SAN DIEGO & MENLO PARK, Calif.—Illumina Inc. is capping off 2020 with a growth spurt, having announced a definitive agreement with GRAIL under which it will acquire the latter company for cash and stock consideration of $8 billion upon closing of the deal.
Illumina founded GRAIL in 2016, when the latter was spun out as a standalone company aiming to develop data science and machine learning to support the development of tests for the early detection of multiple types of cancer.
“Over the last four years, GRAIL’s talented team has made exceptional progress in developing the technology and clinical data required to launch the Galleri multi-cancer screening test. Galleri is among the most promising new tools in the fight against cancer, and we are thrilled to welcome GRAIL back to Illumina to help transform cancer care using genomics and our [next-generation sequencing] platform,” said Francis deSouza, president and CEO of Illumina. “Together, we have an important opportunity to introduce routine and broadly available blood-based screening that enables early cancer detection when treatment can be more effective and less costly. Multi-cancer early detection is better for patients, their physicians and payors. As we accelerate our path to clinical leadership and the path to multi-cancer early detection, we will continue to drive significant value creation for our stockholders.”
Per the agreement, GRAIL stockholders—including Illumina—will receive total consideration of $8 billion, comprised of $3.5 billion in cash and $4.5 billion in shares of Illumina common stock, subject to a collar. At present, Illumina holds 14.5 percent of GRAIL’s shares outstanding, and roughly 12 percent on a fully diluted basis. Once the transaction closes, Illumina stockholders are expected to own roughly 93 percent of the combined company, with GRAIL stockholders owning approximately 7 percent.
GRAIL stockholders will also receive contingent value rights that will entitle them to future payments representing a pro-rata portion of certain GRAIL-related revenues annually for a 12-year period. This reflects a 2.5-percent payment right to the first $1 billion of revenue each year for 12 years, and revenue above that amount each year would be subject to a 9-percent contingent payment right during the same period. GRAIL stockholders will have the option to receive additional cash and/or stock consideration, in an amount to be determined, instead of the contingent value rights, if preferred.
Both companies’ boards of directors have approved the deal, which is expected to close in the second half of 2021, subject to customary closing conditions.
“Cancer is one of society’s most significant challenges, with most cancer being detected too late,” commented Hans Bishop, CEO of GRAIL. “We believe multi-cancer early detection technology could address a tremendous unmet need and reduce the cancer burden worldwide. Combining forces with Illumina enables broader and faster adoption of GRAIL’s innovative, multi-cancer early detection blood test, enhancing patient access and expanding global reach. We are excited about this next step in our journey to transform cancer detection and outcomes and create value for patients and their families and communities, healthcare providers and payors, employers, and stockholders.”
The deal significantly expands Illumina’s testing portfolio, offering the company a chance to seize a bigger portion of a massive market; according to Illumina, the next-generation sequencing market for oncology is expected to reach $75 billion in 2035, growing at a compound annual growth rate of 27 percent. In turn, Illumina’s market presence and manufacturing capabilities will enable it to capitalize on the tests GRAIL has developed and accelerate their commercialization.
While Illumina seems confident in the future value GRAIL could provide, the company’s optimism has not been shared by investors. Illumina’s stock price dropped nearly 7 percent when the deal was announced, with Keith Speights of Motley Fool noting that “Earlier this month, GRAIL filed for an initial public offering (IPO). Its valuation as it prepared to go public was estimated to be around $1.9 billion. Illumina will spend four times that amount to get a company that doesn’t have any products on the market yet and that has no steady source of revenue. The fact that Illumina is investing so much to get a company that it already owned just a few years ago makes the deal even harder to swallow for investors.”
Similarly, Max Masucci, an analyst at Canaccord Genuity, issued an investors note stating, “We reiterate our HOLD rating and lower our PT to $300 (from $350) after [Illumina] announced an $8B deal to acquire private liquid biopsy screening company GRAIL. We continue to view the acquisition as a “swing for the fences” approach to entering the clinical markets, and we believe it will be at least two years before we can evaluate the value generation potential of the deal (in the context of its $8B price tag).”
In an investor note, SVB Leerink seemed similarly doubtful as to if—or when—the potential long-term earnings would compensate for the immediate costs.
“GRAIL has no commercial adoption for its tests yet and likely to require significant investments into trials, regulatory and reimbursement build up to drive adoption,” the note stated. “GRAIL is spending close to ~$300M (FY20) in operating expenses to clinically validate and develop their multi-cancer approach and its pan-cancer screening product, Galleri, is expected to launch as lab-developed test (LDT) in 2021. We see that the liquid biopsy market is already catalyzed with GH (OP), NTRA (OP), NEO (OP), Thrive and Freenome (private) leading the charge. Acquisition of GRAIL would only place [Illumina] in direct competition with its own liquid biopsy customers.”