Illumina could be forced to divest cancer testing startup Grail should a European court uphold a Tuesday ruling blocking the deal, and a spinoff of the cash-burning company may be the best move forward, experts say.
The European Commission on Tuesday prohibited the already-completed merger, saying it would stifle innovation and reduce choice in the emerging market for blood-based early cancer detection tests. Illumina plans to appeal the decision prohibiting the merger and said it would also ask European courts to block any order from the Commission to sell Grail.
That appeal will go to the European Union’s General Court, which will take some time to decide, said Eleanor Fox, the Walter J. Derenberg Professor of Trade Regulation at New York University’s School of Law.
“However, the General Court must defer to the Commission’s fact finding unless there is clear error,” she wrote in an email.
Illumina closed the Grail acquisition in 2021 while it still faced antitrust challenges on both sides of the Atlantic, and has been holding it as a separate entity. The company’s stock has lost more than half of its value since it closed the deal, falling from to about $201 a share today from $517 in August 2021.
“Grail has been significantly dilutive to Illumina’s valuation, given the heavy cash burn and the lack of visibility on commercial potential in light of intensifying competition, so a spinoff has long been called for,” J.P. Morgan Analyst Julia Qin wrote in an email.
Fox, the law professor, said there is a good chance the full U.S. Federal Trade Commission will overturn an administrative judge's ruling last week that allowed the acquisition to go ahead.
That case must answer the questions of whether or not Grail’s cancer test will be better and delivered faster with the acquisition, and if the competition in the field is likely to produce more and better innovation, Fox added.
Both the EU and FTC cases raise concern that Illumina would have a conflict of interest as a major supplier of the next-generation sequencing systems that Grail’s blood test relies on. The EC said Illumina could easily stifle Grail’s competitors. Illumina offered some remedies, but they weren’t sufficient to alleviate the European Commission’s concerns, the regulator said.
In a Tuesday news release, Illumina said it would begin reviewing strategic alternatives for Grail, to prepare for an anticipated divestment order from the European Commission. The company has also set aside $453 million in legal contingencies to prepare for potential fines related to the deal.
Margrethe Vestager, the EC’s Commissioner of Competition, said at a Tuesday press conference that the commission informed Illumina in July that its completion of the merger could be illegal and result in fines.
“This is unheard of,” Vestager said of Illumina completing the deal before being cleared by the EC. “Companies abide by our rules.”
Vestager also said that the closure created a “troublesome” situation.
“Illumina now needs to undo the effects of its actions and unwind the acquisition,” Vestager added. “Therefore, I intend to suggest in due course a separate decision ordering Illumina and Grail to dissolve the transaction and restore Grail's independence. In the meantime, the interim measures adopted last autumn to prevent harm to competition from Illumina's early acquisition of Grail, well, they will continue to apply.”
If a divestment happens, Illumina has few options.
“The chances of a strategic sale are low, as most companies are super focused on cash conservation, and the IPO market is essentially frozen at this point,” wrote J.P. Morgan’s Qin.
Funding any spinoff will also be challenging, Qin said, as Grail has been burning through cash with no marketable product yet released in an increasingly competitive field.
Illumina will likely need to make “significant upfront commitments” for Grail’s future growth in order to find investors willing to fund Grail’s progress, Qin added.
In a regulatory filing late Tuesday, Illumina said it could be required to divest Grail on “materially worse” terms than those on which it had acquired Grail.
Ricky Zipp contributed reporting.
This article has been updated to add information about Illumina’s plans to appeal European rulings, and the potential sale terms for Grail. Comments from Margrethe Vestager were also added.