Battered by more than three years of opposition from authorities in the United States and Europe—most recently an unfavorable federal appeals court decision on Friday—Illumina said it will divest itself of Grail, the cancer blood test developer it bought for $7.1 billion.
Illumina said it will carry out the divestiture through a third-party sale or capital markets transaction, either of which would be consistent with a divestiture order issued in October by the European Commission (EC). That 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.
Illumina hopes to finalize divestiture terms by the end of the second quarter of 2024.
“We are committed to an expeditious divestiture of Grail in a manner that allows its technology to continue benefiting patients,” stated Jacob Thaysen, PhD, who became Illumina’s CEO effective September 25. “The management team and I continue to focus on our core business and supporting our customers. I am confident in Illumina’s opportunities and our long-term success.”
A former Illumina executive who has commented extensively and publicly on the Grail acquisition cheered Thaysen’s decision.
“Great news for the company, and great to see decisive action from Jacob Thaysen, who probably faced resistance from the majority of the OG board (7 members) that made the disastrous decision to drive the Grail deal forward at any cost,” Alex Dickinson, executive chair of Ryght (rebranded from Synthetica Bio as of November), developer of a generative-AI data analytics platform for biopharmas, wrote on LinkedIn.
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.
“Going to be super interesting to follow the sales process. In theory, could be an IPO [initial public offering], but the market is very tough and more importantly IMO, there is so much dirty laundry (e.g., quality of their sales numbers) inside Grail that no one is going to want to push through the very invasive S-1 SEC [U.S. Securities and Exchange Commission] process,” Dickinson observed.
He also noted that the Grail acquisition was already the subject of an SEC investigation. In August, Illumina tersely disclosed that SEC staffers had been “requesting documents and communications primarily related to Illumina’s acquisition of Grail and certain statements and disclosures concerning Grail, its products and its acquisition, and related to the conduct and compensation of certain members of Illumina and Grail management, among other things.”
The company has stated that it is cooperating with the SEC.
Until now, Illumina had asserted that there’s no legal basis to order a divestiture and had sought to derail regulators in the United States and Europe over questions of jurisdiction.
Siding with FTC over Illumina
Illumina announced its about-face after years of fighting to retain Grail on Sunday, two days after the U.S. Fifth Circuit Court of Appeals in New Orleans sided against the company and with the U.S. Federal Trade Commission, which has opposed the Grail acquisition on antitrust grounds.
A three-judge panel of the court held that the Grail acquisition would likely “substantially lessen competition,” and thus violated antitrust laws. The panel also held that the FTC’s decision opposing the deal should be vacated, and required the agency to reconsider the acquisition, asserting that the FTC should have taken into account Illumina’s promise to continue selling DNA sequencing services to competitors of Grail, without raising prices.
However, the panel rejected arguments by Illumina that the leadership structure of the FTC violated the U.S. Constitution because FTC commissioners can only be removed for cause in violation of the Constitution’s Article II, which vests executive power in the President. Illumina also contended, and the judges also rejected, that the FTC violated due process by depriving Illumina and Grail of a fair proceeding before an impartial tribunal.
“The 5th Circuit’s opinion is an important victory for antitrust enforcement because it clearly recognizes how vertical mergers can threaten competition,” the FTC said in a statement. “As a result this decision marks a pivotal moment for those who want to protect open, competitive markets, and a huge win for consumers in the modern economy.”
In its announcement, Illumina said it would not pursue further appeals, and noted that it had committed to divesting itself of Grail in the event of unsuccessful court challenges in the United States or Europe, where the company had appealed the jurisdiction of the EC over Grail to the European Court of Justice (ECJ).
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.
Grail has generated $63 million in revenue during the first nine months of this year, including $21 million in the third quarter. Those revenue numbers are up 97% from $32 million in January–September 2022 and more than double (110%) the $10 million racked up in Q3 2022.
Grail’s operating losses in January–September fell from last year, to $1.423 billion from $4.46 billion. During Q3, the quarterly loss fell year-over-year, from $4.101 billion to $1.015 billion, Both declines largely reflected a drop in goodwill and intangible impairment charges from $3.914 billion to $821 million.
The 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 has been 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.
In Europe, Illumina had argued that the EC does not have jurisdiction over the Grail acquisition since Grail only operated in the United States and the U.K., not in any EU member states.
European fines
Illumina’s ECJ challenge followed the Commission fining Illumina and Grail approximately €432 million (about $471 million), amounting to 10% of Illumina’s revenue—the largest fine ever imposed by the EC. The EC also fined Grail a symbolic €1000 (about $1,090) in connection with the merger, which has drawn the ire of antitrust regulators in Europe and the United States.
The fine was imposed after the EC ruled 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.
Dickinson also termed Illumina’s about-face “an amazing achievement” for activist investor Carl C. Icahn, who this past spring launched a partially successful proxy campaign to change Illumina’s board and C-suite, and thus its direction—a campaign that involved several letters to shareholders and an exclusive GEN interview.
Illumina’s insistence on carrying out the acquisition despite regulator opposition drained the company of resources, according to a key argument made by Icahn. He 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 elected to the board Andrew J. Teno, a portfolio manager at Icahn’s investment management firm Icahn Capital since October 2020.
Before succeeding deSouza as Illumina CEO, Thaysen was previously senior vice president of Agilent Technologies and president of its life sciences and applied markets group. He had no previous CEO experience, which had led investors and some analysts to question the appointment.
Given EC suggestions that the divestment could be carried out as a trade sale and a capital markets transaction, Dickinson said Illumina would have to inject another $2 billion into Grail just to be able to sell it.
“If you’re a buyer, the question is going to be, how much more than the $2B cash-in-the-bank will I pay for this? It burns $700M a year,” Dickinson wrote on LinkedIn, punctuating the sentence with an emoji showing one eyebrow raised.
“It’s a very, very unusual situation,” Dickinson concluded, adding three popcorn bag emojis.
