Illumina (ILMN)’s long saga over its acquisition of Grail (GRAL) will end this week, when the sequencing giant concludes its worst stretch as a public company by spinning off the cancer blood test developer as promised last December.
The distribution of Grail shares to Illumina shareholders is expected to occur Monday at 12:01 a.m. ET, subject to customary conditions that include the registration statement being declared effective. That day, Illumina’s stockholders will receive a single share of Grail common stock for every six Illumina shares that they held on June 13, the date of record for the distribution of shares.
As of Tuesday, Grail’s common stock begins trading “regular way” on Nasdaq under the ticker symbol “GRAL,” while Illumina shares continue to trade on Nasdaq.
“We believe the market will be glad to have final resolution on this matter, returning the focus to the core ILMN business,” Catherine Ramsey Schulte, a senior research analyst with Baird, wrote in a research note. Baird rates Illumina shares as “Neutral” and has set a 12-month price target of $128.
In connection with the Grail spinout, Illumina disclosed in a June 17 regulatory filing that it entered into credit agreement with J.P. Morgan Chase providing for a senior unsecured term loan credit facility of up to $750 million, at a borrowing rate of approximately 6.7%.
In a June 3 regulatory filing, Grail estimated incurring $20 million in total one-time transaction costs in connection with the spinout, with Illumina paying out $60 million to $75 million. Illumina said in its own filing it will incur approximately $35 million to $50 million in charges, primarily consisting of cash expenses relating to legal and advisory fees: “[Illumina] expects that the majority of these charges will be incurred in the second quarter of 2024 and substantially all of these charges will have been incurred by the third quarter of 2024.”
Illumina’s spinoff of Grail touched off an 11% rise in shares over three trading days, to $114.72 at the close on June 6. Since then, shares slipped 6% to $108.10 on Tuesday before inching up 0.14% to $108.25 on Thursday (markets were closed Wednesday for the Juneteenth federal holiday), then inching up another 0.3% to $108.57.
Two uncertainties
Jefferies analysts Tycho Peterson and Matthew Stanton cited two uncertainties in initiating coverage of Illumina on June 3 with a “Hold” rating and a price target of $115, 11% above its closing price that day of $103.37.
One uncertainty was the number of placements of NovaSeq X sequencing systems, which stood at more than 400 at the end of the first quarter, including 55 systems shipped during Q1. The other is how Illumina’s management strategy will shape up once Grail is spun out.
“We remain highly selective and await more visibility on key issues for ILMN,” Peterson and Stanton wrote in a research note.
Before initiating coverage of Illumina and four other companies (10x Genomics, Guardant Health, Natera, and Pacific Biosciences of California [PacBio]), the Jefferies analysts spoke with more than 100 investors about Illumina, summarizing their concerns as: 1) whether the company can execute a turnaround, and 2) how much the company will likely grow going forward. Many investors assumed Illumina will see flat to low single digit growth in 2025, Peterson and Stanton added.
Grail has estimated that it would be capitalized as a standalone company at about $3.739 billion. That is just over half (53%) of the $7.1 billion that Illumina paid to acquire Grail in 2021, nearly a year after first announcing the purchase (While Illumina disclosed the deal as being $8 billion, it still had a stake in Grail, reducing its value).
U.S. and European regulators opposed the acquisition on antitrust grounds, asserting that the deal would stifle innovation and reduce choice in the emerging market for blood-based early cancer detection tests.
Illumina had justified the Grail acquisition by asserting that it 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.
Last year, Illumina was directed to divest of Grail by both the European Commission and the U.S. Federal Trade Commission (FTC). Illumina CEO Jacob Thaysen, PhD, announced the divestment in December just three months after his appointment to the company’s helm, following an unfavorable U.S. federal appeals court decision.
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 year—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, then a portfolio manager at Icahn’s investment management firm Icahn Capital since October 2020. Teno has since become president and CEO of publicly traded Icahn Enterprises and has left Illumina’s board.
Grail expects to have approximately 551 stockholders of record and approximately 31.1 million shares of common stock outstanding, based on data from April 26.
From June 12 until Friday, common shares of Grail had been trading under the symbol GRALV on a “when issued” basis, which covered transactions made conditionally because a security has been authorized but not yet issued. During the when-issued period, GRALV shares have ranged from $12.51 to $23.36, a high reached Thursday at 3:26 p.m.
This past week, the shares jumped 39% from $14.62 at the start of trading Monday to $20.32 Thursday, before sliding 15% to $17.22 on Friday.
Grail expects to issue 31.1 million shares of its common stock. Based on that projection, Wall Street watchers including TipRanks and Spin-Off Research have cautioned that the company is likely to start out with less than $500 million in market capitalization (the product of the share price and the number of outstanding shares).
Grail’s price fluctuations will remain of keen importance to Illumina since it will retain a minority share of 14.5% in Grail.
