The European Commission has made a significant decision, officially mandating DNA sequencing giant Illumina to divest its subsidiary, Grail. The aim of this divestiture is to restore Grail’s viability and competitiveness in the market, bringing it back to its pre-acquisition status.
On Thursday, the European Commission allowed Illumina to choose the method of divestiture, which could involve either selling Grail to another company or spinning it off as an independent entity. However, Illumina is required to submit a plan for approval to the commission. In the meantime, the two companies are directed to remain separate, and Illumina is obligated to provide the necessary funding to support Grail’s cancer detection test. The divestiture timeline has not been specified.
In a prepared statement, Commissioner Didier Reynders highlighted the significance of this decision, stating, “Today’s decision restores competition in the development of early cancer detection tests.” He further emphasized that ensuring Grail’s independence would create a level playing field in this critical market, ultimately benefiting European consumers.
Grail originated as a research project within Illumina, based in San Diego. In 2016, the company became independent by raising funds to continue development of its liquid biopsy technology, which detects multiple cancers from a single blood sample. Although Illumina retained a small stake in Grail, it announced an $8 billion acquisition deal in 2020 to acquire the remaining shares. The following year, Grail launched Galleri, a prescription multi-cancer early detection test that screens for over 50 types of cancer. However, Grail has not yet commercialized Galleri in the European Union, only in the United States and the United Kingdom.
It is not uncommon for regulatory reviews and commercialization plans to progress at different paces. In 2021, with US and European antitrust authorizations still pending, Illumina closed the Grail acquisition to avoid paying a $300 million termination fee specified in the agreement if the deal was not completed by December 20th of that year. However, this premature action was disapproved by European regulators. As a result, the commission fined Illumina €432 million (around $476 million) for closing the acquisition before the antitrust review concluded. This penalty was the maximum allowed by European merger law.
Illumina has appealed against the European Commission’s jurisdiction over a transaction between two US companies. It is also appealing in the United States, where the Federal Trade Commission has declared the business combination to be anti-competitive. Despite the ongoing legal proceedings, Illumina has kept its operations separate from Grail’s, as ordered by the European Commission. An independent monitoring trustee is ensuring compliance with the order, preventing the sharing of confidential information.
While Illumina still has access to Grail’s financial information, it remains uncertain how much cash the company should reserve to support Grail. According to an Illumina stewardship presentation for investors, Grail generated $109 million in revenue between the acquisition’s closure and the end of the second quarter of this year. The presentation states that if Illumina loses one or both appeals, the company will divest Grail. Even if Illumina succeeds in both appeals, divestiture remains a possibility.
Failure to comply adequately with the restorative measures outlined by the European Commission could result in further penalties for Illumina. The commission stated its ability to impose periodic penalty payments of up to 5% of the company’s average daily revenue, citing European Union merger law. Non-compliance with the requirements may incur a fine of up to 10% of the company’s annual worldwide revenue, similar to the penalty imposed when Illumina prematurely closed the Grail acquisition.
Puneet Souda, an analyst from Leerink Partners, believes that the long saga of the Grail acquisition is nearing its resolution. Although the European Commission has not specified the amount of cash Illumina needs to set aside to support Grail, it appears that Grail’s operating loss might remain on Illumina’s books until the divestiture. Souda projects that Grail will post a net operating loss of $670 million in 2023.
The divestiture of Grail, in accordance with the European Commission’s order, is widely anticipated as the likely outcome of this ongoing situation. Investors are likely to view this divestiture positively, appreciating the resolution of regulatory uncertainties and the potential elimination of substantial margin dilution.
Market Capital Research 