Roche has backed off of its hostile takeover bid for Illumina. The move came after Illumina shareholders rebuffed Roche’s efforts to install board members favorable to a merger at the San Diego-based gene sequencing technology company’s 18 April annual meeting.

In a statement, Severin Schwan, CEO of Swiss-based Roche said, “We continue to hold Illumina and its management in very high regard but, with access only to public information about Illumina’s business and prospects, we do not believe that a price above Roche’s offer for Illumina of $51.00 per share would be in the interest of Roche’s shareholders.”

Roche had initially offered shareholders $44.50 in January, then raised its offer price to $51 in March. It was also trying to expand Illumina’s board and install favorable directors.

Illumina shareholders’ rejection of the measures was not surprising, as Illumina has fought the merger, and shareholder advisory firms had recommended against Roche’s advances.

“We are pleased that Roche has decided not to extend its inadequate offer to acquire Illumina and that we can now return our full focus to growing our business, making the most of the expanding opportunities in our space, and delivering superior results for our customers and stockholders,” Illumina CEO Jay Flatley said in a statement.

But Roche’s decision today that its offer for Illumina will expire on 20 April did surprise some analysts; most had predicted that Roche would be willing to extend or increase its offer even further to see the merger through, as the company did when it acquired Genentech and Ventana Medical Systems.

“I anticipated an extension of the offer at unchanged terms,” wrote analyst Martin Vögtli of Kepler Capital Markets in an email. “Initially, I thought that Roche is playing a tactical game,” perhaps hoping that Illumina would be more receptive to an offer later this year if it falters amid heavy competitive pressure and tightening government funding. “But after talking to Roche representatives I firmly believe now that this was the end of the bid.”

The move now raises pressure on Illumina to continue to dominate the sequencing market by both holding off its larger competitor, Life Technologies of Carlsbad, Calif., whose Ion Torrent technology debuted last year, and fending off companies with newer, potentially disruptive technologies such as UK-based Oxford Nanopore, which has said it will release its first commercial systems this year.

“Illumina will need to figure out longer term how to fight against Life’s much bigger sales channel,” wrote analyst David Ferreiro of New York-based Oppenheimer in an email. He notes that Illumina is under increasing pressure to cut the cost of both its machines and of their output: “Pricing will continue to be an issue, especially if Life’s Ion Proton delivers the $1000 genome,” as it has promised to do by the end of the year.

Vögtli says that Oxford’s potentially powerful platform may be one of the factors that dissuaded Roche from continuing to pursue the merger, along with Illumina’s resistance to a deal and with pressure from Roche shareholders not to pay too much for the acquisition.

“I think the move sends out a strong signal that cost discipline is high on the agenda and that Roche is no longer willing to overpay, especially for risky technologies,” Vögtli wrote.

Roche signaled that it may be interested in pursuing other sequencing companies, saying in its statement that it “will continue to consider options and opportunities to develop further its portfolio of businesses in order to expand its diagnostics leadership position.” But it is unclear who Roche could target; Life is a large company, while others are too new and have too little market share to be attractive targets for a firm whose main focus is bringing sequencing to the clinic.

The unraveling of the Roche bid heightens the competition in the race for the $1000 genome. Sequencing industry veterans had predicted that Illumina would become a much less innovative company under Roche’s management. But Illumina hasn’t clearly spelled out what technology will replace its current one under increasing pressure from other competitors that are just entering the market or on the immediate horizon. Illumina has a partnership with Oxford Nanopore, but it is for a separate technique than the one that Oxford itself is commercializing.

Analysts will be watching closely as Illumina announces its first quarter 2012 results on 23 April to see how well positioned the company is to profit from its continuing independence.

Follow Erika on Twitter at @Erika_Check.