US biotech Illumina faces potential $7bn loss from forced Grail sale

Gene-sequencing company Illumina is facing a steep loss from its forced spin-off of Grail, with traders valuing the cancer-test developer at a 94 per cent discount to the $8bn Illumina paid for it in 2021.

Shares in Grail are already trading in low volumes ahead of Illumina’s planned sale of the unit on June 24, with the stock closing at $15.58 in New York on Monday, giving Grail a market value of just $485mn. However, the stock has edged up from $13.66 at the close of its first trading day last week.

The divestment caps a years-long saga in which Illumina came under immense pressure from antitrust regulators in Europe and the US over its takeover of Grail, leaving the Nasdaq-listed biotech’s share price down almost 80 per cent from its peak before the Grail deal closed in 2021.

The US Federal Trade Commission and the European Commission both ordered Illumina to unwind its acquisition of Grail last year. Although the spin-off is yet to occur, shareholders are allowed to begin trading the right to receive shares ahead of the divestment becoming official.

Doug Schenkel, an analyst at Wolfe Research, said Illumina had overseen “the worst deal in the history of the diagnostics space”, adding that it had been a “complete disaster” for the wider business.

Not only is Illumina facing a significant writedown in the value of Grail and a depressed share price, it has also agreed to fund Grail for two and a half years at a cost of $1bn to abide by EU antitrust rules, said Schenkel.

Illumina will retain a 14.5 per cent stake in Grail after the sale. The San Diego-headquartered biotech founded Grail and first spun if off in 2016. Illumina then paid $7.1bn in 2021 to buy back the part of Grail it did not already own, valuing the business at about $8bn.

Last year, Illumina was hit with a record €432mn penalty by the European Commission for completing the takeover of Grail without seeking the approval of Brussels. Veteran activist investor Carl Icahn also sued Illumina for violating its fiduciary duties over the acquisition.

Illumina and Grail declined to comment.

Grail’s blood test for cancer, known as Galleri, which claims to identify more than 50 forms of the disease, is already available in the US but is yet to receive regulatory approval from the Food and Drug Administration. Grail is set to generate $125mn in revenues this year, according to FactSet.

About a quarter of Grail shares following the divestiture will be owned by index-linked funds, which will have to dump the stock, adding to downward pressure on the share price, Evercore analysts said last week.

In the long term, the spin-off would help Illumina to draw a line under the saga, said Schenkel. “It will give Illumina a fresh start to talk to the investment community about their core business and the ability for them to really improve from recent performance . . . under a recently added CEO and CFO,” he said.