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Grail Deal Will Enable Illumina to Expand From Tech Innovator to Diagnostics Provider

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NEW YORK – Illumina's planned acquisition of Grail, announced Monday morning, will provide the company with a direct entry into the choicest of clinical next-generation sequencing applications — cancer testing — which the firm believes will grow to $75 billion over the next 15 years.

"This is a tremendous moment for the early cancer detection field," said Luis Diaz, head of the division of solid tumor oncology at Memorial Sloan-Kettering Cancer Center. "It's evidence that the technology is ready for primetime."

But Illumina has a history of competing with its clients, he said, noting the firm's entry into noninvasive prenatal testing (NIPT), cancer panels, and now early detection of cancer. Diaz is also chairperson of Personal Genome Diagnostics, a cancer sequencing company that he said operates in a different market segment from Grail, as well as a shareholder in Thrive, a company that will compete with Grail in early cancer detection. 

On a conference call with investors, Illumina executives explained that they saw the market as being big enough to warrant the dive in and to allow room for everyone.

"This could be the largest genomics application in the market," Illumina CEO Francis deSouza said during the call, explaining that Grail's product pipeline for cancer screening, therapy selection, and minimal residual disease monitoring adds $60 billion to the total addressable market for Illumina's NGS oncology products. Additionally, Grail has developed a "differentiated offering" that helped Illumina decide to enter the cancer testing market directly, instead of as a products and services provider.

Nevertheless, Illumina will continue to allow customers and partners to develop cancer testing assays on its NGS platforms. "We're committed to providing current customers with our platform as they come forward and not restricting that in any way," Phil Febbo, Illumina's CMO, told GenomeWeb. DeSouza noted Illumina has continued to support competitors that have built their won NIPT assays on its platform, despite acquiring Verinata in 2013.

But deSouza also said the largest names in tech – Apple, Amazon, and Microsoft — were in the practice of competing with their clients. "They provide the platform and have specific applications they provide directly themselves, typically the largest applications," he told investors. He added that entering the market directly "gives you access to insights that help you create a better platform, too."

While Illumina is high on the deal, Wall Street has signaled skepticism since Bloomberg first published rumors about it last week. Analysts noted that Illumina had lost nearly $20 billion in market capitalization since news of the deal first broke. In Monday afternoon trading, shares of Illumina had tanked another 9 percent, to $270.31, and JP Morgan downgraded shares of Illumina to 'neutral' and lowered its price target to $280 from $390.

"Being the 'arms dealer' for clinical customers has been fruitful for Illumina but Illumina itself is not viewed as a strong clinical company," Cowen Analyst Doug Schenkel wrote in a research note. "We don't see the clear fit for acquiring a company that (a) is still at a stage where clinical studies and clinical product development are still critical and will be for years, and (b) would benefit from true clinical commercial infrastructure/reach that does not really exist at Illumina."

However, deSouza noted on the call that Illumina's stock also fell when the company first announced its plans to acquire Solexa in 2006, a deal that formed the basis for its hugely successful sequencing business.

On the call, Illumina officials noted that Grail had been spun out of Illumina as a moonshot program. With recent successes in demonstrating its technology for cancer screening and plans to launch two clinical cancer tests next year, Illumina felt that it was time to bring Grail back into the fold. "We have a very clear line-of-sight on how we can accelerate the plan they're on today," deSouza said. "And we can only do that if they're part of Illumina." He suggested that in addition to commercial, government affairs, and regulatory infrastructure at Illumina, Grail could benefit from Illumina's conversations with more than 50 population sequencing programs for which the company provides its technology.

Grail will operate as a separate division and deSouza pledged transparency on Grail's profit and loss. Illumina CFO Sam Samad noted that the deal would be dilutive to EPS in the range of $3.25 to $3.75 per share for the first full year following the close of the deal.

Extrapolating from Grail's investments in the first half of 2020, operating expenses are currently approximately $270 million per year. "Obviously, that's going to grow," Samad said, as Grail accelerates commercialization efforts and builds a sales force for its Galleri multi-cancer early detection assay, the first planned commercial product.

Illumina expects to launch Galleri as a laboratory-developed test in the first half of 2021. The test is "fully developed," said Illumina CTO Alex Aravanis, a Grail founder who rejoined the firm in May, and no additional technical progress is needed to support that commercial launch. A second test, the Diagnostic Aid for Cancer, will launch in the second half of 2021. 

Grail CMO Joshua Ofman added that the company intends to file for premarket approval to potentially offer Galleri as an in vitro diagnostic, but that the timing of that filing is not yet certain and that Grail wants to first operate in the LDT environment.

In addition, the firm is looking to international markets. "Already Grail has had a lot of interest ex-US," Febbo said. "They're looking forward to leveraging Illumina as a service provider to provide access to Grail's portfolio of tests."

"Our goal, ultimately, is that this cancer screening technology is available to as many patients as possible," Aravanis said. "Fundamentally, the acquisition is about bringing that to patients. There's a pretty compelling argument that this acquisition is in that interest."

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