By Vinay Naik (University of Warwick), Roshni Padhi, Amarins Laanstra-Corn and Winston Shum (Stanford University)
Overview of the deal
Total Transaction Size: $8B
Date Announced: September 21, 2020
Acquirer Advisor: Goldman Sachs
Target Advisor: Morgan Stanley
Illumina’s eight billion-dollar acquisition of GRAIL is a landmark deal in the biotechnology space. GRAIL will receive $3.5 billion in cash and $4.5 billion in Illumina stock, and the deal will pave the way for Illumina to lead the cancer screening and detection industry. Illumina has the power to accelerate the commercialization process of GRAIL’s test by leveraging its manufacturing experience and global scale, and the acquisition is also vertical as Illumina supplies the sequencers that Grail uses when performing its tests. GRAIL also contributes to the diversification of Illumina’s product offerings, as the NGS oncology market is projected to grow to $75 billion by 2035, at a CAGR of 27%.
“Over the last four years, GRAIL’s talented team has made exceptional progress in developing the technology and clinical data required to launch the GalleriTM 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 NGS platform” — Francis deSouza, Illumina’s President and Chief Executive Officer.
Company Details: Acquirer - Illumina
Illumina is a global leader in DNA sequencing, developing and manufacturing products that impact the life sciences, oncology, and health segments. Its customers include academic, government, pharmaceutical, and biotechnology firms around the world.
Founded in 1998, headquartered in San Diego, California
CEO: Francis deSouza
Number of employees: 8,000
Market Cap: $45.31B (as of 01/10/2020)
LTM Revenue: $3.351B
LTM EBITDA: $1.108B
LTM EV/Revenue: 12.87
LTM EV/EBITDA: 38.93
Company Details: Target - GRAIL
GRAIL is a healthcare company focused on fighting cancer at early stages with the help of next-generation sequencing and state-of-the-art computer science algorithms. Using liquid biopsies, its technology can identify several types of cancers and where they are located in the body, with a false positive rate of less than one per cent. Its investors include Amazon CEO Jeff Bezos, Bill Gates, and Illumina.
Founded in 2016, headquartered in Menlo Park, California
CEO: Hans Bishop
Number of employees: est. 440
Estimated Valuation: $6B
Projections and Assumptions
In the near term, Illumina’s acquisition solidifies their backing behind GRAIL. Prior to the acquisition, Illumina owned 14.5% of the company’s outstanding shares, and acquiring the rest of the company allows them to fully involve themselves with GRAIL’s operations and vertically integrate, as Illumina provides key NGS functions for GRAIL’s products. After raising more than $2 billion, GRAIL recently filed papers planning an IPO to raise up to $100 million, but the acquisition guarantees them more immediate capital from a strategic backer. Even though the transaction is expected to be accretive to Illumina revenue at the beginning of 2021, Illumina’s shares fell more than 20% in the first week after the announcement due to concerns about the lack of short-term upside. The deal is expected to close in the second half of 2021, at which point Illumina will reveal analysts’ accretion/dilution analyses. In the meantime, operating expenses (specifically in research and development) will be extraordinarily high as GRAIL must continue to run clinical trials before getting approval for its product to be launched commercially.
The fate of Illumina’s acquisition depends on the success of GRAIL’s developing technologies. Earlier in the year, GRAIL announced its 2021 commercial rollout plan for Galleri, their functioning liquid biopsy test. This is on track with Illumina’s goal to get more heavily involved in NGS oncology applications, with the end goal of leading the multibillion-dollar market, which is estimated to reach $75bn by 2035. Over half is expected to come from early detection testing. Additionally, GRAIL and Illumina have entered a long-term supply agreement. GRAIL will exclusively use Illumina sequencers and other applicable products, and any of GRAIL’s intellectual property may be transferred back to Illumina to be used in any non-cancer technologies. The companies’ merger will strengthen the business, as their vertical integration may allow them to undercut competitors on price.
Risks and Uncertainties
Having previously spun off GRAIL in 2016, Illumina’s choice to backtrack and acquire a majority stake in GRAIL means they will now be competing with their own customers. Currently, the two companies have a unique relationship, in which Illumina provides GRAIL with their sequencing instruments and reagents.
However, Illumina also sells these products to other customers, many of whom are aiming to develop their own liquid biopsy tests. By positioning themselves as both a provider of equipment and developer of liquid biopsy tests, conflicts are likely to arise. Disgruntled customers may turn to rivals to source sequencing instruments, causing Illumina’s growth trajectory to potentially level off. The expected short-to-mid term EPS dilution may explain the recent share price decline.
Moreover, investors and analysts alike are questioning the viability of the deal based on the high amount of R&D spend that GRAIL needs to undertake over the next few years. The firm currently has four clinical trials running, posing a risk to Illumina’s profitability post-acquisition. Uncertainty surrounds the timeline of taking the liquid biopsy tests to market. Illumina will be competing within an already crowded space, going up against established tests offered by Guardant and Roche. The pace of market penetration is somewhat concerning and may work against the transaction.
A major hurdle for Illumina getting to market on time will be gaining the necessary FDA approval, which has provisionally been set for 2023. Their proposed acquisition of Pacific Biosciences in November 2018 was blocked by regulators over antitrust concerns, and although the acquisition of GRAIL is vertical, while the proposed Pacific Biosciences acquisition was a horizontal integration, investors are expressing some concern.
“Given the material shift in strategy this deal signifies, combined with dilution and limited visibility, we see the risk-reward as more balanced” — Dan Brennan, UBS Analyst