The principal rationale for reuniting the two companies is to enable broader and faster adoption of Grail’s multi-cancer early detection blood test, Galleri. However, regulators argue the marriage could stifle industry innovation and lift prices, with speculation that the European Commission could fine the DNA sequencing juggernaut up to 10% of its annual revenue – equal to about USD 400m. However, our expert remarked that this sum is unlikely to materially impact Illumina’s balance sheet long term and emphasised that Grail’s clinical capabilities will “certainly” drive top-line revenue.
Indeed, we were told Illumina has “sufficient ground” to believe that Grail will be a major driver of sequencing in oncology. The expert was also bullish about Grail’s future pipeline, which they said could extend to therapy selection and residual disease detection.
Despite Illumina’s efforts to appease the European Commission, the expert said the investigations will weigh heavily on the acquisition. Even though the company has committed to reducing pricing by over 40%, for example, the expert noted that regulators are primarily concerned about competition, not just pricing. “Illumina may give a small company the same pricing that it gives Grail, but you have to think about all the other outstanding factors that are necessary for those companies to be successful commercially,” the former Illumina director said.
In another Interview, we were told that the rise of Oxford Nanopore has given Europe “a little bit more teeth” after the company’s successful IPO. Its progress in the space suggests it could be one of the “dark horse competitors” and thus its momentum is likely to have impacted the political implications of the deal, a former Illumina global product manager said.
One potential outcome of the ongoing regulatory tussle is Illumina having to find alternative routes for Grail, with the former Illumina director suggesting a potentially high risk of divestiture. If this happens, we were told that “Grail’s success is still going to be of benefit to Illumina” and that the move is unlikely to impact Illumina’s technology roadmap. However, as well as it being “operationally painful” to undo the deal, top-line revenue opportunity would be lost.
Ultimately, the specialist said a decision by the European Commission could be made in March, noting: “I think the European Commission approach is honestly something people believe is a fairly unprecedented exercise of jurisdiction, and I think Illumina took a fairly unprecedented move itself to close the acquisition prior to having approval from the Commission.”
The controversy surrounding the Grail case suggests Illumina’s future M&A opportunities could also be affected, given the failed acquisition of PacBio last year and the sheer size of the company. Going forward, “I can imagine them doing small tuck-ins,” the specialist said. “I think these larger ones become really, really challenging, unless it is really something very tangential that’s not key for sequencing.”
Overall, the specialist was “very bullish” on Illumina’s long-term prospects. “I think there’s still a lot of value to unpack.” Grail’s future, meanwhile, “all depends on their go-to-market strategy”. Despite some initial concerns regarding the Galleri launch, the expert sees significant opportunity in front of the company, although it may take “some years” to see substantial progress. They also noted that an IPO was on the cards at Grail before the acquisition. “Either way that they would have gone, they would have had access to material amounts of new capital to invest in promoting the Galleri solution.”
The information used in compiling this document has been obtained by Third Bridge from experts participating in Forum Interviews. Third Bridge does not warrant the accuracy of the information and has not independently verified it. It should not be regarded as a trade recommendation or form the basis of any investment decision.
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