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Could Illumina's Quest to Acquire GRAIL Fail?

By Keith Speights and Brian Orelli, PhD - Apr 9, 2021 at 6:04AM

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The chances are certainly higher now that the deal won't happen.

Illumina (ILMN 3.62%) spun off liquid biopsy company GRAIL a few years ago. But the big genomic sequencing pioneer now wants GRAIL back. However, there's a potential wrinkle that could derail Illumina's plans. In this Motley Fool Live video recorded on March 31, Motley Fool contributors Keith Speights and Brian Orelli discuss whether Illumina's quest to acquire GRAIL could ultimately fail.

Keith Speights: Let's switch to some non-COVID news here. Illumina -- ticker there's ILMN -- learned yesterday, on Tuesday of this week, that the U.S. Federal Trade Commission is challenging its planned acquisition of GRAIL. Brian, how bad is this news for Illumina?

Brian Orelli: Yeah. This seems ironic on two fronts. First, the shares dropped 6.6% after the announcement yesterday that they were going to maybe not be able to acquire GRAIL. Then when you look back when they announced that they were going to acquire GRAIL, it fell 8.6% on the news that it was going to acquire GRAIL. Investors seem to either all those people sold their shares and now all of people that are left are pro-GRAIL, or I don't know. Investors don't seem to be able to make up their minds.

The second irony here is GRAIL access spun out of Illumina in 2016. So Illumina developed Grail and then decided I got the impression that they sort of just wanted to get it off the books, you know it was a losing entity and so they figure if they spun it out and they were no longer the majority shareholder than they didn't have to report it within their operating costs and so that was the impression I got in 2016.

But they had kept it in would the FTC be arguing now that the company should break up? I doubt it, so I don't know. We'll have to see what the FTC says in the long run.

I think this is bad news for Illumina because I think the clinical opportunities, or where the growth opportunities lie for genetic sequencing. You only need to get your genome sequenced once and cancer is really the exception to that. Your genome isn't going to change except that you have tumors and that almost the definition of cancer is as you get genetic changes that result in your cells not doing what they're supposed to be doing, growing, that's what cancer is.

GRAIL has this test that can detect cancer from blood samples, at least that's what they're hoping. They're running a pretty large clinical trial right now.

I don't know what to make of this. Illumina saying that they're committed to... the issue here, I guess Illumina's success is a detriment. Basically, every company uses Illumina sequencing machines and so now, by owning GRAIL, Illumina is going to be the supplier to other companies that are also trying to develop these genetic tests, as well as competing directly against those companies and so that's where the FTC is worried.

Illumina has committed to driving down the prices by more than 40% by 2025 as well as giving equal and fair access to its sequencing products to other companies that will be competing against it. Would that be enough to satisfy the FTC, who knows?

Speights: I think you're right. That's the big issue here. But I think you're also right that it is very ironic that GRAIL started out as part of Illumina and to my knowledge, no government agency was calling for Illumina to divest that unit at all. Illumina did it on its own and so I think this is definitely bad news if Illumina can't close this acquisition of GRAIL.

I think GRAIL presents a big business opportunity for the company over the long run. I'm like you, though, who knows what's going to happen?

I think Illumina's assurance, if it can really make a good argument, that it will make its technology available to all other players in the liquid biopsy market that compete against GRAIL or we'll compete against GRAIL. You would think if it could make a compelling case there then it's resolved the issue. But we will see.

I'm in the group of investors I own Illumina shares. I'm in the group of investors who was encouraged by the move. I think it was a smart move. At least over the long run, may not make Illumina a whole lot in the short-term, but over the long run, I thought the acquisition of GRAIL was a smart move.

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