The European Commission (EC) has formally ordered Illumina to divest itself of Grail, more than two years after the sequencing giant angered the regulator by completing the $7.1 billion deal for the cancer blood test developer before receiving EC approval.
The divestment order was all but expected since July, when the EC fined Illumina and Grail approximately €432 million ($456.4 million), amounting to 10% of Illumina’s revenue—the largest fine ever imposed by the Commission. The EC also fined Grail a symbolic €1000 ($1,056) in connection with the merger, which has drawn the ire of antitrust regulators in Europe and the U.S.
The fine followed the EC’s ruling last year that Illumina’s purchase of Grail violated antitrust regulations. The EC then blocked the acquisition, asserting that the deal would stifle innovation and reduce choice in the emerging market for blood-based early cancer detection tests.
“With today’s decision, the Commission has adopted restorative measures requiring Illumina to divest Grail and restore the situation prevailing before the completion of the acquisition,” the EU wrote (emphasis in original).
An Illumina spokesperson said the company was reviewing the divestment order.
Illumina has maintained that there’s no legal basis to order a divestiture and that the EC does not have jurisdiction over the Grail acquisition since Grail only operates in the U.S. and the U.K., not in any EU member states. Illumina is 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.
The EC’s order 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.
“Restoring Grail’s independence will remove the harm to competition resulting from Illumina’s ability and incentive to delay or disadvantage Grail’s rivals,” the EC asserted.
“Viable and Competitive”
The EC ordered the newly-independent Grail to be “as viable and competitive after the divestment as it was before Illumina’s acquisition” (emphasis in original). And the Commission said the divestment must take place “within strict deadlines and with sufficient certainty,” though an EC announcement did not detail what those deadlines are.
It will be up to Illumina to choose how to divest itself of Grail. The EC suggested as alternatives a trade sale and a capital markets transaction. Illumina has to submit a concrete divestment plan for the disposal of Grail that must be approved by the Commission.
“Illumina could try and sell Grail to another LS [life sciences] company but I don’t know if anyone would take it because of poor results and the high burn. Same problem with VCs [venture capitalists],” Alex Dickinson, executive chair of Synthetica Bio, developer of a generative-AI data analytics platform for biopharmas, wrote on LinkedIn this week.
Dickinson was a senior VP with Illumina from 2010 to 2017, during which he founded and led BaseSpace, Illumina’s AWS-based informatics platform, and later led Illumina’s global population sequencing (PopSeq) business.
Grail has generated $42 million in revenue during the first six months of this year, including $22 million in the second quarter. While those revenue numbers are up 90% from $22 million in January-June 2022 and 20% from $12 million in Q2 2022, Grail’s operating losses in January-June rose 14% from last year, to $408 million from $359 million. During Q2, the quarterly loss rose 23% year-over-year, from $152 million to $187 million.
Illumina announced its plan to buy Grail in September 2020, saying the deal would accelerate the commercialization of Galleri, then being planned for launch in 2021 as a laboratory-developed test (LDT). According to Illumina, Galleri can detect more than 50 cancers across all stages and correctly identified the tissue of origin in 93% of positive results, with >99% specificity.
While Illumina disclosed the deal as being $8 billion, it still had a stake in Grail, reducing its value to $7.1 billion.
The U.S. Federal Trade Commission (FTC) began challenging Ilumina’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.
Illumina is 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.
Icahn’s Key Argument
Illumina’s insistence on carrying out the acquisition despite regulator opposition drained the company of resources, according to 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 also took aim at Illumina’s shrinking stock price since 2021, which he calculated reduced its market capitalization by some $50 billion; and the near-doubling last year of then-CEO Francis deSouza’s total compensation to almost $27 million.
deSouza kept his board seat—but quit two weeks after shareholders voted to oust board chairman John W. Thompson, who has ties to deSouza, and instead elect to the board Andrew J. Teno, a portfolio manager at Icahn’s investment management firm Icahn Capital since October 2020.
Last month, Illumina’s board appointed Jacob Thaysen, PhD, as CEO effective September 25. Thaysen was previously senior vice president of Agilent Technologies and president of its Life Sciences and Applied Markets Group—but no previous CEO experience, which led investors and some analysts to question the appointment.
Dickinson said Illumina should consider Icahn’s proposal for selling off Grail, in which existing illumina shareholders each get a share of Grail: “Maybe Icahn’s proposed rights offering would work.”
But back when Illumina snapped up Grail in 2020, Dickinson noted, the initial public offering (IPO) market was hot, as was the market for venture capital.
“What does it mean to make Grail “as viable and competitive” when the entire financial market for medtech has crashed? What happens when the $800M Illumina puts in has gone? So many questions.”
Alex Philippidis is Senior Business Editor of GEN.