According to news reports, Roche Holdings (PINK:RHHBY) is mulling a bid for diagnostics company Life Technologies (Life Tech).  While Life Tech has a presence in several business verticals including laboratory equipment and scientific instruments, it is the rapidly growing genome sequencing business that likely caught the attention of the Swiss healthcare giant.
The move signifies Roche’s continued interest in genome sequencing after multiple attempts – including a hostile bid – to acquire Illumina, which failed about a year ago.  Below we take a closer look at Life Tech and how an acquisition could benefit Roche.
We have a $58 price estimate for Roche Holdings, which is about in line with the current market price. Roche shares have risen nearly 30% over the past year.
Genetic Sequencing: Key to 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 the use of sequencing has historically been hindered by significantly higher costs and longer analysis time, this is beginning to change with the introduction of more advanced devices and analytics. The average prices of genetic sequencing systems have been declining with growing competition.  Further, as processes are steadily improving, the analysis time has also come down from days to a few hours.  Going forward, we expect an increase in the use of sequencing to develop differentiated and targeted drugs and companion diagnostics in areas of high unmet need, particularly oncology. 
Likely in response to this growth potential, Roche has intensified its focus on combining more of its pharmaceutical pipeline drugs with the development of companion diagnostics, as evidenced by the aforementioned takeover attempt of Illumina.
What Does Life Technologies Offer?
Life Tech’s business unit Ion Torrent recently launched a same-day sequencing system, which is what Roche was primarily looking for with its Illumina bid.  While Illumina would have given Roche ready access to its already well-established same-day genome sequencing technology, Life Tech’s system can also do the job in one day, and for $1,000 per sequence.  With its R&D capabilities and global reach, coupled with Life Tech’s genome sequencing products, Roche could bolster its efforts to incorporate sequencing into clinical and routine diagnostics.
Acquiring Life Tech would provide 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 in its targeted skin cancer drug Zelboraf. The drug comes with a companion diagnostic test that identifies patients with a specific genetic mutation who would most benefit from the treatment. Zelboraf witnessed a huge uptake in demand, generating revenue of more than $250 million in the first year after its launch in late 2011.
The Other Contenders
Roche is not without competition when it comes to potential suitors for LifeTech. Potential strategic buyers include core diagnostics companies like Thermo Fisher Scientific and Danaher. 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 have also been rumored to be taking part in the bidding. 
Roche and Thermo Fisher are expected to emerge as the most serious suitors, though Roche appears to be more interested in just acquiring the genetic sequencing business. Therefore it may not want to spend over $11 billion (Life Tech’s market capitalization) on an acquisition that comes with other, lower-growth diagnostics businesses. However, separate bids for separate businesses could be difficult due to potential adverse tax impacts. Life Tech’s other businesses appear to be a good fit for Thermo Fisher’s existing portfolio, so it may be more willing to pay up for the whole company. Notes:
- Roche joins Life Tech auction; KKR, H&F team up, Reuters, March 20 2013 [↩] [↩] [↩]
- Illumina’s Board Unanimously Rejects Roche’s Unsolicited Tender Offer as Inadequate, Illumina, Feb 07 2012 [↩]
- Roche eyes Illumina for DNA analysis in £3.6bn bid, CIO, Jan 27 2012 [↩] [↩]
- The future of cancer treatment: Whole genome sequencing?, Smart Planet, July 08 2012 [↩] [↩]
- Weighing Roche’s Alternatives to an Illumina Deal, NYTimes, March 06 2012 [↩]