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Here’s Why Illumina Shares Barely Budged When It Gave Up On Its Takeover to The Tune Of $98 Million

Genome-sequencing company Illumina (NASDAQ: ILMN), abandoning the takeover of smaller competitor Pacific Biosciences (NASDAQ: PACB), lost it $98 million and a year of its time. One would have expected Illumina shares to sink like a stone after the Jan. 2 announcement, but they didn't. Instead, the shares slipped only 1.3% in the trading session that followed, and have since gained about 2%.

Image source: Getty Images.

So what happened? First, a bit of background. Both Illumina and Pacific Biosciences are in the business of sequencing genomes. They develop devices that read genetic material, and these readouts can be used in many areas, such as helping researchers determine a genetic link to disease or better understanding livestock genetics to optimize breeding. Illumina is a specialist in "short reads" of genetic material, while Pacific Biosciences' specialty is sequencing longer portions of DNA for a "long read." Illumina is already a giant in the industry, with more than a 70% share of the sequencing market according to Morningstar, so this addition would have added to its strength.

In fact, it's this big positive that killed the deal. The Federal Trade Commission as well as an antitrust group in the U.K. recently said the alliance would create a monopoly. Instead of continuing the battle to win over regulators, Illumina and Pacific Biosciences decided to drop the plans they had been working on for more than a year. As a result, Illumina must pay Pacific Biosciences a $98 million termination fee linked to the collapse of the agreement.

71% premium

The news is actually not all that bad for Illumina. One reason concerns the price of the acquisition. Illumina offered $1.2 billion, the equivalent of $8 a share, in an all-cash transaction. That represented a 71% premium on the Pacific Biosciences' share price at the time of the offer. Avoiding this cost brightens Illumina's financial picture in spite of the penalty fee. Of course, growth comes at a price, and in some situations, companies must make massive investments to gain products and market share.

But in Illumina's case, here are some points to consider: As mentioned above, Illumina is the market leader. That's one major advantage. In addition, its short-read technology is more accurate than the long-read technique -- therefore, Illumina has the benefit of owning the more reliable of the two. That said, there are times when long reads are essential and expertise in the area would indeed bring added value to the company. But Illumina has options, whether that's developing its own techniques in-house, or searching for a smaller, less-expensive company with technology it can buy and build upon.

Collaborations with Qiagen and Adaptive Biotechnologies

Growth in earnings and demand for Illumina's sequencing products are two more reasons why the loss of Pacific Biosciences won't have a significant impact on Illumina's future. In the third quarter, Illumina reported earnings per share of $1.93 (surpassing analysts' forecasts for $1.40) and a 6% increase in revenue. The company also announced product collaborations with Qiagen (NYSE: QGEN) and Adaptive Biotechnologies (NASDAQ: ADPT), showing its ongoing interest in working with other experts in the field. Through 2023, Morningstar expects Illumina to grow revenue at a 12% compounded annual rate and earnings per share at a 14% rate.

Illumina will also benefit from increasing demand. According to a Global Industry Analysts report, in the 2019 to 2025 period, the DNA sequencing global market will grow by $17.6 billion, with a compound annual growth rate of 18%.

For investors, all of this means that though the Pacific Biosciences acquisition would have brought quick access to a complementary technology had it been approved, Illumina didn't absolutely need it. By dropping the deal, Illumina avoided expenses and the uncertainty of a potential regulatory refusal months down the road. And the company can continue along its path of growth and market leadership. Looking at the share price reaction -- or lack of reaction -- investors clearly aren't disappointed in Illumina's decision to forge ahead on its own.

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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Illumina. The Motley Fool recommends Qiagen N.V. The Motley Fool has a disclosure policy.


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