Illumina said today it agreed to acquire the majority stake it does not already own in cancer blood test developer GRAIL for $8 billion in cash and stock, confirming nearly a week of speculation that an acquisition deal was in the works.

The deal comes nearly five years after Illumina joined investors that included Bill Gates and Jeff Bezos in committing more than $100 million toward launching GRAIL in 2016, with the goal of commercializing a simple test that screens for multiple early-stage cancers by measuring circulating tumor DNA (ctDNA) in the blood.

Illumina owns 14.5% of the outstanding shares of GRAIL, which was spun out as a standalone company. Once a deal is completed, GRAIL will operate as a standalone division within Illumina, with a dedicated leadership team.

Until now, GRAIL raised approximately $2 billion in several financings—including $900 million raised in 2017—to develop its Galleri™ multi-cancer screening test, supported by its technology platform and Illumina’s NGS platform. An earlier version of Galleri was able to detect more than 50 cancer types, over 45 of which have no recommended screening in the U.S.

Illumina said today that its acquisition of GRAIL would accelerate the commercialization of Galleri, which is planned for launch next year as a laboratory developed test (LDT).

Also planned for launch next year, during the second half of 2021, is GRAIL’s diagnostic aid for cancer test (DAC). DAC is designed to accelerate diagnostic resolution for patients for whom there is a clinical suspicion of cancer.

“Most promising”

“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,” Illumina President and CEO Francis deSouza said in a statement. “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.”

Investors, however, appeared to show a mixed response to the deal. Illumina’s share price tumbled 16% before the start of trading today, to $248.90 as of 9:15 a.m., before the price rallied soon after the opening bell to $282.30 at 9:58 a.m., reflecting only a 4% decline from Friday’s closing price of $295.50. As of 1:47 p.m. shares slid again, trading at $271.78, down 8% from Friday.

The deal was announced nearly a week since Bloomberg News first reported Illumina was in talks to buy GRAIL—just a week after GRAIL filed for an initial public offering (IPO) with a placeholder amount of $100 million.

“The deal marks a major step for ILMN into clinical diagnostics and likely alters its future growth trajectory while driving significant dilution in the near-to mid-term,” Puneet Souda, a senior research analyst at SVB Leerink and managing director, Life Science Tools and Diagnostics, wrote in an investor note this morning.

Last week after news of the potential deal surfaced,  Souda observed: “It is hard for us to see how GRAIL lowers sequencing costs or drives sequencing product innovation, but we continue to believe that there is no fundamental change in ILMN‘s view on core sequencing product innovation and also no change to its ultimate TAM [total addressable market].”

Illumina said today that the NGS-based oncology testing TAM being targeted by GRAIL is expected to grow to $75 billion by 2035.

“Given ILMN’s existing stake and potential future royalties, we think ILMN’s current positioning is attractive—participating in the potential upside without the meaningful investments that will inevitably be needed for commercialization, all while having a potentially very large clinical customer,” Catherine Ramsey Schulte, Senior Research Analyst with Baird, wrote in an investor note.

“We think ILMN’s existing stake/relationship is an attractive way to play the potential upside, but would be wary of the additional risk and dilution such an acquisition would introduce, as we think it’ll likely take several years and significant investment before any potential meaningful revenue generation,” Schulte added.

Arguing for the deal

Illumina countered by arguing that it would benefit from acquiring GRAIL, contending that the deal would:

  • Extend Illumina’s portfolio to include cancer screening, diagnosis and cancer monitoring, offering multiple future growth opportunities by creating a portfolio of proprietary tests in each major oncology testing application area—tests that Illumina vows will be best-in-class.
  • Accelerate adoption of Galleri upon launch by leveraging Illumina’s global scale, manufacturing and clinical capabilities.
  • Enhance Illumina’s leadership in genomics by expanding into providing tests, while continuing as a top sequencing company.

“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,” GRAIL CEO Hans Bishop stated.

Illumina expects to close on its acquisition of GRAIL in the second half of 2021, subject to customary closing conditions, including applicable regulatory approvals.

Deal subject to “collar”

At closing, Illumina said, it and other GRAIL shareholders will receive $3.5 billion in cash and $4.5 billion in shares of Illumina common stock, subject to a “collar” designed to ensure that GRAIL stockholders excluding Illumina receive Illumina shares equal to approximately $4 billion if the 20-trading-day volume weighted average price of Illumina stock as of 10 trading days prior to closing is between $295 and $399.

GRAIL stockholders excluding Illumina will receive approximately 9.9 million Illumina shares if the 20-trading-day volume weighted average price of Illumina stock is above $399 as of 10 trading days prior to closing—and receive approximately 13.4 million Illumina shares if the 20-trading-day volume weighted average price of Illumina stock as of 10 trading days prior to closing is below $295.

Current Illumina stockholders are expected to own approximately 93% of the combined company, with the other 7% expected to be owned by GRAIL stockholders, based on the mid-point of the collar.

Most of the cash portion of the deal—approximately $3.1 billion—would go to shareholders excluding Illumina. That portion is expected to be funded using balance sheet cash of both Illumina and GRAIL, plus up to $1 billion in capital raised through the issuing of either debt or equity. Illumina said it has obtained financing commitments for a $1.0 billion bridge facility with Goldman Sachs Bank USA.

$2B in cash, cash equivalents

The companies reported a combined $2 billion+ in cash and cash equivalents: Illumina reported $1.77 billion as of June 28, while privately-held GRAIL reported cash and cash equivalents of $341.341 million as of June 30, more than double the $143.189 million reported as of December 31, 2019, according to its IPO prospectus.

According to that prospectus, GRAIL finished the first half of this year with $136.416 million, and a net loss of $244.855 million for all of last year.

Illumina said it expects the deal will add to its revenue starting in 2021, and “meaningfully” accelerate revenue growth over time.

Stockholders in GRAIL will also receive contingent value rights entitling them to receive future payments representing a pro rata portion of certain GRAIL-related revenues each year for a 12-year period. This will reflect a 2.5% payment right to the first $1 billion of revenue each year for 12 years. Revenue above $1 billion each year would be subject to a 9% contingent payment right during this same period.

Illumina said it will offer GRAIL stockholders the option to receive additional cash and/or stock consideration, in an amount to be determined prior to closing, in lieu of the contingent value rights.

“We believe multi-cancer early detection technology could address a tremendous unmet need and reduce the cancer burden worldwide,” Bishop added. “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, health care providers and payors, employers, and stockholders.”

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