics, personalized healthcare. Let me just take it in the broader sense. I guess there's 2 points I want to make here. One is that we'll see the uptake into the clinical world, I think, at 2 different paces, one pace in the United States and a different pace outside the United States. And that's because the difference in the regulatory hurdles. The U.S. will be a bit slower. We've had several meetings as have others in the industry with the FDA about how they intend to regulate sequencing. And I think that's still in a state of evolution, and it will take us continuing to provide input there to drive that forward. The second one, of course, is though outside the United States, we have a CE marking, which allows things to be used in adopting the clinic much more quickly. Now to the relative applications, I mean, today, sequencing is being used clinically in settings such as HLA typing for a bone marrow transplant. HIV deep sequencing and in some cases in oncologic mutation analysis. So I don't think this is something that is 5 or 10 years out in Europe in particular. I think it's something we see already and that we can foster and begin to drive. It won't be a black-and-white situation. There won't be one day, it's in the research world, the next way it's in the clinic world. But it will evolve and it will evolve quicker in Europe than it will in the United States.
And sorry, Alan, you could comment on the financing?
Yes, absolutely. Yes, Alexandra, I think a very fair point to make. I think my first statement is here, look at our rating. I think we have AA- with S&P and A1 with Moody's so I think really, we are in a comfortable situation there. And we are, let's say we are very convinced that we will come up with very good terms and conditions for the financing. Please understand that I'm not going to be here very specific because there are things, still a lot of things that we have first to fix before we get to that. But I think it's very clear, we can be very attractive when it comes to financing costs.
Alexandra Hauber - JP Morgan
Sorry because I may be misunderstanding. So you're going to raise financing you're going to raise debt for that?
Look, I think what we're doing is and what you see is it will be financed from available cash on the Roche balance sheet, that's obvious, yes, and the borrowings under its credit facilities. That's what we're going for and that's what we can do. And I think everything else, we have further to decide and look at.
On your third question again, in terms of gaining the majority on Illumina's board and the timing related to that, now, what I can do at this point, I can confirm to you that we are taking steps to gain this majority. But at this point, I could not provide you with any technical details on how we achieved that. For that, I'd like to refer you to the proxy documents which we, of course, will file in due time.
The next question is from Ms. Luisa Hector of Credit Suisse.
Luisa Hector - Crédit Suisse
Yes, I have 2 questions. So first given that this is a hostile offer, how much due diligence have you been able to do? And are there any particular areas of uncertainty, be it around IP litigation or anything regulatory? Is there anything that you're concerned about? And then just to follow up on moving into the IVD market. Dan, you gave the example for the HLA and their various deep sequencing. So where that's occurring today? Where is the funding coming from because I think you said this would involve a shift away from government. So if this is predominantly sort of going to be driven by Europe to start with, where is the funding coming from? And are you seeing it very easy to get the sequencing paid for the reimbursement? Is that happening easily at the moment? And would you expect that to continue since really you've got the funding for that. As it moves into IVD, why is it that you're confident?
May I just take the first question on the due diligence and the related process. I cannot comment on this in detail but I can refer you again to the information in the whole package, which will be published very soon as part of the tender offer which is, of course, publicly available and filed with the SEC. If we can.
Sure, absolutely. I mean, I think again, I think sequencing is in its infancy in terms of the diagnostics field. But for instance, in the select populations, we have HLA typing or even HIV deep sequencing. I mean, we do have providers and insurers and governments that are paying for this because of the significant value that it adds. I mean, if you type the wrong bone marrow, there's much more significant costs. The question will be as it goes into broader segments. For instance, there are many institutions that we know of around the world, oncology institutions that are starting to take a 50-exome or 100-exome sampling of patients with oncology. Now sometimes, the institution itself is reimbursing in that, and of course, we'll have to approach how that's reimbursed country by country. But I'm confident as with other diagnostic applications that once you have robust clinical data around it, which is something I think that we're quite keen on at Roche and that we amortize across the Roche Group, the next step is, of course, reimbursement. And when it provides the type of value, it provides to the overall potential healthcare system by being able to treat the right patients with the right therapies at the right time and avoid inappropriate treatment, I'm confident we'll get reimbursement country by country as we proceed with the clinical applications.
The next question is from Mr. Michael Leacock of RBS.
Michael Leacock - RBS
Two brief questions, if I may. Firstly, Dan, I'll be very interested to hear your perspective of the competitive position of Illumina, particularly in terms of things like pricing of machines and so on and how you think that might play out. Secondly, your Slide 16 shows what you think are some of the strengths of Illumina and the strengths of Roche. In terms of unlocking that potential, are there any other factors any rate between hurdles perhaps that Roche doesn't have which would need to be overcome in order to really unlock the full commercial potential of this deal?
From a competitive position standpoint, I don't want to start to speculate on all the competitor's parameters. I would just say that Illumina is clearly the leading technology in sequencing today, has been for many years. And we're confident with that type of track record, it will continue to do well vis-à-vis the competition. In terms of unlocking the potential, no, I don't think there are other hurdles specifically because we've done this with other acquisitions. So it's not a concept, it's an actual reality in terms of how we operate it. Clearly, I mean, when we get down to the specifics of a particular case, we put a lot of effort and work behind, how do we get the 2 teams to work together, how do we look and dimensionalize the customer base, how do we set up the right incentives. I mean, all those things are extremely important but I don't consider them hurdles, and they've worked well for us in the past.
Next question from Mr. Keyur Parekh of Goldman Sachs.
Keyur Parekh - Goldman Sachs
I have 2, if I may. Dan, first, can you help us understand kind of what Roche can add to this platform in the context of your ability to enter the IVD market kind of sooner than Illumina might have been able to do on its own? And then secondly in sense of kind of the uncertainties around the competitive landscape and as kind of Michael was referring to, can you help us understand why you feel comfortable betting on the Illumina technology, given that you still don't have a clear path forward towards third-generation technologies?
Sure, okay. I mean, what can Roche add to the platform? I mean, I think referencing again back to Slide 17, and we've had lots of experience with this. Developing a research base, research grade, instrument and assay is really a different task than developing a full IVD instrument and assay in terms of documentation, in terms of validation. And there's a lot of pitfalls associated with that because the regulations are constantly changing so you really have to be very up to speed with what's required by the different authorities around the world, what documentation is required, how do we drive that, how do we make the system very robust for large-scale manufacturing principles, highly validated manufacturing principles. So it's everything from the clinical development expertise I think we provide to the operations manufacturing expertise and then eventually to the introduction of those platforms in the marketplace to a different customer base. In terms of, I'm sorry, the second question was?
Keyur Parekh - Goldman Sachs
Competitive landscape. Yes, so again, I think I don't want to comment on the competition. I think we've got a very competitive combination of platforms in 454 and in Illumina for instance in sequencing, and other aspects of the business. We’re constantly monitoring the competitive environment, which is important. And so far, I think the technologies that could be even stronger than what we see here today are still in a very early feasibility stage and have a lot of prove.
Thank you, Dan. With this, I would like to close our call today. I know some of you have scheduled another call in a few minutes at 1 o’clock. So thank you again for joining, and have a good day.
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