Illumina loses its grip
The sequencing giant’s acquisition of Grail is heading for the rocks.
Illumina is appealing the European Commission’s determination that its merger with Grail must be dissolved, but that appeal is looking less and less likely to succeed.
Yesterday the Commission gave Illumina concrete instructions on how to split off its subsidiary, and despite its ongoing appeal Illumina is believed to be quietly exploring various exit options for the liquid biopsy-focused group. But this will be costly, and Illumina has already taken a $3.9bn write-down on the $8bn deal.
The Commission has not yet issued a formal divestment order – that is expected early next year – but it has told Illumina what steps to take to unwind the deal in the interim. Transitional measures, with which Illumina must comply until the deal is dissolved, include keeping Grail separate and viable, with no further integration.
To complete the dissolution Illumina must restore Grail’s independence, to the same degree it had prior to the completion of the transaction. Grail must be as viable and competitive after the divestment as it was before Illumina’s acquisition; and, most importantly, the divestment must be “executable swiftly and with sufficient certainty”.
This raises questions about the capitalisation level necessary for Grail to remain a viable liquid biopsy group after leaving the Illumina fold – either Illumina will have to generously fund Grail so it can be spun out as an independent group, or a deep pocketed buyer will have to step in.
And who would buy? The liquid biopsy market already plays host to several large companies with entrenched blood tests that are – unlike Grail’s flagship Galleri product – FDA-approved. It seems unlikely that any of these would want to pay top dollar for another, similar test. Groups that do not yet play in this segment can surely find a cheaper way into it.
The companies can seek a closed-door hearing and also submit a written response before the Commission issues a final decision in early 2023.
But there will be consequences for Illumina if it fails to comply with the Commission’s demands. The Commission can impose a fine of up to 10% of the company’s annual worldwide turnover, which would, on 2021 figures, amount to around $400m.
Illumina maintains that any divestment order should be halted until its appeal of the Commission’s prohibition has been settled by the European courts. And it is separately appealing a July 2022 decision by the General Court of the European Union, disputing the Commission’s jurisdiction to challenge the Grail deal.
Separately, the Commission is investigating Illumina for jumping the gun and closing the Grail merger without European authorisation. This remains ongoing.
Almost the only hope Illumina now has is that its appeal succeeds. If the two groups are forced to split in Europe, it seems impossible that they can continue to do business as a single entity elsewhere. There are legal challenges ongoing in the US too, where the FTC is investigating this deal.
It seems all but certain that this deal is going to cost Illumina even more than the $4bn it has already paid. This could become a cautionary tale for other groups tempted to close deals without regulators’ permission.