by Alex Philippidis
Illumina responded Friday to the European Commission (EC)’s order to divest itself of cancer blood test developer Grail by saying it will comply should it lose its European court appeal of the directive—or lose an appeal it is pursuing of a separate U.S. order to divest.
The EC’s order, issued Thursday, requires Illumina to dissolve or “unwind” its purchase of Grail, now a subsidiary, so that Grail has the same independence from Illumina that it had before the deal was announced in 2020.
The sequencing giant is still fighting the order by appealing the jurisdiction of the EC over Grail to the European Court of Justice (ECJ). Illumina has said in the past it will pursue a jurisdictional appeal even as it works to divest Grail in accordance with the EC.
In a statement, Illumina disclosed that it would have 12 months to divest of Grail, with a three-month extension possible. Illumina also confirmed an earlier EC statement by saying it will be permitted to explore a range of options for carrying out the divestiture, including but not limited to a third-party sale or a capital markets transaction.
Should Illumina choose to divest of Grail via a capital markets transaction, Illumina must capitalize Grail with two-and-a-half years of funding based on the cancer blood test developer’s long-range plan.
“Notably, the terms of the order provide for flexibility in transaction structure, an encouraging outcome from Illumina’s ongoing dialogue with the EC,” Illumina stated.
The order also calls for Illumina to retain a stake in Grail of up to 14.5%—the stake it had before acquiring the company—and reestablish a royalty arrangement it previously had in place with Grail.
Illumina said that with help from financial and legal advisors, it has already begun preparatory work necessary for divesting of Grail “if needed.” The divestiture process will be led by Illumina.
“Most negative” scenario
“For long-term shareholders, we think a quick sale to a competitor may be the most negative divestiture scenario, given weak market sentiment and tax obligations that could cut into the $68 per share of value that we place on Grail,” Morningstar analyst Julie Utterback commented on the firm’s website.
If Illumina is able to spin off Grail to shareholders in a tax-free manner—as Danaher recently did when it spun out Veralto, which has nearly $5 billion in sales, into a public company—Morningstar’s fair value estimate of Grail may remain roughly intact until the spinoff is complete, Utterback continued. She added that the intrinsic value of Grail to Illumina shareholders would remain largely the same minus dilution to help fund Grail’s operations.
“If a spinoff to shareholders is completed, Illumina’s fair value estimate will likely revert to the value of the genomic sequencing business, which we currently estimate at $201 per share or well above recent prices,” Utterback commented. “Positively, with a divestiture, Illumina’s intrinsic value may be easier for the market to recognize without Grail’s ongoing losses overshadowing the results of the legacy business.”
Morningstar’s estimate is just above the $200 12-month price target set for Illumina shares by Stifel. On Thursday, Dan Arias, managing director, life sciences & diagnostics with Stifel, reiterated the firm’s “Buy” rating and $200 price target on Illumina.
Illumina said it is required to continue funding Grail until any divestiture occurs.
“Illumina is committed to resolving all issues regarding Grail in a timely manner, with the objective of achieving the maximum value for shareholders and the best outcome for Grail,” the company added.
Illumina announced its plan to buy Grail in September 2020, saying the deal would accelerate commercialization of the Grail-developed Galleri cancer blood test, then being planned for launch in 2021. According to Illumina, Galleri can detect more than 50 cancers across all stages and has correctly identified the tissue of origin in 93% of positive results, with >99% specificity.
Illumina disclosed the deal as being $8 billion but still had a stake in Grail, reducing its value to $7.1 billion.
Angering regulators
The U.S. Federal Trade Commission (FTC) began challenging Illumina’s purchase of Grail in March 2021. Five months later, Illumina completed its purchase of Grail despite the FTC challenge and the EC’s antitrust review of the deal, angering both regulators.
Illumina is also appealing an FTC Opinion and Order to divest itself of Grail, issued in April. The order contended that an Illumina merger would lessen innovation in the U.S. market for multi-cancer early detection (MCED) tests like those marketed by the cancer blood test developer, since Illumina is the nation’s only provider of DNA sequencing that is a viable option for MCED liquid biopsy tests.
In challenging the FTC order, Illumina has argued that the leadership structure of the FTC violates the U.S. Constitution because FTC commissioners can only be removed for cause in violation of the Constitution’s Article II, which vests executive power in the President. Illumina has also contended that the FTC violated due process by depriving Illumina and Grail of a fair proceeding before an impartial tribunal.
But if it loses a final decision of the U.S. Fifth Circuit Court of Appeals, Illumina acknowledged, it will divest of Grail.
In August upon releasing second-quarter results, Illumina tucked within its Form 10-Q quarterly filing a terse acknowledgment that staffers from the U.S. Securities and Exchange Commission had been “requesting documents and communications primarily related to Illumina’s acquisition of GRAIL and certain statements and disclosures concerning GRAIL, its products and its acquisition, and related to the conduct and compensation of certain members of Illumina and GRAIL management, among other things.”
“Illumina is cooperating with the SEC in this investigation,” the company stated.
Illumina’s execution of its Grail acquisition emerged as a key argument made by activist investor Carl C. Icahn during his partially successful proxy campaign last spring—a campaign that involved several letters to shareholders and an exclusive GEN interview. Icahn asserted that Illumina’s insistence on carrying out the acquisition despite regulator opposition drained the company of resources, an argument that Illumina has rejected.
Illumina said it will answer further questions about the Grail divestiture from analysts when it releases third-quarter 2023 earnings, which is scheduled for November 9.
Alex Philippidis is senior business editor of GEN.
