In January of this year, Illumina (ILMN -1.85%) announced plans to form a new venture called GRAIL. This company, of which Illumina would own 52%, will attempt to create a single blood test for the early detection of all major types of cancer through the use of circulating tumor DNA (ctDNA) testing and deep sequencing technology. This venture has attracted numerous backers, with notable investors Bill Gates and Jeff Bezos. While estimates vary, should this blood diagnostic work as planned, Illumina's management has guided toward a bull case total addressable market of $100 billion to $200 billion.
First a bit of background
Illumina is the global leader in DNA sequencing and array-based technologies. Illumina produces sequencing platforms such as HiSeq X Five/Ten and HiSeq 2500/3000/4000 systems which are used to rapidly sequence genomes on a large scale. Illumina also produces the NextSeq 550 and iScan system arrays which are further used to conduct genotyping analysis. Taken together, Illumina is undoubtedly the industry leader within the genomics market at nearly 75% market share. Technological advancements within genomics have brought the cost of sequencing the human genome down from nearly $3 billion with the Human Genome Project in 2003 to only $1,000 with Illumina's HiSeq X in 2014. This rapid cost reduction has driven the proliferation of Illumina's genomics technologies into the fields of agriculture, oncology, and reproductive health. This, combined with the growing trend toward personalized medicine has led to strong performance for Illumina stock (up more than 400% over the last 5 years) and consistently high valuations.
The mission of GRAIL is to enable the earlier detection of cancer in asymptomatic individuals through a blood screen with the goal of decreasing cancer mortality. With at least half of U.S. cancers diagnosed at stage III or IV, through the use of cancer screening, GRAIL is looking to make a stage-shift in cancer diagnosis by detecting cancers at an earlier, curable stage. The current standard for diagnosing and identifying cancerous tumors within patients has been the tissue biopsy. This method involves the extraction of a tissue sample from the patient which can oftentimes be painful and require surgery. A new, more patient-friendly alternative has recently emerged in the form of liquid biopsy -- the biopsy GRAIL is hoping to utilize in early stage cancer detection. The liquid biopsy functions by using a blood sample and screening it for ctDNA markers. As cancerous tumors grow over time, dying cancer cells release some of their DNA into the bloodstream. By obtaining blood samples and screening it for the genetic markers of cancerous DNA, the early detection of cancer should be possible -- or so GRAIL hopes.
The challenge liquid biopsy technology faces is that of signal-to-noise. With the extremely small amount of cancerous DNA found within a given blood sample vs healthy DNA, the sensitivity of cancer screens poses a serious problem. Even an accuracy as high as 90% could produce an unconscionable number of false positives, or tests that read out as cancerous when the patient is actually cancer-free. GRAIL claims that they are "uniquely positioned to pioneer this field today sequencing at depths that are cost-prohibitive to others." GRAIL believes their "ultra-deep sequencing" has the potential to increase sensitivity and specificity by improving this signal-to-noise ratio and by detecting more mutations per sample, hopefully driving down the number of false positives.
A long-term buy
The potential to accurately diagnose all major cancers in asymptomatic patients is undoubtedly a game-changing possibility. While there are some challenges with signal-to-noise in early stage cancer detection with liquid biopsy, if there was any company to succeed in this indication, it would be one with the full backing of Illumina's leading gene sequencing technology. While investors will have to wait a while for more information on GRAIL's success (GRAIL plans to launch large-scale clinical trials in 2017 in order to deliver a pan-cancer test in the 2019 timeline), management has guided to a base case addressable market of $20 billion to $40 billion and a bull case of $100 billion to $200 billion. For long-term investors, I believe GRAIL could push Illumina on to higher highs.