Dive Brief:

• Illumina on Friday disclosed more details of the European Commission’s order to unwind its Grail acquisition, saying it will have 12 months, with the potential for a three-month extension, to divest the liquid biopsy business it bought for $8 billion in 2021 without securing the regulator’s blessing.
• The DNA sequencing company also was directed to capitalize Grail with two-and-a-half years of funding, based on Grail’s long-range projections, at the time of the transaction, if it opts for a spinoff, Illumina said in a statement.
• The order further requires Illumina to retain a stake in Grail of up to 14.5% and reestablish the royalty arrangement it previously had in place with the company, which makes a blood-based multi-cancer early detection (MCED) test.

Dive Insight:

San Diego-based Illumina, the industry leader in gene sequencing, already was operating under interim measures established by the EC, which opposed the merger from the start. 

The commission contends that Illumina’s ownership of Grail threatens to stifle competition in the liquid biopsy market due to its position as the dominant producer of next-generation sequencing platforms used to analyze genetic material from test samples.

In July, the EC fined Illumina 432 million euros (about $454 million), the maximum penalty it could impose, for closing the Grail acquisition without its approval. Illumina, which maintains that the deal was a merger between non-competitors, called the fine “unlawful.”

On Thursday, the commission handed down its much-anticipated order to divest Grail. The regulator said it might also impose periodic penalty payments of up to 5% of the company’s average daily aggregate revenues and a fine of up to 10% of its annual worldwide revenues.

The order gives Illumina flexibility in structuring the divestiture of Grail. The company said it can consider structures including a sale to a third party or a capital markets transaction. 

Illumina said it has started preparations for divesting Grail while it continues to challenge the EC’s jurisdiction over the deal in a European court.

If it loses that appeal, or a final decision in the U.S. Fifth Circuit Court of Appeals, the company said it will divest Grail. The Federal Trade Commission has also ordered Illumina to divest Grail.

Illumina may have a hard time finding a buyer for Grail due to the investment needed to advance its MCED test, Canaccord Genuity analyst Kyle Mikson said in a note to clients Thursday. The company is currently valued at less than $3 billion, according to Mikson.

A spinoff or initial public offering are the most likely options for a divestiture, he said, but “given the capital market environment, this would also likely not be a simple exercise.”

Financing Grail also could be complicated, the analyst said. “We believe GRAIL could need much more cash going forward given the capital required to sustain the business,” Mikson said, noting Grail’s projection for a 2023 operating loss of $670 million.