[Updated, 3:45 pm ET.] Grail is set to be acquired for $8 billion by Illumina, the gene sequencing giant that formed the cancer diagnostics developer and spun it out as a separate company four years ago. The announcement comes less than two weeks after Menlo Park, CA-based Grail revealed its plans for an IPO to support commercialization of its first test next year.
Speaking on a conference call Monday, Illumina (NASDAQ: ILMN) CEO Francis deSouza said that the Grail acquisition enables his company to secure a place in the next phase of genomics: sequencing as a standard of care. [Story updated throughout with details from the conference call.]
“Early cancer detection represents the largest genomic application by far, we believe, over the next decade,” deSouza said. “Because cancer screening impacts a very large part of the population, it ushers in an era where regular genomic testing is the norm for a population. We accelerate this vision by acquiring Grail.”
For its part, Grail says that Illumina’s global footprint, and regulatory and commercial experience, will help it reach more cancer patients across the world faster than it would be able to do on its own.
Grail is developing liquid biopsies, tests that detect cancer from tiny pieces of genetic material that tumors shed into the blood. The goal is to diagnose cancer at its earliest stages, before symptoms manifest, when an earlier intervention has the best chance to stop the disease. The company’s tests are based on next-generation DNA sequencing (NGS) technology of Illumina.
The research underpinning Grail stems from non-invasive prenatal testing that Illumina was doing in its clinical labs years ago. One test revealed abnormalities in the DNA of the mother, who was later found to have cancer that she did not know about, deSouza said on the call. It was unclear at the time whether Illumina’s finding could translate into a cancer diagnostic, and if so, what types of cancers it could detect. In 2016, Illumina formed Grail as “a company that could go after this moonshot mission,” deSouza said.
Hans Bishop, Grail’s CEO, says that his company’s cancer-detecting technology is designed to target the most informative regions of the human genome, then apply machine-learning algorithms to detect the presence of cancer and identify the tumor’s tissue of origin. Grail’s first test, Galleri, was designed to screen asymptomatic people older than 50. It’s a multi-cancer test that screens for more than 50 types of cancer. In the 12 deadliest types of cancer in the US, the sensitivity rate—how well it detects disease—was 67 percent, Bishop said. Even though the sensitivity rate dropped to 44 percent as Galleri expanded to 50 plus cancers, Bishop said the test is important because it detects cancers that can’t be screened at all with current technologies.
“When you think about the medical need, 70 percent of deaths in this country from cancer occur in cancer where there is no screening—this test will detect the vast majority of those,” he said. “That’s why it’s the right thing to have a test that can detect the maximum number of cancers possible.”
The company is currently evaluating Galleri in a clinical trial enrolling about 6,000. Patients in the study whose cancer was detected are provided the results of their tests, and then subsequently worked up by physicians. In addition to confirming the results from earlier studies of the diagnostic, Bishop said the latest clinical trial will provide additional insight into how the testing process translates to clinical practice. In its IPO filing, Grail stated it plans to launch Galleri in 2021 as a laboratory developed test.
With Grail’s technology tested in tens of thousands of patients and plans in the works for the commercial launch of its first test next year, deSouza said that now is the right time to acquire the company. Grail is Illumina’s largest acquisition since the $600 million Solexa buyout in 2006 that brought the gene sequencing technology now the mainstay of its business. But investors seem wary of Illumina’s latest move. The company’s stock price dropped last week in anticipation of a deal, and at the market open Monday, it dipped again, falling down 9.6 percent from Friday’s closing price to $266.87 per share.
“We’ve had this happen to us before when we were in the array business and we wanted to get into sequencing, and we announced that we were acquiring Solexa to get into the sequencing business,” deSouza said. “Our stock dropped that day, too. It took awhile for us to work with the market to explain where we were going and why we thought that was a big opportunity. Today, that’s been an enormously successful story and sequencing is the vast majority of our revenue.”
Illumina primarily provides its gene sequencing technologies to others that develop their own products. The company is already seeing rapid market adoption of NGS-based tests that physicians use to select cancer therapies. In buying Grail, Illumina is betting diagnostics that enable earlier cancer detection will follow a similar trajectory; it projects this market will grow to $75 billion by 2035.
Illumina isn’t isn’t giving up on providing its NGS technology to others. But by directly providing a diagnostic for clinical applications, Illumina is putting itself into competition with some of its customers. For example, Archer Dx uses the Illumina technology in its experimental products that analyze DNA, RNA, and circulating tumor DNA from a blood or tissue sample. Like Grail, Boulder, CO-based Archer Dx says its tests enable earlier detection of cancer to enable earlier clinical intervention. In June, genetic testing company Invitae (NASDAQ: NVTA) announced an $886 million deal to acquire the company. In explaining the rationale for the buyout, Invitae management cited the same changes in genomic cancer diagnostic trends that Illumina is stating now.
DeSouza said the early detection market is large and he expects it will support multiple players, some that are taking a single approach to one type of cancer and others that, like Grail, test for multiple cancers. He added that Grail will continue to support Illumina customers that are using NGS for cancer diagnostic applications.
Grail is one of several companies developing liquid biopsies. Others include South San Francisco-based Freenome, which closed a $270 million round of funding last month to continue clinical development of its tests, bringing its total capital haul to more than $500 million. Thrive Earlier Detection of Cambridge, MA, raised $257 million in June, bringing its fundraising total to $367 million. Since spinning out of Illumina in 2016, Grail has raised about $2 billion to support its research and clinical development efforts.
The deal announced Monday is a cash and stock transaction. Grail stockholders—including Illumina, Grail’s largest stockholder owning about 14.5 percent—will receive $3.5 billion in cash and $4.5 billion in shares of Illumina common stock. Those Illumina shares will have a “collar” that ensures that the owners of Grail’s stock, except for Illumina, receive Illumina shares equal to about $4 billion based on the average trading price of those shares in the 10 days before the deal closes. When the transaction is completed, Illumina shareholders will own about 93 percent of Grail, leaving Grail stockholders with about 7 percent based on the mid-point of the collar.
In addition to the cash and stock payment, Grail stockholders will receive contingent value rights, which makes stockholders eligible for future payments amounting to a percentage of revenue from sales of the company’s products. That breaks down to a 2.5 percent payment right to the first $1 billion in revenue each year for 12 years. Revenue topping the $1 billion mark would trigger a 9 percent contingent payment right in the same 12-year span. Stockholders will have the option to receive additional cash and/or stock instead of the contingent value right. The amount of stock consideration will be determined before the deal closes.
The transaction, which has been approved by the boards of directors of both companies, is expected to close in the second half of next year. When it does, Grail will operate as a standalone division within Illumina.
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