Why Illumina’s Future Remains Bright

Even as the allure of Illumina (NASDAQ:ILMN) has somewhat dimmed from its rejection of Roche’s (PINK:RHHBY) takeover bid, it still is a stock to watch — and buy, as profit-taking picks up speed.

Illumina develops important research tools for large-scale analysis of genetic variation and function, where Roche wants to expand, and dominate.

Illumina’s stock has continued to cool down after its torrid advance following Roche’s unsolicited $44.50 offer on Feb. 7, 2012, and we should expect more selling by traders who had jumped in when the stock was zooming up on the news. The stock had skyrocketed to as high as $55 in late January — way before the formal bid was announced on Feb. 7. It has since fallen to $53, and should drop even more as Wall Street pulls its buy recommendation on the stock.

That’s the time the savvy pros are expected to buy or come back to the stock. That’s because they believe Illumina is worth much more than Roche’s bid, which Illumina described as “grossly inadequate” and “dramatically undervalues” the company and, therefore, is not in the best interest of its shareholders.

Predictably, many Street analysts pulled their recommendation on the stock to a hold or underperform from a buy. But Illumina’s management and board are undeterred.

“We feel strongly about this,” said Jay Flatley, president and CEO of Illumina, who told analysts at a conference call on Feb. 7 that the company, “based on its track record and market leadership is securely positioned to capitalize on tremendous market opportunities in the years ahead.”

Illumina has the “promise and potential,” argued Flatley, to experience “extraordinary growth as genetic information becomes broadly applied beyond molecular biology research and into molecular diagnostics, reproductive health and cancer management.”

As for the stock, some pros believe the obvious — the lower it gets, the more attractive it becomes. The stock traded as high as $79.40 per share on July 5, 2011. When it collapsed to a 52-week low of $25 on Dec. 13, 2011, it was clear to many industry watchers that Illumina had been thrown into the bargain bin. And so the likes of Roche paid heed to the stock.

Some big investors and some analysts are convinced Roche will come back with a higher bid, before somebody else in Big Pharma comes along to gobble up Illumina.

“Roche is intent in pursuing its takeover bid through private negotiations and more likely than not will submit a higher bid,” said the head of an investment management company that already owns shares but declined to be named. Roche in December 2011 had offered $40 per share to acquire Illumina, which the latter also rejected.

“We believe Roche will have to raise its offer price,” said Jeffrey Loo, analyst at S&P Capital IQ, as he sees “notable synergies as clinical applications developed through genetic sequencing is in its infancy, but is expected to grow significantly within several years.”

Even if Illumina stays independent, many analysts believe Illumina is worth much more than Roche’s $44.50 bid. The unsolicited takeover bid validates Illumina’s valuation, according to some on Wall Street. Analyzing and understanding genetic variation and function “are critical to the development of personalized medicine, a key goal of genomics,” Loo said. He noted that genetic variation accounts for many of the physical differences among humans, such as hair, color, height and eye color.

Such variations, he said, have important medical consequences, including a predisposition to disease and different response to drugs. The value of Illumina’s tools is in assisting researchers process billions of tests necessary to convert raw genetic data into medically valuable information to improve drugs and therapies — and potentially cure diseases.

Quintin J. Lai, analyst at investment firm Robert W. Baird, who rates the stock as “outperform,” has a 12-month price target of $60 per share.

“Our price target continues to be based in part on Roche’s hostile bid for the company, which we believe gives Illumina a scarcity value that potentially attracts additional, possibly compelling, bids,” Lai said. He noted that Roche has been an acquisitive company over the years.

Illumina has long been rumored as a target of Roche and other conglomerates, Lai said, “which could create a situation where additional players will drive the stock higher.” He is optimistic that Illumina will be a long-term strong-growth company. Lai expects Illumina’s earning to jump to $1.72 per share in 2013, up from an estimated $1.47 in 2012, and $1.30 in 2011.

Investors who seek to participate in the growth of genetic research in helping find a cure for a variety of diseases should look into Illumina’s rejection of Roche’s bid not as a bummer but an opportunity to get in on a better deal — and larger participation in the advance of medicine.

As of this writing, Gene Marcial did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2012/02/why-illumina-ilmn-future-remains-bright-roche-rhhby/.

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