Dive Brief:
- The European Commission has approved Illumina's planned divestment of Grail, the sequencing company said Friday, although no divestment plan has been finalized.
- Illumina must capitalize Grail with around $1 billion if it spins off the cancer screening company to create an independent business. The sum, which represents two-and-a-half years of funding, is less than the $2 billion that Evercore ISI analysts saw as the worst-case scenario.
- Selling Grail to a third party would free Illumina of the need to capitalize Grail, but the buyer would need approval from the commission and likely other regulators, Leerink Partners analysts wrote in a note to investors. Illumina still expects to finalize terms by the end of June.
Dive Insight:
The agreement on the capitalization terms is the main update to come out of the commission’s approval. Previously, Leerink analysts expected the commission to require Grail to resume life as a standalone company with a capitalization of $1.5 billion or more. Evercore analysts estimated in a note to investors that Illumina would need to provide $1.75 billion to $2 billion under its modeling of the worst-case scenario.
Illumina ended last year with $1.05 billion in cash. Evercore analysts believe Illumina may have to raise $500 million to $1 billion of new debt to capitalize Grail, a financing they said “is not an issue” in the larger scheme of things.
The alternative is to find a trade buyer for Grail. Leerink analysts spoke to Illumina after it shared news of the commission’s approval to understand the options that are open to the company and the conditions that are attached.
“[Illumina] still has flexibility to pursue either an asset sale or a spin-off,” the analysts said. “A third-party sale does not include any capitalization requirement, and it appears there is no minimum price requirement, valuation floor or restrictions on the mix of cash/stock in a potential sale.”
They added that the initial commission divestiture order states Illumina can only retain up to a 14.5% ownership stake in Grail.
Leerink analysts said the commission approval is “an important next step” in Illumina’s move to focus on its core business, which is “in the midst of a new product cycle, a challenging macro backdrop still, emerging competition and a longer path to deliver on the elasticity of demand in clinical end-markets.”
Evercore analysts said clarity on Grail’s capitalization could encourage investors to own Illumina stock.
