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Illumina could be forced to divest cancer-screening startup Grail if a European court upholds a Tuesday ruling blocking the deal, and a spin-off from the cash-burning company could be the best move, experts say .
The European Commission on Tuesday forbidden the already completed merger, saying it would stifle innovation and reduce choice in the emerging market for early cancer detection blood tests. Illumina plans to appeal the ban on the merger and said it will also ask the European courts to block any Commission order to sell Grail.
That appeal will go to the General Court of the European Union, which will take some time to decide, said Eleanor Fox, Walter J. Derenberg Professor of Business Regulation at New York University School of Law.
“However, the Tribunal must defer to the Commission’s fact-finding unless there is a manifest error,” she wrote in an email.
Illumina closed the acquisition of Grail in 2021 while still facing antitrust challenges on both sides of the Atlantic, and owns it as a separate entity. The company’s stock has lost more than half its value since it closed the dealfrom around $201 per share today to $517 in August 2021.
“Grail has been significantly dilutive to Illumina’s valuation, given high cash burn and lack of visibility into market potential in light of increased competition, so a spin-off is long overdue. “, wrote Julia Qin, an analyst at JP Morgan, in an email.
Fox, the law professor, said there was a good chance the entire U.S. Federal Trade Commission would reverse an administrative decision judge’s decision last week which allowed the acquisition to go ahead.
This case should answer questions about whether Grail’s cancer screening test will be better and delivered faster with the acquisition, and whether competition in the field is likely to produce more and better innovations, added Fox.
The EU and FTC cases raise concerns that Illumina has a conflict of interest as a major supplier of the next-generation sequencing systems on which Grail’s blood test is based. The EC said Illumina could easily stifle Grail’s competitors. Illumina offered some remedies, but they weren’t enough to allay the European Commission’s concerns, the regulator said.
In a Tuesday Press release, Illumina said it would begin examining strategic alternatives for Grail, to prepare for an early divestment order from the European Commission. The company has also set aside $453 million in legal contingencies to prepare for potential transaction-related fines.
In the event of a divestment, Illumina has few options.
“The chances of a strategic sell-off are low, as most companies are very focused on conserving cash, and the IPO market is essentially frozen at this point,” JP Morgan’s Qin wrote.
Funding any spinoff will also be difficult, Qin said, as Grail has spent money with no marketable products yet released in an increasingly competitive field.
Illumina will likely need to make “significant up-front commitments” to Grail’s future growth in order to find investors willing to fund Grail’s progress, Qin added.
In a regulation late tuesday filingIllumina said it may be required to divest Grail on “materially worse” terms than those on which it acquired Grail.
This article has been updated to add information on Illumina’s plans to appeal the European rulings and on Grail’s potential terms of sale.
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