“The divestiture of Grail is one of our 2024 priorities,” Thaysen stated June 3 in announcing the Grail spinout. “As we prepare to lead the next era of genomics innovation, we believe Grail will play an important role in advancing the industry and improving human health.”
“We also look forward to exploring opportunities where we can support Grail’s work with industry-leading technologies and solutions,” Thaysen added.
Leaders & laggards
- Aerovate Therapeutics (AVTE) shares cratered on June 17, freefalling 93% from $24.62 to $1.65 after the company shut down the Phase III portion of the Phase IIb/III Inhaled iMatinib Pulmonary Arterial Hypertension Clinical Trial (IMPAHCT; NCT05036135) and a long-term extension study (IMPAHCT-FUL; NCT05557942, both assessing AV-101, the company’s lead program. AV-101—a dry powder inhaled formulation of imatinib—failed the IMPAHCT trial’s Phase IIb portion by missing the primary endpoint of statistically significant change in pulmonary vascular resistance (PVR) compared to placebo for any of the three doses studied (10mg BID, 35 mg BID, and 70 md BID) or show meaningful improvements in the secondary endpoint of change in six-minute walk distance (6MWD). Aerovate said it plans to release full data from the Phase IIb portion at a date to be determined.
- GeoVax Labs (GOVX) shares rocketed 71% from $1.11 to $1.90 Tuesday after the company won approximately $24.3 million—and potentially up to $45 million—through the Biomedical Advanced Research and Development Authority (BARDA)’s Rapid Response Partnership Vehicle consortium to advance development of GEO-CM04S1, a dual-antigen next-generation COVID-19 vaccine, by funding the manufacturing of clinical materials and support for a Phase IIb trial. GeoVax will sponsor a 10,000-participant, randomized double-blinded study designed to compare the efficacy, safety, and immunogenicity of GEO-CM04S1 with an undisclosed FDA-approved mRNA COVID-19 vaccine. BARDA also plans to award $343 million to a contract research organization (CRO) to carry out the clinical trial.
- Mustang Bio (MBIO) shares sextupled, catapulting 554% over two days from 13 cents to 75 cents Monday and 85 cents Tuesday, after the company presented updated positive data from a single-institution Phase I/II trial (NCT03277729) assessing MB-106 in patients with Waldenstrom macroglobulinemia. Nine of 10 patients treated with the CD20-targeted, autologous chimeric antigen receptor T-cell (CAR-T) therapy responded to treatment with three complete responses, two very good partial responses, four partial responses, and one stable disease. One complete response patient has stayed in remission for 31 months, with an immunoglobulin M (IgM) level that rapidly decreased to the normal range and has remained normal since, Mustang said. MB-106 is being developed with the Fred Hutchinson Cancer Center to treat relapsed or refractory B-cell non-Hodgkin lymphomas and chronic lymphocytic leukemia.
- Ovid Therapeutics (OVID) shares plunged 76% from $3.29 to 79 cents Monday after the company shared partner Takeda Pharmaceutical’s announcement that soticlestat (TAK-935) failed both the Phase III SKYLINE trial (NCT04940624) assessing the selective inhibitor of cholesterol 24-hydroxylase as a treatment for Dravet syndrome, and the Phase III SKYWAY trial (NCT04938427) evaluating the drug in Lennox-Gastaut syndrome. Soticlestat narrowly missed SKYLINE’s primary endpoint of reduction from baseline in convulsive seizure frequency vs. placebo and missed SKYWAY’s primary endpoint of reduction from baseline in major motor drop (MMD) seizure frequency vs. placebo. In both trials, Ovid said, pre-specified subgroups of patients showed significant treatment effects on the primary endpoint and on secondary efficacy endpoints of caregiver global impression of improvement, clinician global impression of improvement, and seizure intensity and duration scales over the 16-week treatment period.
- Sarepta Therapeutics (SRPT) shares soared 42% from $123.50 to $175.06 in premarket trading as of 6:57 a.m. ET Friday morning before settling for a 30% gain, to $160.72. Friday was the first trading day after the company won FDA approval to expand the labeled indication for Elevidys® (delandistrogene moxeparvovec-rokl) to include individuals with Duchenne muscular dystrophy (DMD) with a confirmed mutation in the DMD gene who are at least four years of age. The FDA granted traditional approval for ambulatory patients, and accelerated approval for non-ambulatory patients, with the latter potentially hinging on verification of clinical benefit in a confirmatory trial. Elevidys is contraindicated in patients with any deletion in exon 8 and/or exon 9 in the DMD. “The expansion of the Elevidys label to treat Duchenne patients aged four and above, regardless of ambulatory status, is a defining moment for the Duchenne community. Today also stands as a watershed occasion for the promise of gene therapy and a win for science,” Sarepta’s president and CEO Doug Ingram stated.
