On June 3, 2024, Illumina’s board of directors approved the spin-off of its subsidiary GRAIL, Inc., focusing on early cancer detection, and shared details on the timeline. The spin-off will be affected through the distribution of at least 85.5% of outstanding shares of GRAIL to Illumina shareholders on a pro rata basis, with a spin-off ratio of 1:6. The transaction is expected to be tax-free for shareholders, with the record date set for June 13, 2024, and the distribution scheduled for 12:01 AM, New York City Time, on June 24, 2024. GRAIL’s common stock is expected to commence trading on June 25, 2024, under the symbol “GRAL” on the Nasdaq Global Select Market.
European Commission Litigation
Back in 2016, Illumina initially spun off GRAIL but then reacquired it in 2020, which led to a European Commission investigation due to concerns about market competition. The Commission challenged the acquisition, prompting Illumina to receive an order in October 2023 to divest GRAIL. In April 2024, the Commission approved Illumina’s divestment plan, ensuring resolution of all issues related to GRAIL for the benefit of shareholders and GRAIL.
Deal Rationale
The strategic acquisition of GRAIL by Illumina in 2020 aimed to leverage their strengths in genomics and early cancer detection. However, regulatory concerns led to the decision to divest GRAIL through a tax-free spin-off, unlocking value for stakeholders. The spin-off offers Illumina shareholders the opportunity to retain ownership of GRAIL by receiving shares in the subsidiary. It also allows both Illumina and GRAIL to independently focus on their respective areas of expertise and growth opportunities.
Investment Thesis
Illumina (Parent Entity)
Despite challenges in key markets, Illumina remains a leader in next-generation sequencing, with promising growth opportunities in diagnostic markets. The company’s new NovaSeq X system is expected to drive revenue growth, although near-term financials may be impacted by subdued demand. A strategic evaluation is underway following management changes, with the divestment of GRAIL expected to support a turnaround. Stakeholders eagerly await long-term revenue targets by the end of 2024.
GRAIL, Inc. (Spin-Off Entity)
GRAIL’s Galleri test shows promise in identifying various cancers early, with significant implications for reducing cancer mortality rates. Reimbursement initiatives by governments offer long-term prospects, although the company remains cash-intensive in the near term. Challenges in achieving commercial viability persist, but GRAIL’s innovative approach to early cancer detection positions it well for growth opportunities.
Valuation
Illumina (Consolidated)
Illumina, valued using blended valuation methods, faces challenges in the near term that may impact financial performance. A discount to peer multiples reflects concerns about weaker sales growth, resulting in a target price of $91.24 per share and a SELL rating.
GRAIL, Inc. (Spin-Off Entity)
GRAIL’s potential in early cancer detection is underscored by the Galleri test’s effectiveness. Comparative valuation against peers leads to a fair value estimate of $7.17 per ILMN share, with an estimated fair value of $36.66 per share for GRAIL.
Company Description
Illumina, Inc. (Parent)
Founded in 1998, Illumina is a global biotech leader specializing in DNA sequencing and array-based technologies. The company operates through Core Illumina and the GRAIL business, with a presence in over 160 countries and around 9,250 employees worldwide.
GRAIL, Inc. (Spin-Off)
Established in 2006 and acquired by Illumina in 2021, GRAIL focuses on early cancer detection through innovative technologies like the Galleri test. The company has around 1,340 employees globally with a strong presence in the U.S.
