A DNA Chip Maker Acquires Gene-Sequencing Company

Published: November 14, 2006
A small San Diego company called Illumina has been making significant gains in market share over the last year at the expense of Affymetrix, the company that pioneered and has long ruled the market for so-called DNA chips used in genetic studies.
Yesterday, Illumina announced another move in its effort to leap ahead. The company said it would acquire Solexa, a developer of DNA sequencing machines, for $600 million in stock.
The acquisition will put under one roof most of the main tools now used for genetic studies.
“We believe the combination of Illumina and Solexa will create a powerful life sciences franchise,” the chief executive of Illumina, Jay Flatley, told analysts in a conference call yesterday.
Solexa, based in Hayward, Calif., is one of several companies trying to develop methods to determine the sequence of DNA in an organism at less cost and far more quickly than the technology used only a few years ago in the Human Genome Project.
Eventually DNA sequencing might be so cheap that every person would be able to carry around his or her complete genetic blueprint on a DVD or computer chip.
That day is still far in the future. But Solexa is expected to soon begin shipping a DNA sequencing machine that it claims will be able to determine the three billion DNA units in a person’s genome for about $100,000, about one-hundredth the cost of using older sequencers.
Illumina hopes that having the gene-sequencing technology will complement its gene chips, which are used to measure particular genetic variations, not the complete sequence of DNA units. The chips are slivers of glass or other material containing bits of DNA of genes of interest.
Illumina’s products are mainly used in studies trying to find genes that cause or raise the risk of a disease. Scientists might take the DNA from 1,000 people with a disease and another 1,000 without the disease and compare their genomes at 500,000 specific spots. The aim is to find genetic variations that correlate with the disease.
Such studies have become more feasible in the last year as the cost of testing such variations has dropped. And Illumina has won a number of contracts for those studies from pharmaceutical companies and academic institutions at the expense of Affymetrix, which has had manufacturing and technical difficulties.
Illumina’s revenues jumped to $53.5 million in the third quarter of this year from $19.5 million in the third quarter of 2005. Profit has also soared as has its stock price, which enabled Illumina to buy Solexa for stock.
Solexa shareholders will receive Illumina stock worth $14 a share at the time the deal closes, though the price would be lower if Illumina’s stock is below $40.70 at that time, as it is now. At $14 a share, the deal would be at a 44 percent premium to Solexa’s closing price of $9.70 on Friday.
Yesterday, Solexa shares soared $2.86, or 29 percent, to $12.56. Illumina’s shares plummeted $5.14, or 12 percent, to $38.91, but the price is still about 140 percent higher than it was a year ago.
An analyst at Pacific Growth Equities, Un K. Kwon, said the drop reflected the 20 to 35 percent dilution in Illumina’s earnings expected next year from the deal.
“Illumina was starting to get to a point as a company where they were more mature and had significant earnings,” she said. The Solexa acquisition “puts that up in the air.” Ms. Kwon said that strategically, however, the deal made sense for Illumina.
As Illumina has gained, Affymetrix has suffered. Its share price is down nearly by half from a year ago. The company cut the price of its chip used in such disease-gene studies in half.
A spokesman for Affymetrix, Andrew Noble, said the manufacturing problems had been fixed and the company was “back on track.” Affymetrix also still leads in the market for chips used to study which genes are active in a cell at any given time.
Ms. Kwon, the analyst, said Illumina’s move could prompt Affymetrix to buy its own sequencing company. Affymetrix shares fell 61 cents, or 2 percent, yesterday, to $25.70.