Roche might expand offer for Illumina

Roche Holding AG said it is willing to study "additional value" in its bid for Illumina Inc, after a proxy advisory company recommended that the target company's shareholders reject the hostile offer.

Roche's concession was tied to "the opportunity to enter discussions and perform due diligence" in preparation for a possible deal, said the Basel, Switzerland-based drugmaker.

Institutional Shareholder Services said Roche's $6.7 billion bid undervalues San Diego-based Illumina, the maker of machines that search the human genome for ways to defeat disease. Egan-Jones Ratings Co also recommended that Roche's proposals, including a slate of new directors, be rejected, according to a statement by Illumina.

The advice may prompt Roche, the world's largest maker of cancer drugs, to raise its offer for Illumina a second time, said Lionel Melka, co-manager of Bernheim, Dreyfus & Co's Diva Synergy Fund, which holds Illumina stock.

"This report puts a lot a pressure on Roche to bump again to get a friendly negotiation going prior to the April 18 meeting" of Illumina shareholders, said Melka, whose company is based in Paris, before the statement from Roche.

Acquiring Illumina would expand Roche's offering of diagnostic products and potentially allow the Swiss company to better target medicines to patients. Illumina plans to introduce a machine capable of scanning a person's complete DNA within a day by the end of this year, Illumina has said.

Shareholders of Illumina should vote for management's nominees to the board of directors at the annual meeting and reject Roche, according to the report by ISS.

"Roche would seem to be an excellent partner for Illumina as the sequencing industry grows more intertwined with new drug development," ISS analysts wrote. "The current bid, however, falls short of providing a compelling enough consideration to cause Illumina's shareholders to support Roche's nominees."

The Swiss drugmaker bid $44.50 per share for Illumina in January, and raised the offer to $51 on March 29. Illumina, which closed at $52.33 on April 5, rejected both proposals as inadequate and refused to negotiate.

After the first rebuff, Roche proposed that Illumina shareholders oust four directors at the annual meeting, expand the board and elect six Roche nominees.

That would give the Swiss company a majority on the board, clearing the way for negotiations.

The sweetened offer values Illumina at 34 times this year's expected earnings, Roche said in a statement on March 29.

That's a higher valuation than other publicly traded gene-sequencing companies, such as Life Technologies Corp, Roche said in a presentation to investors.

Still, no one should value Illumina based on this year's profit, ISS said.

Bloomberg News in Paris