Illumina’s ‘inevitable’ split from Grail likely by mid-2024, analysts say

Dive Brief:

The European Commission is “almost certain” to force Illumina’s divestment of Grail, a move that could happen in the first half of 2024, analysts at Canaccord Genuity wrote in a research note on Wednesday.
A Financial Times article on Tuesday said the EC’s divestment order is expected as early as this fall and suggested Illumina faces a fine, which could come as soon as next week, of as much as 10% of its annual revenue (up to $453 million) for acquiring Grail without approval. An EC spokesperson, reached by MedTech Dive, declined to comment on the case.
The Canaccord Genuity analysts, commenting on the article, said a fine that size would far exceed the EC's previous largest fine of about $125 million, or 1% of annual revenue, imposed on telecommunications company Altice in 2018.

Dive Insight:

Gene sequencing pioneer Illumina’s determination to keep cancer test maker Grail, which it acquired for $8 billion in 2021 over the opposition of regulators, inspired a proxy showdown led by activist investor Carl Icahn that culminated in the ouster of Chair John Thompson in May.

Weeks later, CEO Francis deSouza, staunch defender of the Grail deal, abruptly stepped down from his post, despite surviving the proxy vote.

Now, as it conducts a search for its next CEO while implementing a cost-cutting plan designed to shore up its operating margins, Illumina continues to fight both EC regulators and the U.S. Federal Trade Commission through various appeals processes.

Regulators contend that Illumina, as the dominant producer of next-generation sequencing platforms used to analyze genetic material from test samples, could stifle competition in the liquid biopsy market.

Illumina maintains the Grail transaction is a merger between non-competitors, and its supply agreements with customers are binding.

The San Diego-based company has said it will divest Grail if it loses either an FTC or EU jurisdictional appeal.

“We disagree that the Commission has jurisdiction to review the GRAIL transaction as well as with the premise of the Commission imposing a fine. We have appealed the EU’s jurisdiction and will appeal any decision imposing a fine. Illumina’s merger with GRAIL is pro-competitive and in the best interests of patients in Europe and worldwide,” Illumina said in an emailed statement.

Decisions on the jurisdictional appeals are expected by early 2024, the Canaccord Genuity analysts wrote.

EU regulators hope a record fine will serve as a deterrent to other companies that might consider finalizing a merger without their approval, according to the Financial Times article, which cited two people with knowledge of the decision.

The Canaccord Genuity analysts said they believe a divestment of Grail, along with expected improving company fundamentals, could support Illumina’s share price.

“We have connected with Illumina, as well as with multiple individuals highly familiar with European mergers and the ILMN/GRAIL situation, to discuss potential implications,” the analysts wrote. “Overall, we believe the shares remain attractive and should rise as the company nears its essentially inevitable separation from GRAIL by mid-2024 (roughly).”