- Illumina has agreed to acquire Grail in an $8 billion deal that could establish the sequencing giant as a leading player in the growing race to use blood-based tests known as liquid biopsies to catch cancers early.
- Grail spun out of Illumina in 2016 and raised $2 billion to back its work. Long-rumored to be considering an initial public offering, the company finally filed for an IPO earlier this month to finance the coming launch of its first product, a test called Galleri. But Illumina has swept in ahead of the IPO with a cash-and-stock deal for the 85% of Grail it does not already own.
- Wall Street, however, didn't react positively. Analysts questioned the deal's rationale, noting the company, best known for its DNA sequencing machines, has struggled with clinical investments and now risks creating conflicts with its own customers. Shares in Illumina have fallen more than 20% since last week, when reports of a possible Grail buyout surfaced.
Illumina's genome sequencing machines are the bedrock of the growing effort to use blood tests to detect cancer.
Yet, Illumina has played a behind-the-scenes role, providing the equipment that enables so-called liquid biopsies but not selling the tests itself. Indeed, though it helped create Grail, Illumina chose years ago to spin the business out and invest in its progress.
Now, in a change of direction, Illumina is set to pay $3.5 billion in cash and $4.5 billion in shares to acquire Grail outright, staking a claim on the future of liquid biopsies and the company's ability to compete with a growing group of rivals.
Illumina CEO Francis deSouza claimed Monday the acquisition will launch a "new era" in early cancer detection, and Grail's chief executive Hans Bishop said Illumina's global reach will give it a leg up in its future commercialization efforts.
The Grail deal positions Illumina to participate in what the company estimates will be a $75 billion market by 2035 for cancer tests that rely on next-generation sequencing. That's a $60 billion-greater opportunity than Illumina would have without Grail, according to deSouza.
Grail's Galleri multi-cancer screening test is slated to launch commercially in 2021. Grail has yet to prove, through clinical trials, its test can improve health outcomes.
But deSouza contended Galleri's impact could be significant, claiming widespread adoption of the product could avert many deaths in the U.S. each year. Grail, meanwhile, estimates use of Galleri alongside existing screening guidelines could help greatly reduce the cost of diagnostic work-ups.
"We consider early cancer detection to be one of the largest clinical opportunities of the next 15 years," deSouza added.
Illumina expects the Grail transaction will close in the second half of 2021 and plans to share more detailed expectations about revenue growth and impact on earnings per share then.
The deal, however, was met with widespread skepticism from analysts and investors.
"We are not sure that 1+1=2 in this instance," Cowen analysts wrote in a note to investors. "In fact, when we factor in concerns about 'competing with customers,' Illumina will need to clearly address any concerns that in this instance '1+1' could actually equal 'less than 2.'"
Indeed, many of the factors that drove Illumina to spin Grail out in the first place are still relevant today. One reason was to share the financial burden of developing liquid biopsies for early cancer detection, an expensive effort involving massive clinical trials. Grail went on to raise $2 billion.
The investment has taken Grail to the cusp of commercialization but it has plans to run more clinical trials, suggesting its spending will remain high.
Spinning out Grail also spared Illumina from the conflicts it could face as both a provider of genome sequencing equipment and developer of tests that run on the devices. Cowen analysts said "almost every one of Illumina's major clinical customers has (and many emerging customers) ambitions to develop liquid biopsy based cancer screening tools."
If Illumina buys Grail, those customers will also be its competitors. That fact prompted the Cowen analysts to argue that Illumina needs to buy up other end users of its sequencers to mitigate the threat that its customers-turned-competitors will start sourcing equipment from its rivals.