gene sequencing technology now the mainstay of its business. But investors seem wary of Illumina’s latest move. The company’s stock price dropped last week in anticipation of a deal, and at the market open Monday, it dipped again, falling down 9.6 percent from Friday’s closing price to $266.87 per share.
“We’ve had this happen to us before when we were in the array business and we wanted to get into sequencing, and we announced that we were acquiring Solexa to get into the sequencing business,” deSouza said. “Our stock dropped that day, too. It took awhile for us to work with the market to explain where we were going and why we thought that was a big opportunity. Today, that’s been an enormously successful story and sequencing is the vast majority of our revenue.”
Illumina primarily provides its gene sequencing technologies to others that develop their own products. The company is already seeing rapid market adoption of NGS-based tests that physicians use to select cancer therapies. In buying Grail, Illumina is betting diagnostics that enable earlier cancer detection will follow a similar trajectory; it projects this market will grow to $75 billion by 2035.
Illumina isn’t isn’t giving up on providing its NGS technology to others. But by directly providing a diagnostic for clinical applications, Illumina is putting itself into competition with some of its customers. For example, Archer Dx uses the Illumina technology in its experimental products that analyze DNA, RNA, and circulating tumor DNA from a blood or tissue sample. Like Grail, Boulder, CO-based Archer Dx says its tests enable earlier detection of cancer to enable earlier clinical intervention. In June, genetic testing company Invitae (NASDAQ: [[ticker:NVTA]]) announced an $886 million deal to acquire the company. In explaining the rationale for the buyout, Invitae management cited the same changes in genomic cancer diagnostic trends that Illumina is stating now.
DeSouza said the early detection market is large and he expects it will support multiple players, some that are taking a single approach to one type of cancer and others that, like Grail, test for multiple cancers. He added that Grail will continue to support Illumina customers that are using NGS for cancer diagnostic applications.
Grail is one of several companies developing liquid biopsies. Others include South San Francisco-based Freenome, which closed a $270 million round of funding last month to continue clinical development of its tests, bringing its total capital haul to more than $500 million. Thrive Earlier Detection of Cambridge, MA, raised $257 million in June, bringing its fundraising total to $367 million. Since spinning out of Illumina in 2016, Grail has raised about $2 billion to support its research and clinical development efforts.
The deal announced Monday is a cash and stock transaction. Grail stockholders—including Illumina, Grail’s largest stockholder owning about 14.5 percent—will receive $3.5 billion in cash and $4.5 billion in shares of Illumina common stock. Those Illumina shares will have a “collar” that ensures that the owners of Grail’s stock, except for Illumina, receive Illumina shares equal to about $4 billion based on the average trading price of those shares in the 10 days before the deal closes. When the transaction is completed, Illumina shareholders will own about 93 percent of Grail, leaving Grail stockholders with about 7 percent based on the mid-point of the collar.
In addition to the cash and stock payment, Grail stockholders will receive contingent value rights, which makes stockholders eligible for future payments amounting to a percentage of revenue from sales of the company’s products. That breaks down to a 2.5 percent payment right to the first $1 billion in revenue each year for 12 years. Revenue topping the $1 billion mark would trigger a 9 percent contingent payment right in the same 12-year span. Stockholders will have the option to receive additional cash and/or stock instead of the contingent value right. The amount of stock consideration will be determined before the deal closes.
The transaction, which has been approved by the boards of directors of both companies, is expected to close in the second half of next year. When it does, Grail will operate as a standalone division within Illumina.
Image: iStock/harmpeti
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